Aldrich Wealth’s Nicole Rice, Partner + Chief Growth Officer, and Darin Richards, Partner + Chief Investment Officer, share quarterly market commentary and insights—diving into Q3 2025 performance and what to expect in the quarters ahead.

The S&P 500 grew 8.1% in the third quarter of 2025, its best Q3 since 2020, as investors looked past uneven economic data and policy uncertainty. Optimism around easing interest rates and improving growth supported risk appetite, even as labor conditions softened and tariff developments added volatility. Developed international markets, as measured by the MSCI EAFE, rose 4.8%, supported by steady central bank policy and improving manufacturing activity in Europe, though gains lagged in the US amid uneven inflation trends and lingering trade uncertainty. Emerging markets, as measured by the MSCI Emerging Markets Index, jumped 10.6%, propelled by China’s rebound and AI-driven strength in Taiwan and South Korea, while India underperformed thanks to ongoing policy pressures. In fixed income, the Bloomberg US Universal Index increased by 2.1% as the Federal Reserve’s (Fed) 25-basis-point rate cut and improving risk sentiment supported broad gains across bond markets. Q2 GDP grew at an annualized rate of 3.8%, rebounding from a contraction in Q1 as imports declined and consumer spending remained resilient. Labor market conditions softened, with unemployment rising and job growth slowing, while inflation trends were mixed amid ongoing tariff pressures.

The S&P 500 rose 8.1% during the third quarter of 2025, marking it as the best Q3 since 2020. The quarter unfolded amid mixed economic signals, however, as optimism over steady growth and easing interest rates was tempered by renewed policy uncertainty and signs of labor market weakness. On the tariff front, President Trump agreed to a partial reduction for select imports from Canada (one of the US’s largest trading partners) after initially announcing a 35% tariff. Tariff deadlines with China were again postponed by 90 days, while the end of the de minimis exemption added pressure to smaller importers. These developments fueled a rebound in the US dollar, recovering some ground after its worst first-half performance in more than 50 years. The Federal Reserve (Fed) cut rates by 25 basis points during the quarter as expected, but officials noted growing concern over cooling labor conditions and persistent inflation pressures. While Q2 GDP growth was revised upward, business surveys showed rising input costs and efforts by companies to pass them on to consumers. Services activity, the largest driver of the US economy, slipped to just above the 50 level that marks contraction during the quarter, while consumer confidence fell to its lowest level since April amid political uncertainty and an impending government shutdown. Inflation data were mixed: the Personal Consumption Expenditures (PCE) index rose to 2.9% in July, reflecting tariff-driven cost pressures, while wholesale prices spiked mid-quarter before unexpectedly declining in September. Labor data also softened as private payrolls contracted for the fifth consecutive month and unemployment rose to the highest level in nearly four years, underscoring the challenging backdrop for policymakers and investors alike.

Ten of the 11 underlying sectors of the S&P 500 rose in Q3, as the “Magnificent Seven” stocks reclaimed their leadership and drove much of the index’s advance. Technology and communication services led the way, rising 13.2% and 12.0% respectively, supported by strong corporate earnings and sustained investor enthusiasm around AI. Conversely, consumer staples was the only sector to fall on the quarter, down 2.4% amid rising input costs and a broader shift toward risk-on sentiment.

In a reversal of year-to-date trends, small cap stocks outperformed large cap stocks during the third quarter, as investors bet that lower interest rates would benefit smaller, rate-sensitive companies most. Growth stocks once again outpaced value stocks in large cap markets, but value led growth in mid and small cap markets, as economically sensitive sectors regained momentum.

International developed markets, as measured by the MSCI EAFE Index, grew 4.8% in the third quarter. In the eurozone, markets found stability as trade tensions eased, and economic momentum improved. President Trump and EU leaders finalized a standardized tariff framework in July, helping prevent broader escalation. Business activity expanded throughout Q3, reaching a 16-month high in September as manufacturing and services both strengthened on renewed domestic demand. Inflation hovered near the European Central Bank’s (ECB) 2% target, and the ECB kept rates unchanged in Q3, signaling a pause in cuts and a cautious, data-dependent stance amid lingering risks. Despite improving business conditions, consumer confidence remained subdued and well below its long-term average. In the UK, inflation accelerated to its highest level in more than a year and a half, driven by rising food and airfare costs, while retail sales weakened and the labor market softened. The Bank of England (BoE) held rates steady, though some policymakers favored a cut, reflecting tension between slowing growth and elevated prices. Business activity surged in August then eased again in September, as both manufacturing and services moderated, and confidence slipped to its lowest level since June. In Japan, inflation persisted above expectations and manufacturing activity continued to contract. The Bank of Japan (BoJ) maintained its policy rate but raised its full-year inflation forecast to its most hawkish in years, reinforcing expectations of potential tightening later in 2025. A new tariff deal with the US provided some relief for exporters and supported a modest rebound in business sentiment early in the quarter. Still, export orders fell sharply amid global trade pressures, and the yen weakened against the dollar.

Elsewhere, the MSCI Emerging Markets Index gained 10.6% during Q3, with most constituent countries posting double-digit gains. China was the top-performing country, rising 20.7%, as optimism around a continued US–China trade truce and strength in AI-related stocks lifted sentiment despite lingering economic concerns. Q2 GDP growth exceeded forecasts, but manufacturing activity remained in contraction for a sixth straight month, weighed down by weak external demand. Domestic demand was soft as well, due to muted consumer confidence and ongoing property sector stress. Investors welcomed more market-friendly policy measures, and the US decision to extend the tariff truce by 90 days in August further bolstered confidence. While deflationary pressures and sluggish exports persisted, resilient industrial output, including an 11.4% year-over-year rise in steel exports, helped support hopes that China’s recovery is beginning to stabilize. Taiwan also delivered strong gains on robust semiconductor demand and investor optimism surrounding AI-related exports. In contrast, India was the only major country to decline in Q3, lagging amid renewed trade friction with the US and sanctions related to its dealings with Russia, which weighed on sentiment.

Over the third quarter of 2025, the Bloomberg US Aggregate Index rose 2.0% and the broader Bloomberg US Universal Index increased by 2.1%. Yields moved lower across the Treasury curve following the Fed’s 25-basis-point rate cut, with short-term yields, which are closely tied to Fed rate moves, dropping more dramatically. The yield on the 10-year US Treasury dipped 10 basis points during the quarter to end at 4.16%. Short-duration yields experienced a sharper decline, and the 2-year Treasury fell 18 basis points in Q3.

Credit spreads tightened modestly as investor sentiment improved, and risk appetite strengthened during the quarter. Emerging market debt returned 4.8% as lower US interest rates encouraged demand for higher-yielding assets, even as the stronger dollar created a modest headwind for local-currency bonds. Municipal bonds also posted gains as solid demand outpaced elevated issuance after a weaker first half of the year.

US GDP grew at an annualized rate of 3.8% over the second quarter of 2025, the latest period for which data are available, following a contraction in Q1. The rebound primarily reflected a decline in imports, which are a subtraction in the calculation of GDP, after companies front-loaded inventory earlier in the year. Consumer spending also drove growth, as households continued to spend despite rising credit card balances and early signs of financial strain. While Q2 results were strong, economists cautioned that policy headwinds, including tariffs, and a cooling labor market could lead to a more moderate pace of expansion in the months ahead.

Labor market data continued to soften throughout the third quarter. Jobless claims ticked higher to start the quarter, but remained low by historical standards, reflecting gradual rather than abrupt weakness. Private-sector payrolls contracted in both August and September, falling well-below expectations for five consecutive months of disappointing job growth. The unemployment rate climbed to its highest level in nearly four years by quarter-end, while revisions to earlier payroll data showed fewer jobs created than previously reported. Employers also showed greater caution in hiring as uncertainty and weaker demand persisted.

The Fed cut interest rates by 25 basis points in September, following a pause earlier in the summer, as officials weighed signs of labor market cooling against still-elevated inflation pressures. Inflation data remained uneven throughout the quarter. Consumer prices eased in July, but the Fed’s preferred measure, the PCE index, rose to 2.9%, reflecting tariff-driven cost pressures. Wholesale prices, which often lead broader inflation trends, spiked mid-quarter before unexpectedly declining in September, while consumer prices came in above forecasts. The combination of softer growth, persistent price pressures, and a cooling labor market fueled concerns about a possible stagflationary environment. Fed officials maintained that future rate decisions would remain data-dependent, emphasizing flexibility as they balance the risks of inflation against a slowing economy.

US markets enter the final quarter of the year with a cautiously optimistic tone. Equity performance in Q3 reflected improving sentiment and confidence in the Fed’s ability to engineer a soft landing, even as economic data pointed to slowing growth and labor market weakness. Continued progress on inflation could support additional rate cuts later this year, though the pace of easing will depend heavily on how quickly employment stabilizes. Tariff policy remains a key variable for markets, with uncertainty around implementation and trade negotiations likely to drive near-term volatility. AI-related innovation continues to underpin large cap performance, and while multinational firms may face headwinds from trade disruptions, their financial strength and global reach should provide resilience. Meanwhile, small cap companies could continue to benefit from lower borrowing costs and more attractive relative valuations as investors position for a more supportive policy environment.

Developed international markets continue to trade at attractive valuations relative to US equities, supported by stabilizing economic data and steady central bank policy. In Europe, improving manufacturing activity and domestic demand have helped sustain moderate growth, while inflation hovering near the ECB’s 2% target allows policymakers to maintain a patient, data-driven stance. Looking ahead, steady inflation and cautious monetary policy could provide a foundation for continued recovery across the eurozone. In the UK, softer labor data and persistent inflation have kept the BoE on hold, but gradual easing later this year could support consumer spending and business investment. In Japan, sentiment is improving, but a weaker yen and uneven inflation trends may limit near-term performance. The BoJ has signaled that a potential tightening later this year remains on the table if inflation continues to exceed expectations. Overall, developed international markets appear well positioned to benefit from stable policy, attractive valuations, and continued economic normalization.

Emerging markets enter the final quarter of the year on firmer footing after strong Q3 gains, though the outlook remains uneven across regions. In China, policy support and a temporary easing in trade tensions have improved sentiment, but questions persist around the sustainability of recovery amid property sector stress and deflationary pressures. Continued stabilization in manufacturing and policy efforts could help reinforce momentum, though growth is likely to remain moderate. Elsewhere, Taiwan and South Korea should benefit from resilient global demand for semiconductors and AI technologies, while India’s near-term prospects are constrained by trade frictions and external policy pressures. Despite potential volatility tied to currency and policy shifts, improving fundamentals and attractive valuations continue to support a constructive long-term view for emerging markets.

Fixed income markets are likely to remain sensitive to inflation data and central bank messaging. With the Fed maintaining a cautious stance, yields may stay relatively stable in the near term, though markets continue to price in one to two additional rate cuts this year. Credit spreads tightened in Q3 but could widen if economic data weakens or trade risks resurface. Core bonds should continue to provide stability and income within diversified portfolios, while high yield and emerging market bonds may benefit if rates move lower and investors assume risk in search of yield. Elevated starting yields continue to offer an attractive foundation for long-term investors.

This information is for educational purposes and is the opinion of Aldrich Wealth LP (Aldrich Wealth). Facts and figures are believed to be from reliable sources, but no liability is accepted for any inaccuracies. Indices are unmanaged, unavailable for direct investment, and do not include any transaction, management or other fees or costs. Nothing in this commentary should be construed as an investment recommendation. Forward-looking statements reflect current views and are not guarantees of future performance. Past performance does not guarantee future results. All investments involve risk. Aldrich Wealth is an investment adviser registered with the US Securities and Exchange Commission.