Q3 2025 Economic Commentary

Hello,

I hope all is well and that you enjoyed a fantastic summer and a wonderful beginning to fall!

Through the first eight and a half months of 2025, the markets have proven resilient. After a challenging start to the year, the S&P 500 index has rallied to all-time highs in September, returning to 13.31% YTD as of September 19th, 2025 [1]. Broadening market participation has been particularly encouraging, especially within the small-cap sector of the economy. The Russell 2000 index has returned 9.8% YTD as of September 19th, 2025 [2], getting back to levels the index last reached in October of 2021. The primary catalyst for enthusiasm in the markets has been anticipated rate cuts by the Fed, which finally occurred in September, when the Fed’s 25-basis-point cut took the federal funds rate target range to 4%-4.25%. Why does the stock market respond favorably to rate cuts?  Generally, lower borrowing rates lead to stimulated consumer and business spending and often spur a shift from cash and bonds into stocks (as the yields on cash and bonds decline), leading to increased stock valuations [3]. As of the week ended September 17th, 2025, U.S. money market funds held approximately $7.28 trillion in assets [4]. If investors see the rates on those money market assets come down, it is likely to increase the possibility of some of these assets being moved into the stock market. Looking back over the past 50 years, when the Fed starts to cut rates after taking a pause of at least six months, the stock market has nearly always performed well afterwards. Since 1976 there have been seven such occurrences, and in all but one of these cases, the S&P 500 rose over the following year, with the average 12-month S&P 500 performance gaining 15.5% [5].

Beyond the enthusiasm of being in a rate-lowering cycle, corporate earnings have remained robust. Second-quarter earnings outperformed expectations, with 82% of S&P 500 companies beating EPS (earnings per share) estimates and nearly 60% of companies that provided full-year guidance raising their guidance [6]. So where, if anywhere, is the uncertainty? I would argue it starts and ends with us, the American consumer. Elevated prices, over a prolonged period, have hurt the consumer. A recent study revealed that 67% of American workers now say they are living paycheck to paycheck, up from 63% in 2024 [7]. Median household income in the U.S. in 2024 was $83,730, a 1.3% increase over 2023 [8], while the inflation rate accelerated to 2.9% in August 2025 [9]. Simply put, things are still too expensive for a large percentage of Americans. This is most prevalent within core needs such as food, shelter, and healthcare. The longer-term impact of tariffs also remains uncertain. On the hopeful front, the increased revenue to the U.S. Treasury will lower our budget deficit. On the pessimistic side, price increases could offset the positives, potentially leading to a period of stagflation, or an environment where growth is stagnant and prices for consumers remain elevated. Time will tell.

The most likely downside scenarios, which I do not currently expect but am mindful of, include re-accelerating inflation and growing geopolitical uncertainties. I lean more towards the positives as we end 2025 and go into 2026, but the situation remains fluid. While so much remains uncertain and tricky when it comes to the economy and markets, I remain optimistic! As we have historically, I believe whatever situation we encounter, we will continue persevering through any adversity!  

I remain steadfast in my belief in long-term planning, preparation, and proper diversification, while aligning your portfolio to your comfort level for risk. Time and time again, it is proven that markets cannot be timed. No one has a crystal ball, and no one knows what major world event will occur next. Our best strategy is to be well-diversified across asset classes and remain optimistic and vigilant during times of fear and panic. Our companies remain some of the best in the world, providing goods and services to every corner of the earth. Our people are some of the brightest and hardest working in the world. I believe in the long-term trajectory of the U.S. and global economy!

Thank you for the opportunity to serve you. My priority remains and always will be to ensure that you continue to receive high-quality guidance and a client service experience second to none. While I continue to reach out via phone and e-mail, please know that I am available via Zoom, FaceTime, any other digital technology you prefer, and in person if you would like to meet. I am happy to meet with you at any one of my offices or at your home or near your home, whatever you prefer and with whatever you are most comfortable.

Wishing you, your family, friends, colleagues, and community continued hope, health, and positivity in the coming weeks, months, and beyond!

Thank you!