September Market Commentary

Third Quarter 2025 Economic and Market Review

The third quarter of 2025 was marked by resilient economic growth, strong equity performance, and a notable shift in Federal Reserve policy toward easing interest rates against a backdrop of tariff turbulence, persistent, but not resurgent inflation and a cooling, but not cool, labor market.

Economic Overview

After a sluggish start to the year, the U.S. economy rebounded with an annualized GDP growth rate of 3.8%, signaling renewed momentum in consumer and business activity. Inflation, however, remained above the Fed’s 2% target. The Personal Consumption Expenditures (PCE) index and Consumer Price Index (CPI) both accelerated modestly through August, reinforcing that price pressures have not fully abated.

In contrast, the labor market lost steam. Job growth slowed sharply, the unemployment rate ticked higher, and job openings fell to their lowest level since 2021, prompting the Fed to act. In September, the Federal Reserve cut its benchmark rate by 0.25%, its first rate reduction since 2024, signaling a pivot from tightening to accommodative policy amid signs of softer employment and moderating growth.

Corporate Earnings and Business Climate

Corporate America turned in another strong quarter. S&P 500 (1) earnings grew roughly 7.9% year-over-year, marking the ninth straight quarter of profit gains. Eight of eleven market sectors posted earnings growth, led by technology, utilities, materials, and financials. Energy and consumer staples sectors lagged. Overall, profit margins held firm despite higher input costs and tariff-related disruptions earlier in the quarter.

Equity Markets

Despite early-quarter volatility caused by the Trump administration’s tariff initiatives, markets recovered quickly once select tariffs were paused. The S&P 500, Dow Jones Industrial Average, and Nasdaq Composite all posted solid quarterly gains, repeatedly setting new record highs. Notably, the rally broadened beyond mega-cap technology: even small-cap stocks (Russell 2000) advanced strongly, suggesting improving breadth.

Tech and communication services fueled by AI innovation and cloud-infrastructure spending remained dominant market drivers. (More on AI below) Only the consumer staples sector ended the quarter lower.

Rates, Real Estate, and Commodities

Mortgage rates began edging lower after the Fed’s rate cut, with Fannie Mae projecting 30-year fixed rates near 6.4% by year-end and 5.9% in 2026. Home inventories improved modestly and prices softened in late summer, hinting at a gradual normalization in the housing market.

Crude oil prices declined from about $70 to $62.50 per barrel during the quarter, reflecting concerns over global demand and rising supply, while gasoline prices held near $3.17 per gallon.

Bottom Line

In the third quarter of 2025, markets demonstrated impressive adaptability: stocks advanced to new highs even as the economy faced cross-currents from trade policy, elevated inflation, and a cooling labor backdrop. The Federal Reserve’s shift to rate cuts marks an inflection point that investors hope will sustain growth into 2026, but inflation trends and policy clarity will remain key drivers in the quarters ahead.

AI – Trick or Treat

Similar to the third quarter of 2025, the past two years have seen much of the stock market’s rally driven by the AI boom, primarily fueled by a handful of mega-cap tech firms such as Nvidia, Microsoft, and Alphabet. Analysts estimate that 20% to 35% of total market gains stem from AI-related optimism and re-rating, with trillions in market value tied to expected, not yet realized, productivity gains. Massive, often circular investments between chipmakers, cloud providers, and AI developers have fueled growth, but also risk illusory demand. Which, in the spirit of Halloween, is AI a trick or a treat? To answer these questions, we turned to ChatGPT for assistance, and the results were insightful. If you’re interested in diving deeper into how AI is reshaping productivity and deciding for yourself whether it’s a trick or a treat, check out our latest blog post.

Gold Rush or Fool’s Gold

With gold’s recent price surge to over $4,000 per ounce, clients are inquiring about its potential place in their portfolios. Over the weekend, I read Barry Knapp’s of Ironsides MacroEconomics (been a subscriber for years), note titled “All That Glitters.” He asserts that gold’s surge past $4,000 isn’t really about the usual reasons attributed to increasing gold prices, like inflation, U.S. debt, or dollar debasement, citing that treasury market indicators don’t show inflation expectations rising, and capital is still flowing freely into U.S. assets.

Instead, Knapp points to a structural shift in global trade and capital flows. In his view, the era of export-driven economies (China, Germany, etc.) recycling their trade surpluses into U.S. Treasuries (when the U.S. buys more of their goods, than they do ours) is fading. As global supply chains reorder and the U.S. current-account deficit levels off, central banks and sovereign funds may turn to gold as one of the few viable reserve alternatives. He draws an interesting parallel to the early 1970s, when trade and currency realignments (Nixon suspended the dollar’s convertibility into gold) triggered a long-term repricing of gold.

Knapp expects some short-term volatility but a constructive outlook for gold prices if these structural shifts continue and result in a decrease in the U.S. trade deficit. From our perspective, we see gold in moderation as a selectively valuable diversifier but not a core growth driver.

So What?

As we enter the fourth quarter of 2025, our outlook remains cautiously optimistic. The economy continues to show resilience following the Federal Reserve’s recent shift toward easing. Early signs of improving financial conditions, such as moderating mortgage rates and steady consumer activity, suggest growth may carry into year-end. Equity markets have demonstrated remarkable adaptability, supported by strong corporate earnings and broader participation beyond the Megacap technology sector. Still, lingering inflation, a softer labor market, weakening consumer sentiment, and ongoing trade uncertainties temper enthusiasm.

With markets reaching new highs, it’s gratifying to see account balances moving upward, the reward for patience and staying invested through past volatility. But it’s also in these moments of euphoria that discipline matters most. The temptation to chase what’s hot, whether it’s AI leaders like Nvidia or the shine of surging precious metals, can be hard to resist. While opportunities persist, prudent diversification and attention to long-term goals are essential as markets navigate the balance between momentum and moderation heading into 2026.

Rest assured, even if you don’t own those headline names directly, they’re working for you through the diversified ETFs and mutual funds in your portfolio. During our next review, we’ll quantify that exposure and ensure it still aligns with your goals and comfort with risk.

Market history offers a clear lesson. The “can’t miss” stories of one cycle often become the cautionary tales of the next. Through each, investors who kept perspective and stayed the course were ultimately rewarded. Markets favor patience, not impulse.

So, take a moment to enjoy the gains; you’ve earned them. but stay grounded. Our role is to help you celebrate progress while maintaining the discipline that builds lasting wealth. Let’s connect soon to review your strategy, refine your plan, and keep you positioned for whatever comes next.

Your updated portfolio reports are available in your eMoney vault. If you’d like to review your report or discuss your portfolio and financial plan, we’re always happy to schedule a conversation, whether in person, over the phone, or on Zoom.

With the final quarter of 2025 underway, we are scheduling year-end reviews, focusing on tax mitigation. Topics include retirement account contributions, Roth conversions, capital gains tax management, estate planning, and charitable giving.

As always, thank you for your continued trust.

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1. The Dow, NASDAQ, S&P 500 are unmanaged groups of securities considered to be representative of the stock market in general