Overview:
Markets appreciated in Q3 2025, led by trade tensions subsiding, artificial intelligence (AI) enthusiasm, and easing of monetary policy. Equities rose strongly, with the S&P 500, Nasdaq, and Russell 2000 reaching all-time highs in Q3 2025. International stocks continued to outpace U.S. peers year to date (YTD), with Emerging Markets rallying amid easing trade fears.
The Federal Reserve cut interest rates 25 basis points (bps)[1] in September, and markets are anticipating more cuts by the end of the year. Gross Domestic Product (GDP) rebounded in Q2, but the U.S. job market has slowed down significantly. U.S. tariffs have had a more modest impact than feared. The U.S. economy and corporate earnings have proven stronger than anticipated.
Macroeconomics:
The U.S. labor market continued to be weakened as the unemployment rate ticked up to 4.3% and just 22,000 jobs were added to the economy, missing expectations for the fourth month straight.[2]
Job gains in healthcare were partially offset by losses in federal government, oil and gas extractions, and mining/quarrying. Investors are continuing to monitor the labor market and the impacts from new H1-B visa program changes and booming AI impact. In September, the private sector lost 32,000 jobs.[3]
In the second quarter GDP the comprehensive measure of goods and services produced throughout the economy rose 3.8% after its latest revision.[4] This upward revision was largely driven by stronger consumer spending and a sharp decline in imports. This marks one of the strongest quarters of growth since mid-2023.
The weakened dollar has led to a surge in precious metals. Gold experienced a large surge in September, gaining 10.16%. Gold has also had its strongest annual gain since 1979, gaining around 46.66% YTD.[5]
In September 2025, the Fed cut its federal funds rate by 25 bps to 4.00% to 4.25%. This has been the lowest level since December 2022. Fed officials predicted two more reductions are likely for the remainder of the year, to a range of 2.50% to 3.75%. The Fed has held constant rates to push down inflation, which is still above the Fed’s target of 2% annual rate. However, officials have growing concerns around slowing economy and employment.[6]
U.S. inflation remains sticky, rising 2.9% over past 12 months. Inflation rose 0.4% in August after rising 0.2% in July.[7] Housing, energy, and food continue to drag/influence inflation. Federal Reserve Chair Jerome Powell emphasized a data-driven approach to future rate decisions, particularly concerning the impact of tariffs on inflation.
Global Market and Factor Performance:
Global Markets, based on the MSCI ACWI, rose 7.79% in Q3 2025. Both Developed and Emerging International Markets rose in tandem with U.S. equities over the quarter and remain well ahead of U.S. markets on a YTD basis.
Tariff concerns continue to impact U.S. markets and have led many investors to explore international opportunities. Additionally, the fall of the U.S. dollar has propelled foreign equities YTD.
Emerging Markets, based on MSCI EM Index, outperformed International Developed Markets, based on MSCI World Ex US Index, in Q3, rising 10.33%. International Developed Markets ex USA gained 5.41%.
The technology sector, particularly companies in AI industry, saw significant gains in Q3. Countries in Central and Eastern Europe experienced large gains such as Greece (53.4%), Poland (53.1%), and Hungary (53.0%). However, Western European countries faced challenges such as France, which declined over 1% during the quarter due to political uncertainty and market volatility.[8]
U.S. Markets, represented by MSCI USA Index, outperformed Global Markets, gaining 8.30% in Q3 2025. U.S. equities experienced a turbulent quarter, fueled by interest rates being cut by 25 bps. U.S. performance was driven by Technology, Consumer Cyclical, and Communication Services sectors. The Consumer Defensive sector lagged performance decreasing 2.54%.
Global Factor Performance:
During the third quarter, all global factors produced gains. Momentum continued to outperform the market with a gain of 8.32%[9] and outperformed the MSCI ACWI by 53 bps. Small-cap securities followed, rising 7.50%. Gains were also observed in Quality and Value, which posted gains of 6.44% and 5.60%, respectively. Meanwhile, Minimum Volatility lagged performance across all markets, only gaining 0.75%.
U.S. factors demonstrated positive performance in Q3 2025. Small-cap securities led the gain, returning 8.45%, outperforming MSCI USA index by 15 bps.[10] Momentum and Quality experienced strong gains of 7.22% and 6.18%, respectively. Value and Minimum Volatility lagged in Q3 only rising 4.22% and 1.35%.
International Developed factors demonstrated strong positive performance. Value led gains with a 7.63%[11] return, outperforming the index by 2.22%. Small-cap securities continued to produce strong gains with a return of 6.96% outperforming the index by 1.55%. Momentum followed, rising 5.96%, outperforming by 55 bps. Quality and Minimum Volatility lagged, only gaining 1.86% and 0.13%.
Emerging Market factors produced positive returns in Q3 2025. Momentum led gains with a quarterly return of 10.85%[12], outperforming the index by 52 bps. All other factors provided positive performance but underperformed the Emerging Markets broad index. Value returned 8.20%. Small-cap securities and Quality performed similarly, gaining 4.93% and 4.15%. Minimum Volatility lagged, only rising 1.76%.
Bond Market Overview:
The U.S. Treasury curve flattened in Q3 with short-term treasury yields declining more significantly than long-term yields. This movement was largely driven by the Fed cutting interest rates aimed at supporting the labor market. In contrast, the yield curve steepened, with long-term yields rising slightly, while short-term rates have remained anchored. This shift reflects changes around inflation, future monetary policy, and increased concerns over fiscal deficit.
The combination of tariff related inflation concerns and expansionary fiscal policy across the developed world has kept bond market volatility high. U.S. bonds rose is Q3 as yield broadly declined across the treasury yield curve. Additionally, significant flows into bond funds have led to a rise in bond prices and compressed yields.[13]
Investment-grade and high-yield corporate bond credit spreads continued to tighten during Q3, reaching historic lows. This trend reflects investor demand and stable credit fundamentals. The yield to worst for investment-grade corporate bonds as of September 30, 2025, is 4.8% while high-yield corporate bonds offer 6.7%. These yields may be attractive for income-focused investors.
U.S. investment-grade companies issued about $207 billion in bonds in September 2025, making it one of the top five monthly records. The surge in issuance is driven by favorable market conditions and investor demand.[14]
Municipal bonds rebounded in Q3 to post their first quarterly gains of this year. This recovery was driven by declining interest rates, improving credit fundamentals, and a resurgence in investor demand.
[1] Basis Points (bps) are a unit of measurement used in finance to describe percentage changes for investment performance, interest rates and fees.
[2] “Employment Situation Summary,” U.S. Bureau of Labor Statistics, September 5, 2025, https://www.bls.gov/news.release/empsit.nr0.htm
[3] “ADP National Employment Report: Private Sector Employment Shed 32,000 Jobs in September; Annual Pay was Up 4.5%,” ADP, October 1, 2025, https://mediacenter.adp.com/2025-10-01-ADP-National-Employment-Report-Private-Sector-Employment-Shed-32,000-Jobs-in-September-Annual-Pay-was-Up-4-5
[4] “Gross Domestic Product, 2nd Quarter 2025 (Third Estimate), GDP by Industry, Corporate Profits (Revised), and Annual Update,” Bureau of Economic Analysis, September 25, 2025, https://www.bea.gov/news/2025/gross-domestic-product-2nd-quarter-2025-third-estimate-gdp-industry-corporate-profits
[5] “September, Third Quarter 2025 Review and Outlook,” Nasdaq, October 1, 2025, https://www.nasdaq.com/articles/september-third-quarter-2025-review-and-outlook
[6] Hyatt, D., “Fed Cuts Interest Rate For First Time Since December,” Investopedia, September 17, 2025, https://www.investopedia.com/federal-reserve-september-meeting-interest-rate-decision-11811834
[7] “Consumer Price Index News Release,” U.S. Bureau of Labor Statistics, September 11, 2025, https://www.bls.gov/news.release/cpi.htm
[8] “Global Stock Markets: Top Performers and Laggards (YTD Q3 2025),” Voronoi, October 4, 2025, https://www.voronoiapp.com/markets/-Global-Stock-Markets-Top-Performers-and-Laggards-YTD-Q3-2025-4562
[9] Global Factors represented by MSCI ACWI Factor Indices
[10] U.S. Factors represented by MSCI USA Factor Indices
[11] International Developed Factors represented by MSCI World Ex USA Factor Indices
[12] Emerging Factors represented by MSCI Emerging Market Factor Indices
[13] Buchbinder, J., “Q3 2025 Market Recap: 10 Key Takeaways Investors Need to Know,” Investing.com, October 2, 2025, https://www.investing.com/analysis/q3-2025-market-recap-10-key-takeaways-investors-need-to-know-200667903
[14] “Making Sense - Quarterly Market Review – Q3 2025,” FirstCitizensWealth, https://www.firstcitizens.com/content/dam/firstcitizens/pdfs/wealth/market-outlook/2025/q3-2025-quarterly-market-review.pdf
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