The third quarter of 2025 was another reminder that markets often move in surprising ways. Despite ongoing concerns about high interest rates, political uncertainty, and global trade tensions, both U.S. and international equities continued to advance.
Economic Update
U.S. real GDP growth remains resilient. Third quarter projections indicate an annualized increase of 3.8%, a significant upward revision from the June estimate of 2.1%. This robust performance is primarily attributed to strong capital investment and robust consumer spending. Moreover, second quarter real GDP growth was also reported at 3.8% after several upward revisions, which notably exceeded the initial consensus estimate of 2.6% annualized.1
The U.S. labor market is showing signs of deceleration with both the July and August jobs reports coming in weaker than expected. Additionally, downward revisions to earlier data further indicate a softer labor market trend. Constraints in the labor supply helped to prevent a sharp rise in the unemployment rate, which remains at 4.3%, but this softness in the data was enough to open the door for the Fed to begin a new rate cutting cycle.
At their September meeting, the Federal Reserve cut its policy rate by 0.25%, bringing the target range to 4.00%- 4.25%. Fed Chair Powell described the action as a “risk management cut,” reflecting the Fed’s attempt to balance labor market softening with inflationary risks. Although dot plots and market forecasts indicate the possibility of two additional rate reductions in 2025, Powell emphasized that there is no guaranteed course of action, underscoring the need for a prudent and data-driven strategy.2 Persistently elevated inflation increases the uncertainty regarding the Federal Reserve's potential rate cuts in 2025.
Despite the ongoing government shutdown and resulting federal employee furloughs, U.S. equity markets have shown notable resilience. Historically, such shutdowns have had little effect on equity market returns, and currently, markets continue to reach new highs. This reflects investor confidence that the disruption will be brief and unlikely to impact overall market performance.
The U.S. economy has shown strong growth lately, but ongoing trade disputes and tariffs continue to create uncertainty for businesses and investors. With several tariffs not yet fully implemented, investor uncertainty has grown. There is concern that when all tariffs take effect, inflation could rise quickly and increase market volatility. Case in point, in retaliation for China’s expanded export controls on rare earth minerals, which are critical for semiconductors, defense, and EVs, President Trump announced a new additional 100% tariff on all Chinese imports, effective November 1, 2025.3 The announcement triggered a broad selloff, a spike in volatility, and a flight to safe-haven assets. The rhetoric has since moderated, which has contributed to a partial recovery in the markets. For investors, this environment highlights the value of maintaining a diversified portfolio and actively managing risks.
Market Review
U.S. equities rallied in Q3, up 8%, aided by rate cut hopes, strong corporate earnings, and momentum in growth names, especially those related to the AI theme. We are encouraged by the emerging signs of a broadening of the market, with small and mid-cap names gaining traction over the quarter. Expectations of further interest rate cuts, continued deregulation, and increased tax relief are helping to fuel higher earnings and growth estimates for this segment of the market.
International equities continued showing positive results, with emerging markets up 10% and leading the gains for the quarter; however, lingering concerns remain about trade tensions, the long-term impact of enacted tariffs, and rising geopolitical tensions. Meanwhile developed foreign markets were up 6%, benefitting from moderating interest rate pressures, attractive valuations, and a weaker U.S. Dollar.
Treasury yields drifted lower during the quarter, with the 2-year down 11 bps to 3.61% and the 10-year falling 8 bps to 4.15%- both near the bottom of their year-to-date trading range.
Portfolio Positioning
Our outlook on the U.S. equity market remains cautiously optimistic. The ongoing strength in earnings and the possibility of interest rate reductions suggest positive prospects; however, heightened valuations and concentration risk warrant careful consideration. Following robust performance year-to-date, increased volatility may be expected in U.S. equities as the year concludes.
International equities are increasingly attractive from both valuation and diversification perspectives. Over the past twenty years, the MSCI Europe Index has traded at an average valuation discount of 18% to the S&P 500 Index; currently, this discount stands at 35%.4 Earnings growth in 2026 is projected to exceed that of 2025. Factors such as fiscal stimulus, structural reforms, and accommodative monetary policy are anticipated to enhance investment, bolster consumption, and improve profit margins.
With the Federal Reserve commencing rate reductions, yields from cash and money-market funds are tending to be lower. In contrast, investment-grade bonds are offering yields at levels not seen in over fifteen years. In response, we are reallocating excess cash into short- and intermediate-term bond positions to capitalize on current market opportunities. Additionally, we are taking advantage of attractive yields in core-plus and multi-sector bond funds. The multi-sector bond fund is currently invested in securitized credit instead of high yield bonds, seeking mid-single-digit yields without increasing credit risk.
We see strong structural support for alternatives in portfolios such as private credit and institutional real estate thanks to the high yields they offer and their reduced correlation to traditional stocks and bonds. Our premium income strategy integrates a prudently allocated equity portfolio with covered calls to deliver enhanced income generation. Furthermore, our hedged equity approach is structured to capture potential market gains while mitigating downside risk, thereby protecting portfolios from significant declines. Collectively, these strategies contribute to reduced portfolio volatility and stronger portfolio income.
Closing
We remain committed to balancing growth with downside protection and income generation, while maintaining adaptability and vigilance in response to evolving market conditions. Our investment approach is firmly grounded in long-term fundamentals and disciplined risk management. Considering the current uncertainty, we consider a cautious, measured strategy to be the most prudent. We will continue to monitor developments rigorously and adjust our strategies as clear and actionable opportunities arise.
1 Federal Reserve Bank of Atlanta – GDPNow: Real Gross Domestic Product Nowcast
2 CME Group- FedWatch Tool
3 “Trump puts extra 100% tariff on China imports, adds export controls on critical software,” Dan Mangan, CNBC, 10/10/2025
4 “Challenging today, promising tomorrow,” Christopher Berger and Thomas Grillenberger, European Equities Outlook Q3 2025, Allianz Global Advisors
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