Third Quarter 2025 Market Review

A steady climb amid skepticism

Markets continued to climb a wall of worry in the third quarter, with all three major indices finishing positively. Year to date, the April “tariff tantrum” drawdown has been fully retraced, and the indices remain up for the year.

Breadth, however, stayed narrow. Although equal weighted indices also rose, their gains were less than half as much as their cap weighted counterparts, indicating that a relatively small group of companies continues to drive the bulk of index gains.

This pattern is even more pronounced inside the Nasdaq100, where the cap weighted index meaningfully outpaced the equal weighted version.

Media narratives often framed the rally as “stocks up, despite…,” highlighting daily worries more than long term drivers. There also seemed to be an uptick in “sell everything and buy gold” headlines.

Meanwhile, credit markets have quietly improved. High yield spreads, which spiked during April’s tariff episode, have retraced toward more normal levels—an encouraging signal from the bond market.

Bull case for the stock market

1. Tax clarity: Congress passed a reconciliation bill extending the 2017 tax brackets that were set to expire in 2026. Because businesses plan across one , three , and five year horizons, reducing policy uncertainty simplifies planning and corporate decision making.
2. Growth reaccelerated: Real GDP grew at a 3.8% annual rate in Q2 2025 (April–June), a sharp reversal from -0.6% in Q1. That improvement eased concerns that new tariffs and subsequent trade negotiations would tip the economy into recession.
3. A first rate cut and a more dovish path: For the first time this year the Federal Reserve cut the federal funds rate by 25 bps to a 4.00–4.25% target range and signaled that two additional cuts may be possible at the October and December meetings. The Fed noted softer labor dynamics, “moderated” activity, and inflation that “has moved up and remains somewhat elevated.” Its dot plot implies a median 3.4% funds rate by end 2026, with 2025 projections of 1.6% GDP growth, 4.5% unemployment, and 3% inflation.

Importantly, the Fed’s latest estimate of the “neutral” rate is about 3.7%. With the effective funds rate currently around 4.25–4.50%, policy remains modestly restrictive. In the near term, however, looser guidance, improving growth, and lower uncertainty have acted as tailwinds, especially for broad index based funds like SPY and QQQ.

Earnings support the market too

Over the long run, profits drive prices and recent data were supportive. According to FactSet, 81% of S&P 500 companies beat earnings estimates, the highest rate since Q3 2023. Index earnings grew 11%, marking a third straight quarter of double digit growth. Communication Services (Google, Meta, Amazon, Netflix) was the leading sector by growth rate. Fifty S&P 500 companies issued positive guidance for the next quarter, above both five and ten year averages, and analysts raised earnings estimates for the first time since Q4 2021. Together, these trends support the case for continued price appreciation into year end.

Potential risks to the outlook

Rates: As Chairman Powell put it after the Fed’s decision: “There are no risk free paths now.” The Fed seems to believe it is walking a tightrope between reigniting inflation and crashing the economy. A precipitous rate move in either direction could bring an end to the current market ebullience.

Geopolitics: In September, China hosted the Shanghai Cooperation Organization (SCO) summit, now comprising10 member states, followed by a military parade marking the 80th anniversary of Japan’s WWII surrender. Attendees included Russia’s Vladimir Putin, Iran’s Masoud Pezeshkian, and North Korea’s Kim Jong Un. The joint display was viewed by many as provocative and a sign of deepening alignments in an unwelcome echo of great power tensions once thought behind us.

AI: While prospects for this new technology appear to be potentially game-changing, the jury is still out and not every company will emerge a winner. In the meantime, AI exposed stocks have surged. A group of 63 AI related companies now totals roughly $23 trillion in market capitalization on a mere $2.3 trillion in revenue.

Valuation concerns are real. Some of the industry’s leaders trade at extremely elevated price to sales multiples (e.g., Palantir at over 100x sales while Nvidia is trading at a “mere” 21x sales). For comparison, the S&P 500 trades at roughly 3.4x sales.

Market concentration is high: those 63 stocks represent over 30% of the S&P 500’s market value, and the “Magnificent Seven” collectively also exceed 30% share of S&P 500 returns. of the index. Since the launch of ChatGPT, AI linked names have been responsible for 75% of the S&P 500’s gains. To be clear, a large portion of the market’s gains rest on a very concentrated, very expensive group of companies.

Investor behavior shows familiar late cycle traits, including a desire to “own anything AI” amid aggressive capacity build outs by the industry that could lead to overinvestment. A combination of events that parallels the dot com era fiber buildouts. Counterpoints do matter though: today’s AI leaders are meaningfully profitable, generate tens of billions in revenue, and have high technical and capital barriers to entry. In our view, although AI is likely a transformative technology, careful consideration needs to paid to whether expectations are running ahead of any possible potential reality. Such a calculation, unfortunately, is easier said than done.

Dollar devaluation and retirement reality

Inflation’s compounding effects are insidious over a lifetime. Consider a few markers from 50 years ago versus today:

• Annual income: $7600 then versus $45,000 in 2025
• Housing: consumed 517% of income then versus 803% today
• College: 28% of annual income then in contrast to 65% now
• New car: 55% of annual income then versus 75% currently
• Disneyland admission: $7.50 in 1975 compared to $224 now

Longevity amplifies the challenge. A 65 year old male in 1975 could expect 14 more years to live while a female could look forward to an additional 18 years. By 2022, those figures rose to another18 years for men and 21more years for women. That’s more years to fund, with costs that tend to rise faster than general inflation.

Rules of thumb, like gradually shifting from equities into cash and bonds with advancing age have been called into question by the compound effects of inflation and low interest rates. At just 2% inflation, the purchasing power of $250,000 will decline to roughly $167,000 in 20 years. That leaves a significant purchasing power deficit that won’t likely be handled by increasing allocations to cash and bonds as the old nostrum called for. And that’s why it’s important to have help when building an investment plan for retirement.

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Post from: Insights