Wealth Management Insights for Q3 2025

By Daniel Kern and Matthew Martino, CFA

The “wall of worry” is a commonly used phrase to illustrate how stock markets climb higher despite negative news. Investors have needed to overcome a particularly steep wall of worry this year, but Q3 was another strong quarter for equities with the S&P 500 reaching 23 new all-time highs during the quarter. The S&P ended Q3 up 8.1% for the quarter and 14.8% for the year to date. The S&P has rebounded 34% from its April low.

Equities were supported by corporate earnings and profit margins that were stronger than expected, optimism that the US economy could absorb the latest round of tariffs, and economic data that was generally positive. The cooling labor market enabled the Fed to cut rates in September for the first time in 2025. Companies benefiting from AI-related spending on semiconductors, data centers, and power supply were among the top performers.

Non-US stocks have delivered excellent returns in 2025. Emerging market stocks gained nearly 11% in Q3 and are now up 28% for the year. Developed international market stocks have also outpaced US stocks for the year. The Russell 2000 index of small company stocks rose 12% to reach a new all-time high for the first time since 2021.

Analyzing performance by sectors, Technology and Communications were the top performers in Q3 and year to date. Consumer Staples and Healthcare lagged for the quarter and year to date.

Bond yields moved lower as Fed rate-cut expectations increased during the quarter. Ten-year Treasury yields—which move inversely to their prices—ended the quarter at 4.15%. The dollar stabilized after falling sharply in prior quarters. Gold continued to rally and gained more than 45% year to date. Crude oil was weaker, with global growth concerns weighing heavily and rising production expected from OPEC+, which is the 12 OPEC members and 10 of the world’s major non-OPEC oil-exporting nations.

		Q3	YTD
Equity
MSCI All Country World Index		7.7%	18.9%
S&P 500 Index		8.1%	14.8%
NASDAQ Composite Index		11.4%	18.0%
Russell 2000 Index		12.4%	10.4%
MSCI World ex-US Index		5.4%	25.9%
MSCI Emerging Markets Index		10.9%	28.1%
Fixed Income
Bloomberg Aggregate Index		2.0%	6.1%
Bloomberg 1–5 Year Gov/Credit		1.3%	4.9%
Bloomberg Municipals		3.0%	2.6%
Bloomberg 1–3 Month T-Bill		1.1%	3.2%

Tariffs

Trade policy remained in the headlines in Q3, with announcements of some trade deals, additional country- and product-specific tariffs, and fluid negotiations between the US and China. Investors appeared to be relieved at the avoidance of worst-case scenarios for the time being. Legal challenges to the use of the International Emergency Economic Powers Act (IEEPA) to impose tariffs proceeded through the courts, with review by the Supreme Court likely to begin in November.

Employment

Conditions in the labor market have changed dramatically. Slower recent employment growth and significant downward revisions of prior employment growth were enough to convince the Fed to cut rates in September. The supply of labor is decreasing in response to changes in immigration policy, which makes it likely that the monthly rate of job creation needed to maintain stability in the unemployment rate is much lower than previously thought. We assess the labor market as cooling but not collapsing, but we see some risk associated with potential labor shortages in industries such as construction and hospitality.

Inflation

Inflation remains above the Fed’s 2% target, and progress appears to have stalled, which may keep the Fed from cutting rates as rapidly as expected. With inflation still above target, the Fed is monitoring tariffs, shelter-related costs, and wage trends for signs of a renewed surge in inflation. Forward expectations for inflation, as measured by market-implied rates and survey data, remain under control.

US budget

The US budget deficit remains unusually high for a period in which economic growth is strong and the labor market is close to full employment. Although we continue to strongly believe in the creditworthiness of the US government, we think continued high levels of US government debt and deficits will have an impact on the long-term economic and market outlook. Mounting interest costs to support accumulated government debt may hurt the government’s ability to spend on other priorities and may place upward pressure on the yields required as the US issues new debt. The impact of government debt and deficits is likely to be gradual rather than an immediate challenge.

Portfolio Positioning

Corporate profits have been strong despite a turbulent environment, and we’ll be closely watching corporate earnings, profit margins, and forward guidance released over the next few weeks. Corporate and household balance sheets remain in good shape, while consumer spending continues to be resilient. Lower-income consumers are in tougher shape, with accumulated inflation and higher interest rates cutting into purchasing power.

Artificial intelligence (AI) remains a powerful theme, with opportunities and threats created by AI at the forefront of considerations as we look at investment opportunities. While the buildout of data centers to train large language models (LLMs) draws the most attention, some of the most compelling investment opportunities may be drawn from outside the semiconductor, cloud, and utilities companies that have led this year’s bull market. For example, AI could accelerate the time to market and reduce the cost of developing new drugs. Also, AI-enhanced robotics could help improve productivity and profit margins for lower-margin businesses such as restaurants and warehouse retailers.

We have been encouraged by the performance of international stocks as countries such as Germany and China made long-overdue economic and policy changes. Although we expect the US to continue to grow faster than other developed international markets, we expect the growth premium to narrow, which will make international diversification an important part of our investment strategy.

Our long-term outlook is for equity returns to be less robust than the double-digit returns of the last decade but solidly positive for the decade to come. Bonds should be a better source of income than has been the case over the past decade, but with inflation more unstable bonds may not be as reliable a hedge against an equity downturn.

We advise against making any material asset allocation changes in response to market volatility, though we understand it can be tempting to try to time the market. Unless there is a change in your goals, cash needs, income, or obligations, it is prudent to stay the course with your long-term asset allocation.

Our mission is to help individuals and families meet their personal and financial goals through thoughtful planning and advice. Our personalized approach and broad range of services are designed to allow you to enjoy the present and be confident about the future. If you have questions or comments about your personal portfolio or any of the trends and strategies we’ve outlined here, please reach out to us or any member of your Nixon Peabody Trust Company team. We’re always happy to hear from you.

Daniel Kern
Chief Investment Officer
+1 617.345.1044
dkern@nixonpeabody.com

Matthew Martino, CFA
Senior Director of Portfolio Strategy
+1 617.345.1122
mmartino@nixonpeabody.com