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Key Takeaways, Third Quarter 2025

Despite weak job growth, US equities advanced solidly helped by the Fed’s rate cut in September and rising earnings estimates. The Russell 3000 rose 8.2%. Growth and especially AI-related stocks led. The Russell 2000 gained 12.4%, the Magnificent Seven 15.6%.

Economic uncertainty remains elevated. The stock market is diverging from the “real economy”, and soft data (surveys and sentiment) are diverging from hard (economic reports).

Powell described the Fed cut rates in September as “risk management” pointing to a deceleration in job gains. The Fed remains committed to its 2% inflation target, but states that policy will be data-dependent. Treasury rates fell, significantly in the short-end, but only marginally for longer bonds. Credit spreads narrowed, more for High Yield. Bonds of all types gained.

Stock market investors seem of two minds. Some are chasing the promise of AI, while others are focused on the economy, tariffs and other sources of uncertainty, and their implications for inflation and economic growth.

Equities

The US stock market continued the rally of the last two months of Q2, with the broad market gaining 8.2%. The index is up 14.4% YTD, 17.4% for the last year, and 24.1% per annum for the last three years.
Small caps and growth stocks led. The Russell 2000 gained 12.4% in Q3, but only 10.4% YTD. The Russell 1000 Growth rose 10.5% in Q3, 17.2% YTD, 25.5% for 12 months, and 31.6% for three years.
Developed international stocks lagged the US, returning 4.8%. Emerging Markets led, gaining 10.6%. Year-to-date, international stocks are still materially ahead of the US. Developed are up 25.1%, and Emerging 27.5%.

Fixed Income

Bonds: After a long pause, the Fed cut rates by 25 bps in September. Investors expect one or two more cuts this year. The yield on 1-year Treasuries fell 28 bps in Q3.
Interest rates on longer maturity Treasuries only fell a little. The 5-year yield fell 5 bps, the 10-year and 20-year 8 bps.
Treasury yields are down more year-to-date: 1-year 48 bps, 5-year 64 bps, 10-year 42 bps, and 20-year only 15 bps.
Aided by narrowing credit spreads, bonds rose. Core bonds gained 2.0% in Q3, Investment Grade corporate bonds 2.6%, and High Yield 2.5%.