The third quarter of 2025 delivered another strong performance for US financial markets, with major stock indices extending their year-to-date rally to new all-time highs supported by solid economic growth, stable inflation, fiscal stimulus, and the Federal Reserve’s start of a rate-cutting cycle. These factors drove the Vanguard Total Stock Index (‘VTI’ ETF Proxy) to a +8.3% quarterly gain, bringing its year-to-date return to +14.3%.

The Fed finally initiated an easing cycle in September, signaling two additional rate cuts by year-end, prompted by weakening labor market data that raised concerns about economic slowdown risks. The passage of the One Big Beautiful Bill Act also bolstered markets by making the 2017 tax cuts permanent and funding domestic industries (congress.gov). Additionally, trade tensions eased as the Trump administration secured agreements with major US trading partners, including the EU, Japan and South Korea, and extended a trade “truce” with China, reducing investor uncertainty from the first-half. Currently, the tariffs are being challenged in the courts, which could be a market factor in Q4. As well, China trade rhetoric is now heating up again.

Within equities, small-cap stocks outperformed large-caps for the first time in 2025 as investors favored economically sensitive companies that typically benefit from lower borrowing costs. Technology nevertheless led sector performance, fueled by strong earnings from companies like Oracle and Broadcom, and sustained enthusiasm for the AI revolution. Conversely, Consumer Staples was the only sector with a negative return, weighed down by investor preference for growth stocks and lingering tariff concerns.

Beyond stocks, in fixed income the Bloomberg Barclays US Aggregate Bond Index (‘AGG’) returned +2.1% despite lingering inflation. Longer-duration bonds outperformed shorter-duration debt, driven by labor market concerns and rate-cut expectations. Meanwhile, commodities showed mixed results with gold surging due to inflation and a weaker US Dollar, while oil prices fell amid increased production and global growth concerns. Emerging markets also benefited from a weaker US Dollar, plus falling global rates and a reported rebound in Chinese economic growth (M&G Investments, “Why investors are turning to emerging market equities…”, 8/9/25).

Despite the positive macroeconomic backdrop, risks persist, including a weakening labor market, persistent inflation, elevated valuations driven by AI enthusiasm, and political discord leaving us within a federal government shutdown. Any shortfall in expected profit growth or capital spending could thus pressure markets at any time. We will continue to monitor these dynamics closely into the new year as we wish you a warm fall and holiday season ahead.

Source: Index proxies based on dividend adjusted ETF time-series data from Unicorn-Data-Services. Data considered dependable, but not guaranteed. Past performance is no guarantee of future performance or profitability. Statements herein do not constitute individual investment advice – please speak with your advisor about your particular situation.