Market Commentary | Q3 2025
Markets can feel like they inhabit a different reality than our daily lives. Headlines today offer a relentless stream of stories about geopolitical conflicts, new tariffs, and government shutdowns. Families are paying higher prices for groceries, utilities, and other household costs. And yet, the US stock market is at an all-time high.
The S&P 500 rose more than +8% in the third quarter, propelled by technology stocks, AI enthusiasm, and a rate cut from the Fed. International and emerging markets stocks have delivered even stronger gains than domestic stocks this year. These simultaneous realities create a stark contrast, raising a natural question for some clients: how can markets thrive when the world seems so unsettled?
First, Let’s Do the Numbers
Markets delivered strong gains across most major asset classes in the third quarter. The S&P 500, led by household names such as Nvidia, Apple, and Alphabet, gained more than 8% during the quarter and more than 14% so far this year as enthusiasm for AI continues to drive growth at the biggest firms. Small U.S. companies bounced back after a difficult first half of the year, with the index returning over 9% as the Federal Reserve’s September rate cut gave smaller businesses a long-awaited boost. Developed international markets, including Europe and Japan, rose nearly 5% in the quarter and are up an impressive 25% year-to-date, helped by a weaker U.S. dollar and increased domestic spending programs. Emerging markets outpaced all peers, climbing over 10% in the quarter and more than 27% for the year, with strength concentrated in China, India, and Taiwan.
Fixed income also contributed positively, though at a steadier pace. Broad U.S. bonds gained 2% in the quarter and are up more than 6% for the year, providing reliable income and portfolio stability during a volatile environment. Real estate investments, while still facing headwinds from financing costs, managed a 2.7% quarterly gain as the Fed’s rate cut provided some relief. Although returns remain modest at just over 4% for the year, the sector stands to benefit if rate reductions continue.
Our clients’ portfolios fared well during the quarter, with global diversification continuing to deliver benefits. U.S. large-cap companies dominated headlines, while international stocks and emerging markets drove growth. Bonds and real estate continued to play their role as stabilizers, offering income and ballast. This mix underscores the value of maintaining diversified portfolios, where strength in one area can offset challenges in another.
Tailwinds: Innovation and Optimism
Markets have reached new all-time highs in large part due to the ongoing adoption of AI and the astronomical corporate spending in this sector, which only accelerated during Q3.
In this early phase of the AI revolution, many of the biggest names – OpenAI and Anthropic – are still privately held companies. In the public sector, it has been the infrastructure companies that have benefited the most (think “picks and shovels” comparable to the gold rush). NVIDIA, whose chips are the backbone of AI computing, has seen annual revenues grow from $26 billion in 2023 to $60 billion in 2024 to more than $165 billion over the past 12 months – a rate of growth that is unsustainable, but highlights the insatiable demand for its processors.[1] Amazon (via AWS), Microsoft (via Azure), and Google (via Google Cloud) are also indispensable parts of this AI infrastructure, providing computing power and storage for AI deployment. Cloud divisions at each company have reported significant revenue increases – and stock prices have followed suit. It’s worth noting that, unlike the dot-com era of the late 1990s, most of today’s AI leaders are not speculative startups but profitable giants with strong balance sheets and global customer bases.
The promise of AI extends well beyond technology companies. In healthcare, AI tools are accelerating drug discovery and improving diagnostics. In logistics, AI is helping firms optimize supply chains and cut costs. In the energy sector, AI is being used to manage grids more efficiently and support renewable integration. Venture capital funding for AI-related companies has surged, reflecting expectations for widespread adoption across industries.
Still, risks are real. As we’ve previously noted, market performance has become heavily concentrated in a handful of large-cap technology stocks. The top 10 stocks in the S&P 500 currently account for 38.7% of the index, with many of those companies trading at valuations that require strong and sustained earnings growth to be justified. Even if AI ends up being a transformative technology, the narrative (and market prices) could easily shift if increases to productivity and profitability fail to materialize on the anticipated timelines.
Headwinds: Adjusting to Higher Costs
If innovation and AI are the current tailwinds, higher costs represent the headwind. Among the various challenges the current market is facing, the one that impacts households and companies every day is the long shadow of recent inflation.
For households, the burden of inflation is felt most clearly in day-to-day spending. Grocery bills, utility costs, and rents are meaningfully higher than they were five years ago. Consumer prices, as measured by CPI, have increased +3.1% year-over-year as of August and +24.6% over the past 5 years.[2] Wage gains have helped many families maintain their standard of living, but not all households or industries have kept pace. In recent months, data showing rising delinquencies on consumer loans suggests that some households are beginning to struggle under the burden of persistent costs and a slowing labor market.[3]
Corporations face a parallel challenge. Higher wages and increased borrowing costs are weighing on profitability, and not all companies have the pricing power to pass those costs on to customers. Tariff policy adds another layer of uncertainty as companies are hesitant to shift supply chains or adjust customer pricing when trade policy is constantly in flux. Negotiations between the two largest economies in the world – the U.S. and China – are a proxy battleground for a much larger strategic competition between the two nations, further complicating the ability for companies to accurately forecast their costs or plan ahead for additional hiring.
While the inflationary burst of 2022 may no longer dominate headlines, its shadow lingers. Materials, labor, and borrowing costs are all significantly higher, creating an incremental drag on earnings. Even with the recent rate cut, companies and households are refinancing debt at higher interest rates than at almost any point in the past decade. As long as growth outpaces costs, markets remain happy, but these higher baseline expenses represent a latent risk factor.
Zooming Out to Maintain Perspective
The paradox of record highs amid uncertainty is not new. Markets are forward-looking and are quick to price in risks that are visible. However, they can be just as quick to price in potential solutions, adaptations, and future growth when new information becomes available.
April of this year provided a pertinent example. When tariffs were first announced, markets reacted with sharp volatility as a new risk entered the picture. In the moment, it felt consequential, and we heard concern from clients. Yet, when we look back at the year-to-date chart, markets have recovered, and that spike is already little more than a blip. Zooming out further, across multiple years, the volatility that rattled investors this April barely registers on the chart. Good long-term investors know that perspective matters.
The contrast between restless headlines and resilient markets is not a puzzle to solve – it’s the natural rhythm of markets.
Resources
[1] Quarterly Earnings Fiscal Years 2023-2026 NVIDIA
[2] Consumer Price Index. August 2025. U.S. Bureau of Labor Statistics, CPI Inflation Calculator. https://www.bls.gov/data/inflation_calculator.htm
[3] Delinquency Rate on Consumer Loans, All Commercial Banks. September 2025. Federal Reserve Bank of St Louis
