In our quarterly Economic & Market Update Newsletter, we separate the relevant from the noise, to bring you timely content that helps you on the path to and through retirement!
3rd Quarter 2025 Commentary
Stock Market Update
The U.S. stock market hit new highs in the third quarter of 2025 and grew 8% overall for the quarter. Gains were broad across most sectors of the market, but most of the growth is still driven by ongoing innovation in artificial intelligence.
The lion’s share of earnings growth and stock price performance remains concentrated in the largest tech names. Just a handful of companies, the “Magnificent 7,” have been responsible for 52% of the earnings growth in the entire stock market over the past year. Their continued strength is a major driver of overall market performance.
Bond Market Update
The Morningstar US Core Bond Index grew 2.04% for the quarter, largely driven by expectations that the Federal Reserve would cut interest rates for the first time in 2025 (which they did at their September meeting). As yields declined, bond investors benefited not only from income but also from price appreciation in their bond holdings.
Economy Update
The U.S. economy continues to grow, with GDP increasing at a healthy 3.8% year-over-year through the second quarter of 2025. However, beneath the surface, concerns are mounting. The August inflation report showed a 3% rise compared to the same time last year. This puts the Fed in a tricky position—rate cuts could drive inflation higher, especially with tariffs adding upward pressure on prices. But the labor market is more of a concern for the Fed at this time.
Job Market Update
According to ADP, U.S. businesses have cut jobs in three of the last four months through September. This summer’s job weakness follows the largest ever downward revision in employment data—over 900,000 fewer jobs were added between March 2024 and March 2025 than previously reported. Consumer confidence is another economic red flag, declining again in September. Since consumer confidence drives spending decisions, this decline is a concerning signal for future economic growth.
Portfolio Impact
Looking ahead, stocks and bonds can continue to perform well in the short term as the Fed continues to cut rates. As recession risks grow, and the stock market reaches new highs, we continue to evaluate asset allocation in client portfolios and reduce risk when warranted. Dividend stocks remain attractive, especially since concerns about an overvalued stock market are largely focused on the biggest tech names—not dividend growth stocks.
Inflation remains a concern, so we’ve added Treasury Inflation-Protected Securities (TIPS) to client portfolios this past quarter and continue to build those positions where appropriate. We’ve also extended bond ladders and slightly increased duration to lock in higher rates before the Fed continues to lower interest rates.
Additionally, we’ve slightly increased international exposure, particularly in our asset model portfolios. This higher allocation to overseas markets has helped boost client portfolio performance in 2025, as international growth has outpaced U.S. stock market returns.
Bottom Line:
The U.S. stock and bond markets posted strong gains in Q3, driven by AI-led growth in large tech companies and the Fed’s first rate cut of the year, while economic indicators like inflation, job losses, and declining consumer confidence point to growing recession risks.
