Stocks Hit New All-Time Highs in the Third Quarter

Newsletter

October 1, 2025

Major stock indices continued the 2025 rally and surged to new all-time highs in the  third quarter as economic growth remained stable, tariff increases were no worse  than feared and the Federal Reserve cut interest rates, beginning the long-awaited  rate-cutting cycle.  

Markets started the third quarter with a continuation of the year-to-date rally thanks,  initially, to the passage of the One Big Beautiful Bill Act in early July. This legislation  contained several pieces of economic stimulus including making the 2017 tax cuts  permanent, reintroducing accelerated depreciation and committing billions to the  development of domestic industries, providing the markets and the economy with a  fresh dose of fiscal stimulus. But while that was the first positive market event in July,  it was not the last. Second-quarter corporate earnings results (released in mid-July)  were stronger than expected and importantly showed no significant signs that tariffs  or policy uncertainty were weighing on results. Finally, in mid-to-late July, the Trump  administration announced trade agreements with some of the largest U.S. trading  partners including the EU, Japan and South Korea, while the U.S. and China agreed to  extend their trade “truce” as the two sides negotiated toward a larger trade  agreement. These trade “deals” reduced investor anxiety stemming from the re imposition of reciprocal tariffs in early August and lowered trade-related concerns  among investors. These factors, along with stable economic and inflation readings,  helped to push the S&P 500 steadily higher and the index rose 2.24% in July.  

The beginning of August brought an economic surprise, however, that temporarily  paused the rally in stocks. The July jobs report, released on August 1st, was much  weaker than expected, not just because job growth in July disappointed but also  because there were substantial negative revisions to the May and June reports. The  underwhelming employment data introduced the idea that the labor market was  weaker than expected and that did slightly increase economic slowdown risks.  However, the soft employment data also boosted expectations for a Fed rate cut, and at the Jackson Hole Economic Symposium Fed Chair Powell strongly hinted that  a rate cut was coming at the September Fed meeting. Rising rate cut hopes helped  to offset the underwhelming employment data and stocks ultimately continued their  advance, as the S&P 500 rose 2.03% in August.  

The rally accelerated in September despite growing signs that the labor market is  indeed seeing some deterioration. The August jobs report was another  underwhelming print showing just 22,000 jobs added that month, well below the  consensus estimate. But like in August, the expectation for Fed rate cuts helped offset  that negative employment report and the Fed did cut interest rates at the  September meeting. Equally as importantly, Fed members signaled they expected  two more rate cuts this year via the “dot plot.” The start of a Fed rate-cutting cycle,  which should support the economy, combined with strong AI-related tech stock  earnings from Oracle and Broadcom to send stocks higher and major U.S. stock  indices all hit new all-time highs following that Fed rate cut, capping a moderate  increase in September.  

In sum, the third quarter was resoundingly positive for the U.S. economy and markets  as economic data showed solid growth, inflation readings stayed mostly stable, the  Fed cut interest rates, the U.S. reached trade agreements with major trading partners  and AI-linked tech companies continued to produce better-than-expected earnings.  Given these positives, major U.S. stock indices rallied solidly in the third quarter, just  as they should have given this news.  

Third Quarter Performance Review  

Rising expectations for a rate cut; strong AI-related corporate results, and stable  economic growth helped propel the major stock averages solidly higher in the third  quarter.  

Starting with market capitalization, small caps outperformed large caps for the first  time in 2025 as investors rotated out of large-cap stocks and into more  economically sensitive small caps, as they historically have received the most  benefit from lower borrowing costs that come with falling interest rates.  

From an investment style standpoint, both growth and value ETFs were solidly higher  in Q3 but growth outperformed value thanks to continued strength in AI-linked tech  stocks, continuing a trend from the second quarter. 

On a sector level, 10 of the 11 S&P 500 sectors finished the third quarter with a positive  return. Tech and tech-aligned sectors (consumer discretionary and  communications services) comfortably outperformed other market sectors and  posted strong quarterly returns. Positive earnings results from AI-linked tech stocks  such as Microsoft, Alphabet, Amazon, Nvidia, Oracle, Broadcom and others kept  investor enthusiasm for AI-related investments high and that powered tech and  communications services higher. The consumer discretionary sector, meanwhile,  benefited from solid economic growth and expected lower interest rates, which  should support consumer spending.  

Looking at sector laggards, consumer staples was the only sector that finished the  third quarter with a negative return. Investor preference for more economically  sensitive sectors (given falling interest rates) and tariff related concerns pressured  that sector, which finished the third quarter with a modest loss.  

US Equity Indexes 

Q3 Return YTD 

S&P 500 8.12% 14.83% 

DJ Industrial Average 5.67% 10.47% 

NASDAQ 100 9.01% 18.10% 

S&P MidCap 400 5.55% 5.76% 

Russell 2000 12.39% 10.39%

Source: YCharts  

Internationally, foreign markets saw mixed performance vs. the S&P 500 as emerging  markets outpaced U.S. stocks in the third quarter while foreign developed markets  posted a positive return but relatively underperformed the S&P 500. Emerging  markets handily outperformed the S&P 500 in Q3 thanks primarily to a weaker dollar,  falling interest rates and a rebound in Chinese economic growth. Foreign developed  markets also rallied in the third quarter but lagged the S&P 500, due in part to  concerns about fiscal stress and slow growth in the United Kingdom. 

International Equity Indexes 

Q3 Return YTD 

MSCI EAFE TR USD (Foreign Developed) 4.83% 25.72% 

MSCI EM TR USD (Emerging Markets) 10.95% 28.22% 

MSCI ACWI Ex USA TR USD (Foreign Dev &  EM) 7.03% 26.64% 

Source: YCharts  

Commodities were solidly higher in aggregate in the third quarter but that result  somewhat masked mixed internal performance. Gold surged to fresh all-time highs  in the third quarter thanks to elevated inflation and the weaker U.S. dollar. Oil,  however, declined as increased production from OPEC+ and concerns about global  economic growth weighed on oil prices, especially late in the third quarter.  

Commodity Indexes 

Q3 Return YTD 

S&P GSCI (Broad-Based Commodities) 4.07% 6.09% 

S&P GSCI Crude Oil -3.94% -12.88% 

GLD Gold Price 16.87% 47.05%

Source: YCharts/Koyfin.com  

Switching to fixed income markets, the leading benchmark for bonds (Bloomberg  Barclays US Aggregate Bond Index) saw a strong quarterly return despite elevated  inflation readings, as expectations for rate cuts and labor market deterioration  boosted demand for both short- and longer-term debt.  

Looking deeper into the bond markets, longer-duration bonds comfortably  outperformed those with shorter durations as investors reached for longer-term yield  amidst underwhelming labor market data. Shorter-duration bonds also saw a  positive return, however, as investors anticipated the start of a rate-cutting cycle by  the Fed.  

Turning to the corporate bond market, both investment grade bonds and lower quality, high-yield bonds saw strong gains in the third quarter. Investment grade  bonds slightly outperformed high yield bonds as the weakening labor market and  slight uptick in economic concerns boosted the attractiveness of higher credit  quality corporate bonds. 

US Bond Indexes 

Q3 Return YTD 

BBgBarc US Agg Bond 2.03% 6.13% 

BbgBarc US T-Bill 1-3 Mon 1.10% 3.25% 

ICE US T-Bond 7-10 Year 1.76% 7.20% 

BbgBarc US MBS (Mortgage-backed) 2.43% 6.76% 

BbgBarc Municipal 3.00% 2.64% 

BbgBarc US Corporate Invest Grade 2.60% 6.88% 

BbgBarc US Corporate High Yield 2.54% 7.22%

Source: YCharts  

Fourth Quarter Market Outlook  

Markets begin the final quarter of 2025 in a decidedly positive macroeconomic  environment as the Fed is cutting interest rates, tariffs have not disrupted the U.S.  economy (so far), broader economic growth remains stable and investment  enthusiasm for AI-linked tech stocks remains high. Those factors propelled stocks  steadily higher throughout the third quarter, added to already-solid year-to-date  gains for major U.S. stock indices and boosted investor enthusiasm.  

However, while the current macroeconomic setup is positive, it should not be  confused with a riskless environment and continued gains in stocks are not  inevitable. And as always, there are risks to the markets and economy we must  monitor.  

First, the labor market is deteriorating and that is an economic risk that needs to be  monitored closely. Numerous employment indicators, in addition to the monthly jobs  report, are signaling a loss of momentum. For now, they are not at levels that would  increase concerns about overall U.S. economic growth, but if we see the  unemployment rate continue to rise, investors will become more concerned about  the state of the U.S. economy and that could be an unexpected negative influence  on the markets, as an economic slowdown is not currently anticipated by investors  or analysts.  

Additionally, inflation remains stubbornly high. Headline CPI remains just under 3.0%,  solidly above the Fed’s 2.0% target. Meanwhile, tariffs are now starting to impact  broader parts of the U.S. economy and while analysts generally believe tariffs will 

produce only a one-time price increase and not create broader inflation, that  outcome remains uncertain. Bottom line, there is a chance that tariffs further boost  inflation in the fourth quarter and that could result in the Fed having to reconsider  future rate cuts, which would produce a negative surprise.  

Staying on tariffs, there remains substantial policy uncertainty with regard to trade  and tariff policy. The Supreme Court will hear arguments on most reciprocal tariffs in  November and if the Supreme Court upholds the lower court ruling invalidating  tariffs, it could cause market volatility. While the removal of tariffs may initially boost  stocks, it will also extend broader policy uncertainty, as the administration will likely  try to reimpose tariffs using different legislation. Bottom line, markets embrace clarity  and the longer trade policy uncertainty exists, the greater the chance that it  becomes a headwind on growth.  

Finally, AI and tech enthusiasm has driven the valuation of the S&P 500 to a  historically high level. While elevated valuation, by itself, isn’t a negative influence on  stocks, the high valuation does underscore this reality: A lot of profit growth is priced  into the largest tech stocks and if AI-related capital expenditures from major tech  firms begin to decline or AI adoption disappoints investor expectations, it could be a  substantial surprise negative for markets.  

In sum, the macroeconomic environment is currently positive as the economy and  markets are benefiting from rate cuts, fiscal stimulus (via the One Big Beautiful Bill  Act) and continued investor enthusiasm for AI-linked tech stocks. But we also  recognize that risks remain on the periphery of both the markets and the economy.  

At Trubee Wealth Advisors, we understand these risks and we are committed to  helping you effectively navigate this investment environment. Successful investing is  a marathon, not a sprint, and even bouts of intense volatility are unlikely to alter a  diversified approach designed to meet your long-term investment goals.  

Therefore, it’s critical for you to stay invested, remain patient, and stick to the plan, as  we’ve worked with you to establish a unique, personal allocation target based on  your financial position, risk tolerance, and investment timeline.  

We thank you for your ongoing confidence and trust. Please rest assured that our  entire team will remain dedicated to helping you accomplish your financial goals.  

Please do not hesitate to contact us with any questions, comments, or to schedule a  portfolio review.

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