As of this writing, the federal government entered a partial shutdown after Congress was unable to reach a budget agreement. While shutdowns can create headlines and short-term uncertainty, history shows that markets have generally taken these events in stride, with limited long-term impact on economic growth or corporate earnings. Essential government functions and services continue to operate, and negotiations are ongoing in Washington. For investors, the key takeaway is that while political gridlock can be unsettling, it does not alter the fundamental drivers of portfolio performance. We remain committed to disciplined decision-making, staying aligned with our long-term goals, and resisting the urge to react to short-term headlines.
The third quarter of 2025 was marked by policy uncertainty and market resilience, with equity markets setting records despite navigating escalating trade tensions, Federal Reserve deliberations, and significant geopolitical developments. The quarter began with markets celebrating the "One Big Beautiful Bill" and strong employment data, only to face persistent headwinds from tariff-induced trade tensions. What initially appeared to be market-rattling policy shifts gradually transformed into cautious optimism as investors interpreted tariff announcements as negotiating tactics rather than permanent threats.
The narrative shifted in August with solid corporate earnings, renewed optimism around the transformative potential of artificial intelligence, and expectations of Fed rate cuts. The powerful confluence of factors helped propel the major indices to all-time records. Softening labor conditions and cooling inflation paved the way for the Fed's first rate cut of 2025 in September, reducing the federal funds rate by 25 basis points to a range of 4.00%-4.25%. The central bank is expected to deliver two additional cuts by year-end. Despite renewed volatility in the final trading days — driven by concerns over record-high valuations and economic data that could weaken the case for additional Fed cuts — the quarter ultimately showcased the market’s durability. Investors remained focused on long-term fundamentals, reinforcing the value of disciplined, strategic investing.
U.S. stocks, as measured by the Russell 3000 Index, posted an impressive third quarter, with markets hitting multiple fresh record highs following the August 1 bottom. The rise was fueled by strong second-quarter corporate earnings, particularly in the technology sector. Momentum accelerated in September after encouraging inflation data and monetary policy expectations, with Chairman Jerome Powell’s dovish pivot toward labor market risks providing additional support. Market leadership rotated meaningfully: small-cap stocks (S&P SmallCap 600) outperformed large-cap (S&P 500), followed by mid-cap stocks (S&P MidCap 400), reflecting growing investor confidence in domestically focused companies poised to benefit from easing trade tensions and accommodative monetary policy.
Factors are enduring drivers of risk and return, rooted in economic theory and consistently observed across different markets and time periods. Factor performance varied widely in the third quarter, with growth leading, followed by momentum, while value and quality lagged. Growth stocks benefited from the AI enthusiasm that drove tech sector leadership, with companies such as NVIDIA, Oracle, and Broadcom delivering strong earnings and optimistic forward guidance. Quality's underperformance highlighted investors’ shift toward higher-risk, higher-growth assets, spurred by the Fed’s more accommodative stance. This environment diminished the typical premium awarded to companies with healthy balance sheets and reliable earnings.
Source: Planning Alternative, YCharts data
International stocks (MSCI All Country World Index ex-U.S.) underperformed U.S. stocks (Russell 3000) during the third quarter. However, emerging market stocks (MSCI EM) led global performance, outpacing developed international markets (MSCI EAFE), with China’s strong showing as a key contributor. The U.S. and China extended a trade truce until November 10, helping export-oriented firms. The Chinese government also announced it would aim to triple its chip supply in 2026 — boosting Chinese tech stocks. International lag was partly due to the U.S. dollar's stabilization during the quarter after its decline in the first half of 2025, which previously provided tailwinds for non-U.S. assets.
Bonds (Bloomberg US Aggregate Bond Index) finished the quarter higher, driven primarily by growing anticipation of a more accommodative monetary policy. Bond yields receded from their mid-July peak as labor market data showed slowing job growth and unemployment rose to 4.3%. Shorter-duration bonds (Bloomberg US Government/Credit 1-5 Year Index) benefited most from the Fed's dovish pivot, while longer-duration bonds faced headwinds from concerns about fiscal policy and increased Treasury supply. Municipal bonds (Bloomberg Municipal Bond 1-10 Year Blend Index) outperformed both categories, with strong technical conditions and attractive relative yields drawing investor demand.
Alternative assets posted solid third-quarter gains, fueled by shifting Fed policy, rising precious metals, and renewed interest in real assets. Natural resources stocks (S&P Global Natural Resources) led the way, lifted by metals and mining companies that surged on higher commodity prices and anticipated rate cuts. Gold stood out, capturing headlines and momentum after being exempted from White House tariffs. Commodities (Bloomberg Commodity Index) advanced, though softness in wheat and cotton weighed on broader results. Global real estate (S&P Global REIT Index) also benefited, as falling rates drove demand for income-generating investments.
Source: Planning Alternative, YCharts data
Source: Planning Alternatives, YCharts data
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”– Peter Lynch
The third quarter of 2025 highlighted that markets possess a remarkable ability to transform uncertainty into opportunity. What began as another chapter of trade policy volatility and hesitation from the Fed evolved into a compelling story of endurance and patience. The S&P 500's September performance (+3.65%) marked its strongest showing for that month in 15 years. The powerful finish transformed what had been a quarter of measured caution into one of meaningful gains, rewarding investors who resisted the temptation to retreat when headlines generated noise and unease.
Source: Planning Alternatives, YCharts data
The quarter's defining characteristic was not the initial tariff concerns and policy uncertainty, but rather the market's sophisticated interpretation of policy announcements as negotiating tactics rather than permanent economic disruptions. Moreover, the Fed’s policy shift, coupled with strong corporate earnings, fostered ideal conditions for markets to climb to new highs.
Looking ahead, the Fed's anticipated rate cuts extending into 2026 may offer support for equities, but various headwinds loom. Uncertainties surrounding future inflation, coupled with a softening labor market, are clouding the economic landscape. Meanwhile, concerns about an "AI bubble" are rising as some AI startup valuations soar and recent volatility among major AI-linked stocks introduces questions about valuation levels and growth trajectories. A good measure of stock market valuation is the S&P 500 Shiller CAPE Ratio, which divides current market price by the average of inflation-adjusted earnings over the past decade, smoothing out short-term volatility and business cycle fluctuations that distort traditional P/E ratios. The current reading places valuations near 20-year highs.
It’s important to maintain perspective amid market euphoria. Strategic asset allocation and global diversification remain prudent approaches, providing ballast when individual sectors or themes experience inevitable periods of reassessment.
Our strategic positioning remains consistent with the adjustments made earlier this year, reflecting our conviction in a measured, balanced approach amid today's complex market environment. We continue to hold a neutral stock allocation relative to benchmark weighting. This is neither a market-timing strategy nor a reactive stance, but a deliberate response to an economic landscape that lacks a dominant narrative. While the market demonstrates resilience, we remain mindful of persistent risks, including record-high valuations and the delayed impact of tariff and monetary policy decisions. This neutral positioning enables us to capture market gains while being well-prepared for periods of heightened volatility.
Our tactical flexibility operates within this framework, allowing us to express investment convictions through targeted asset class and sub-asset class exposures when our analysis identifies compelling opportunities. We continue to favor U.S. equities over international markets, maintaining our domestic tilt while still capturing the advantages of global diversification. Within our U.S. equity allocation, our momentum-focused ETF continues to contribute positively during this era of concentrated leadership among large-cap technology names. This component complements our dividend-focused approach and our comprehensive exposure across the market capitalization spectrum. We also maintain our ex-China emerging markets exposure in our international equity sleeve. We remain steadfast in our commitment to core investment principles, avoiding any impulse-driven adjustments. Our focus is anchored in research-driven analysis and aligning each client's portfolio with their individual financial objectives.
We vigilantly monitor the markets and will implement thoughtful portfolio adjustments if conditions warrant. Our foundational commitment to strategic asset allocation, global diversification, and long-term investment discipline remains the cornerstone of our approach. These principles guide us through uncertainty and toward the pursuit of True Wealth for our clients.
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