Quarterly Market Update

The third quarter of 2025 gave markets and investors a chance to take a breath after the tumultuous volatility of the second quarter following President Trump’s tariff announcement on Liberation Day. During the quarter, headlines around tariffs took a backseat as markets began to discount their impact. The US signed trade deals with several partners including the European Union, Japan, and South Korea, while tariff deadlines with China were postponed.

Instead of tariff headlines, strong market sentiment around the AI theme, questions around the independence of the Fed, and potential weakness in labor markets were some of the primary factors driving markets. Positive momentum surrounding the AI theme and continued capex spending helped to drive the S&P 500 to multiple record closings during the quarter. Second quarter corporate earnings were strong and generally ahead of expectations, though management teams cautioned markets about the uncertain impact of tariffs. Companies have so far been able to mitigate tariff impacts without largescale price increases to consumers. Over the quarter, the White House also continued its pressure campaign on the Fed to be more aggressive in their rate cutting leading into the September FOMC meeting.

At the September FOMC meeting, the Fed recalibrated their policy stance as they cut rates 25bps at the September FOMC meeting. Chair Powell noted risks to the labor market and inflation were becoming more balanced, after a weak July jobs report that showed job growth well below expectations at 73,000. The July report also featured significant downward revisions for the prior two months. The Fed is now in a delicate position with labor market data starting to show signs of potential weakness, while the full impact of tariffs on inflation has not yet been fully realized.

Lastly, after a period of notable US Dollar weakness, the currency stabilized in the third quarter. Meanwhile Gold continued its ascent, up 18.6%. Sentiment on the commodity remains strong and is supported by central bank demand. Volatility in both equity markets subsided as the VIX and MOVE indices moved lower.

During the quarter, equity markets experienced strong absolute returns across regions and market capitalizations as trade tensions waned. Equities globally reached record levels, while valuations continue to run above average in the US. The prospect of lower rates and diminishing odds of recession risk in the US propelled US small cap equities ahead of US large caps. From a style perspective, growth outperformed value as the tech sector was supported by the AI theme.

Outside the US, emerging markets outperformed. The region was supported by outsized returns from China as tariff rhetoric subsided and AI related companies led. Non-US developed lagged but still posted positive returns over the period. Political uncertainty in France and poor performance in Germany weighed on European returns.

Global fixed income posted positive single digit returns with relatively low volatility compared to the prior quarter. Markets digested weaker labor market data and the restarting of Fed rate cuts led to rates falling across the yield curve, supporting performance. The 10-year treasury yield fell to 4.15% from 4.23%, while the 30-year treasury yield fell to 4.73% from 4.79%. The fall in long end rates supported longer duration fixed income Treasuries, which had been underperforming prior in the year. Yields on municipals bonds fell similarly across the curve and longer duration bonds generally outperformed.

From a credit perspective, US investment grade credit spreads remain tight and narrowed 9bps to 70bps. This is close to historically tight levels, but absolute yields on the asset class remain attractive at roughly 4.75%. The higher carry and spread compression led to investment grade credit outperforming treasuries.

As of the time of writing this, trade tensions are ratcheting up. On October 9th, China announced new export controls on rare earth metals alongside other restrictions ahead of the upcoming US-China meeting at the end of the month. This is a significant escalation and likely designed to gain leverage ahead of the meeting. In response, President Trump threatened 100% tariffs on Chinese goods beginning on November 1st. This would essentially result in a de facto trade embargo, as consumers would be unlikely to continue purchasing products at such levels. Since then, there have been some deescalating comments, but the situation remains fluid.

This development reintroduced volatility back into markets as the VIX broke above 25 and reminded investors that, despite a recent lull in rhetoric, trade tensions are not yet finished. The upcoming summit between the US and China at the end of the month will be an important opportunity to deescalate, but it is likely that posturing between the two countries will continue in the meantime.

Currently, there are many conflicting themes playing out in markets. Positive developments such as strong capex spending on AI, a more accommodative Fed, and tax relief from the One Big Beautiful Bill Act (OBBBA) are being challenged by weaker labor market results, an ongoing government shutdown, and uncertainty surrounding the impact from tariffs. Given all these considerations, diversification is key to avoiding overconcentration in any single risk. Investing in multi-asset portfolios diversified across asset class and region helps to insulate portfolio from any single market shock and create a more resilient portfolio. During times like these, leveraging an investment process driven by experienced portfolio managers with a focus on risk management can help to protect capital.