All equity markets enjoyed a bull market in the third quarter of 2025, as corporate profits were strong and the economy remained resilient despite the twists and turns of the tariff tango.
Stock prices began and ended the quarter at record highs, with an occasional shallow tariff inspired pullback. S&P corporate earnings came in at twice the growth rate forecasted at the beginning of the quarter, providing a solid foundation for the rally. Monetary policy remained on hold for most of the quarter, with the long awaited and expected 25 basis point rate cut coming at the September 18th meeting. Even while relenting on holding rates steady at a restrictive level, Fed Chair Jerome Powell continued to take a “wait and see” approach in discussing future rate cuts. High mortgage continued to weigh heavily on the housing market, with extremely low levels of existing home sales reported, although there was a decent pickup in new home sales.
Small caps lead the leaderboard, with the Russell 2000 surging 12.1%, followed by large cap growth stocks gaining 9.7%, driven by its concentration in the Tech sector. Large cap value stocks posted a respectable 5.7% quarterly advance, weighed down by underperformance in the Financial and Health Care sectors.
In contrast to the equity market, the fixed income market remained very stable. The yield on the 10-year Treasury closed at 4.15%, or 8 basis points lower than at the beginning of the quarter. It is also the same yield as it was in October 2024 and October 2022, continuing to trade in the middle of its range of 3.5% to 5% over the last 30 months.
Gold prices soared to a series of record highs in early May and June. The Dollar held steady at its lowest level since March 2022. The volatility in the oil market abated, with crude trading in a tight range from the low to high $60/barrel throughout the quarter. Those low energy prices have helped keep inflation in check.
As for the outlook for the economy, there is a laundry list of disruptive headwinds developing. Trade developments will continue to be front and center, although the impact of the tariffs has been less dramatic than strategists’ forecasts. In the previous quarter, companies stockpiled inventories and consumers accelerated purchases. The pull-forward of that activity could result in a slower economy later in the year. The softening of the labor market is likely to continue, which could result in lower consumer spending, which has been a key driver of economic growth. Analysts expect third quarter corporate earnings reports to show high single-digit growth. Given that the market is trading at extremely high earnings multiples, any disappointments could disrupt the bull market. An added drag on the economy is the government shutdown that kicked in on October 1. The longer it lasts the greater the damage.
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