September, Third Quarter 2025 Review and Outlook

U.S. equity markets achieved new all-time highs in Q3, with broad-based gains across large and small caps and strong leadership from cyclical sectors, despite a challenging macroeconomic backdrop. This rally was underpinned by robust Q2 corporate earnings that significantly beat expectations and a dovish Federal Reserve, which cut rates in September and signaled further easing. Gold also experienced its best annual performance since 1979, while historical data suggests government shutdowns have not negatively impacted stocks and bonds over the past three decades, implying resilience against current political uncertainties.

Analysis

The U.S. equity market demonstrated significant strength and resilience in the third quarter of 2025, with both large and small-cap indices reaching new all-time highs despite a backdrop of extensive macroeconomic concerns. The broad-based rally saw the Russell 2000 deliver a +12.4% total return in Q3, marking new highs for the first time since November 2021, and the S&P 500 post its second-best September in 27 years with a +3.6% gain. This performance was driven by cyclical sector leadership, with all eleven S&P 500 sectors positive year-to-date. Key catalysts included surprisingly robust corporate earnings, where Q2 S&P 500 earnings growth of 12.7% far surpassed the 7.2% consensus estimate, and forecasts for Q3 remain solid at 7.9% YoY. A dovish shift from the Federal Reserve, which cut rates by 25 basis points in September and signaled an additional 50 bps of cuts for the year, provided a significant tailwind. While soft economic indicators like housing data are weak, hard data such as real GDP and industrial output remain in uptrends. This market strength has occurred alongside a historic surge in precious metals, with gold posting its strongest annual gain since 1979 (+47% YTD), fueled in part by a weak U.S. dollar which experienced its worst first-half performance since the 1970s. Historical data indicating market resilience during government shutdowns further suggests that current political uncertainties may not derail the underlying positive momentum.

Key Decisions for Investors

• Given the broad-based market strength, cyclical leadership, and robust earnings, investors should consider maintaining a pro-risk stance, with a potential overweight to cyclical sectors such as Information Technology, Industrials, and Financials, which are leading the market.
• Monitor the U.S. 2-year Treasury yield's test of its 3.55% support level, as a definitive break below this threshold would further validate the market's dovish Federal Reserve expectations and could provide more fuel for rate-sensitive assets.
• Investors should look past the short-term market volatility related to the government shutdown, as historical analysis over the past 30 years shows equities have consistently risen during these periods.
• Consider the strong momentum in precious metals, as gold's +47% YTD performance offers a potential diversification or tactical opportunity, particularly if the Federal Reserve's signaled rate cuts lead to continued U.S. dollar weakness.