2025 3rd Quarter Market Commentary

Top Headline for Q3: The Bounce Continues…

The sharp April pullback in the equity market feels like a distant memory now. The S&P 500 Index and Nasdaq Composite finished Q3 sitting near all-time highs (see YTD chart below, Nasdaq in orange and S&P 500 in purple). 

YTD performance of the S&P 500 Index and Nasdaq Composite through 9/30/25

As we enter Q4, a modest market pullback would not surprise us. After the eye-opening rebound from the April 8 intraday lows through September 30 - a 34.2% surge for the S&P 500 and 48.4% for the Nasdaq - a seasonal breather makes sense. While investor sentiment has certainly improved since the Spring drawdown, it is by no means at extreme bullish levels. We continue to view any market dips as prime buying or rebalancing opportunities.

General Market Update

US Equities: During the quarter, the S&P 500 Index rose 8.1%, the tech-heavy Nasdaq Composite finished up 11.4%, and the Russell 2000 small cap index was up a strong 12.4%. The equal-weighted S&P 500 (RSP) was up a modest 4.8%, indicating that the quarter’s returns were heavily driven by the largest U.S. equities, predominantly in the Technology sector. We are starting to see some real momentum in the more rate-sensitive small cap sector as rate-cut expectations build.

International and Emerging Market Equities: Uncertainty around the U.S. dollar and trade seems to be supportive of international equity markets, which continue to gain momentum. The Schwab International Equity ETF (SCHF) rose 5.3% for the quarter, while the Schwab Emerging Markets ETF (SCHE) gained 10.7%. Both indices outperformed major U.S. indices year-to-date, a trend worth watching. It appears to be a goal of the current U.S. administration to lower the value of the U.S. dollar as part of an effort to improve the U.S. trade deficit. To the extent that this observation is accurate and the goal is achieved, investors may benefit from some exposure to investments outside of the U.S.

Fixed Income and Credit: While we believe that the potential for volatility remains, the bond market has been remarkably calm. A stalemate between bulls and bears has kept the 10-year U.S. Treasury yield range-bound between 4% and 5% for a full year—hovering around 4.10% as we write this letter. Given the continued lack of long-term clarity, we continue to overweight short to medium duration credits – taking advantage of the abnormally “flat” yield curve. 

Pro-Inflation Investments: As we highlighted in our recent blog post, Gold has been one of the top performing assets year-to-date. Like equities, Gold’s recent run suggests that a period of consolidation is forthcoming, and we’ve recently reduced exposure in many accounts. We continue to be very bullish longer-term on pro-inflation assets as developed nations worldwide run large budget deficits. Lessons from history (e.g., post WWII inflation) lead us to believe that these assets are likely to perform well until the debt-to-GDP ratios of developed nations are materially improved. 

A Look Ahead

As we enter Q4, our radar is up for potential market volatility. There has been extremely low volatility in both the equity and bond market for 4-5 months, which is a bit abnormal from a historical perspective. This lack of volatility has pushed up investor sentiment and pushed away fear. We can see this in the lofty valuations of the "retail favorites" stock basket (e.g., HOOD, COIN, TSLA, and PLTR, to name a few). While Summer tends to be a slow time in the market with abnormally low volatility, the 4th quarter typically brings active trading, end-of-year (EOY) rebalancing, tax-harvesting, and other activities that can move markets. Given the elevated market entering Q4, we will be looking closely for rebalancing opportunities. While we’re cautious on U.S. equity markets heading into Q4, it’s tough to bet against equities with the backdrop of such large budget deficits worldwide. As such, they’ll continue to be an anchor in portfolios as we head into 2026, though we will make periodic adjustments to dial up or dial down the risk exposure. We also expect continued allocations to pro-inflation equities and other inflation hedging instruments.