Building on the momentum from the prior quarter, equity markets delivered another strong performance in Q3 2025, with all major U.S. indices posting robust gains and setting new record highs. The S&P 500 Index1 and Nasdaq Composite Index2 advanced by 7.8% and 11.2%, respectively, during the quarter, extending their year-to-date (through 9/30/25) gains to 13.7% and 17.3%. This continued rally was fueled by the Federal Reserve’s first 2025 rate cut in September, solid corporate earnings growth, and further progress in AI-driven innovation across technology sectors. Investors shrugged off lingering tariff concerns as trade negotiations showed incremental progress, while softening labor market data appeared to bolster expectations for additional monetary easing without tipping the economy into recessionary territory.
Market leadership remained firmly with growth and large-cap technology stocks, as the tech-heavy Nasdaq-100 Index3 returned 8.8% during the quarter. In contrast, the Dow Jones Industrial Average4, with its value-oriented composition, posted a more modest 5.2% gain, underscoring the ongoing preference for growth amid optimistic rate-cut prospects. The Russell 2000 Index5, tracking small-cap stocks, outperformed with a 12.0% advance—its strongest quarterly showing since Q4 2023—benefiting from rate-cut tailwinds that eased borrowing costs for highly levered smaller firms and partially alleviating prior tariff-related fears.
Providing further evidence of narrow market breadth, the S&P 500 Equal Weight Index6 underperformed the market‑cap weighted S&P 500 by 3.4% in the quarter, reflecting the heavy concentration of gains in a handful of mega‑cap technology and AI‑linked companies. The “Magnificent Seven”7 delivered another strong quarter, posting an average return of 17.7% on the heels of a 21.5% gain in Q2. While this leadership supported index gains, it also raised concerns about concentration risk going forward.
International markets extended their positive gains in Q3 2025, though performance moderated slightly amid a modestly stronger U.S. dollar and mixed global growth signals. The MSCI World ex USA Index8 appreciated by 4.8% in the quarter, supported by strong Japanese returns and steady European performance. The MSCI Japan Index gained 7.2% in Q3, building on prior momentum driven by yen weakness, corporate governance reforms, and export tailwinds from easing U.S.-China trade frictions. The MSCI Europe Index extended its strong run with a 3.3% quarterly return, bringing its Q1 to Q3 performance to 24.6%—well ahead of the S&P 500’s 13.7% over the same period. European equity market performance was propelled by European Central Bank (ECB) rate cuts and robust earnings in industrials and consumer sectors.
Emerging markets posted solid results, with the MSCI Emerging Markets Index9 up 10.1%, led by continued strength in Korea and robust China performance. The MSCI Korea Index advanced 12.5% in Q3, fueled by foreign inflows into semiconductors and AI-related plays, alongside government-backed structural reforms that enhanced market accessibility. Chinese equity market returns were particularly robust, with the MSCI China Index appreciating by 20.1% during the quarter. The China rally was driven by enthusiasm around domestic AI-related advancements, easing trade tensions with the U.S., and accommodative fiscal and monetary policy measures.
On the domestic monetary policy front, the Federal Reserve held the federal funds rate steady at 4.25%–4.50% following its July FOMC meeting, with Chair Jerome Powell highlighting a balanced risk assessment from moderating inflation on one hand and a softening labor market on the other. However, at the September 17-18 meeting, the FOMC implemented a 25 basis-point rate cut lowering the target range to 4.00%–4.25%, citing sufficient progress toward the 2% inflation goal and the need to support employment. The updated Summary of Economic Projections indicated a median expectation for two additional cuts by year-end 2025, with futures markets aligning closely on this path amid resilient GDP growth.
In fixed income, the 10-year U.S. Treasury yield ended Q3 at 4.15%, down from 4.23% at the start of the quarter, reflecting the Fed’s easing signal and benign inflation data. This decline masked intra-quarter fluctuations: yields spiked up to 4.50% in mid-July before bottoming out at 4.03% on 9/11/25 due to softer-than-expected labor market data and anticipation of a September Federal Reserve rate cut. The overall downward trend supported bond returns, with the Bloomberg U.S. Aggregate Bond Index10 advancing 2.1% in Q3. Long-duration bonds benefited most, as the iShares 20+ Year Treasury Bond ETF (TLT) rose 2.4%, while short-term exposure via the iShares 1-3 Year Treasury Bond ETF (SHY) gained 1.1%.
Commodity markets exhibited renewed volatility in Q3 2025. The commodity enjoyed a brief rebound due to supply disruption fears from Middle East tensions before ending the quarter on a weak note at $64.31 on supply surplus concerns and weaker demand signals.
Precious metals benefited from generous returns in the quarter with gold appreciating by 16.6%, extending its year-to date (though 9/30/25) return to 47.04%. Gold’s rally was driven by a relatively weak U.S. dollar, its reputation as a safe haven asset, and robust demand from central banks. Silver’s return was even more material, increasing by 29.0% to bring its nine-month return to 59.8%. While silver also benefited from safe haven inflows, price appreciation was also supported by supply deficits and industrial demand tailwinds.
Looking ahead, we remain constructively positioned for the balance of 2025, anticipating sustained equity upside from AI catalysts, healthy corporate profits, and further Fed accommodation. However, market leadership remains narrow and any earnings or guidance disappointment among mega-cap market leaders could spark volatility. In addition, the health of the labor market and continued progress on the inflation front are critical components to the continued upside scenario. Consequently, we believe investors should maintain diversified positioning while selectively participating in growth‑led opportunities.
