Quarterly Market Review — 3Q2025

Global equities (+8.1%) rose sharply in the third quarter, lifting year-to-date gains to 16.0%. Markets advanced on the back of strong corporate earnings, continued strength in AI infrastructure spending, and a dovish shift in US monetary policy. Risk appetite broadened as tariff tensions eased, with progress in trade negotiations preventing a full-scale trade war. Central banks worldwide diverged on policy amid mixed economic and inflation signals. The Fed lowered its policy rate for the first time in nine months, citing a “shift in the balance of risks” as August payrolls disappointed and unemployment climbed to 4.3%. Despite labor market softness, solid consumer spending and industrial production signaled underlying US economic strength, while persistent inflation complicated the Fed’s path toward lower interest rates. The European Central Bank (ECB) held its policy rate steady during the quarter, ending a streak of eight consecutive cuts since mid-2024. ECB President Christine Lagarde emphasized that the pause reflects confidence in sustained domestic demand, bolstered by infrastructure investment and rising defense expenditures. While major central banks charted divergent courses, the JPMorgan Global Composite Purchasing Managers’ Index (PMI) pointed to a broadening economic upswing as global activity accelerated in August for a fourth straight month, with output advancing at its fastest pace since June 2024. However, Chinese economic momentum slowed during the quarter amid tariff-related headwinds and soft domestic demand, with the ailing property sector remaining a key drag on the economy. Nevertheless, emerging markets significantly outpaced their developed market peers in the third quarter amid recent weakness in the US dollar.

Global fixed income markets generated positive total returns in the third quarter, as political uncertainty and fiscal sustainability concerns prevailed. Commodities (+4.1%) ended higher, with all four sectors contributing to returns.

Equities

United States
US equities (+8.1%) surged in the third quarter, registering a sizable 14.8% return year to date. Technology and small-cap stocks realized significant gains, and growth stocks outpaced their value counterparts by a wide margin. Lower trade policy uncertainty, robust economic growth, and much stronger-than-anticipated second-quarter corporate earnings fueled the equity rally despite concerns about inflation, tariffs, and a cooling labor market. GDP grew at a 3.8% annualized pace in the second quarter, thanks to robust consumer spending, and the Atlanta Fed’s GDP tracker estimates that GDP will expand 3.8% in the third quarter, markedly higher than a previous estimate of 3.3%. Ongoing signs of a weakening labor market bolstered expectations that the Fed will continue to lower interest rates following a 25 basis points (bps) cut in September. However, the unusual dynamic of strong economic growth, a weakening labor market, and persistently elevated inflation complicates the Fed’s calculus for additional monetary easing, with dot plot projections showing a wide dispersion in policymakers’ expectations for interest rates in 2025 and 2026. The federal government shut down after Republicans and Democrats failed to agree on a short-term deal to keep the government funded. According to FactSet, second-quarter earnings for companies in the S&P 500 Index grew by a stout 12.0% year over year, markedly better than the 4.8% forecast on June 30. Earnings are projected to grow 7.9% in the third quarter.

Economic data released during the quarter was mixed, but the data suggested that the economy remained healthy. The labor market broadly cooled, with monthly nonfarm payroll growth averaging just 29,000 over June, July, and August. In August, unemployment rose to 4.3%, from 4.1% in June, while hiring was subdued at 3.2% — the lowest since June 2024. However, relatively low levels of layoffs and initial jobless claims were encouraging. Despite the headwinds from a softening labor market and elevated inflation, consumers spent at a very solid pace during the quarter. In August, retail sales and consumer spending rose for the third straight month, with both indicators gaining 0.6% after similar-sized increases in July. The Conference Board’s Consumer Confidence Index in September was modestly below its reading in June, with persistent inflation and the weakening job market key concerns for consumers. High home prices and elevated mortgage rates weighed on the housing market, although mortgage rates in September dropped to their lowest level in a year, offering some hope that lower borrowing costs could rekindle demand. The NFIB Small Business Optimism Index trended higher over the quarter thanks to an improved economic outlook. The Institute of Supply Management (ISM) Manufacturing Index ended the quarter slightly below expansionary territory, while the ISM Services Index expanded modestly.

Within the S&P 500 Index (+8.1%), 10 of the 11 sectors posted positive results for the quarter. Information technology (+13.2%) was the best-performing sector, led by semiconductors & semiconductor equipment (+17.8%) and technology hardware, storage, & peripherals (+24.6%). Communication services (+12.0%) and consumer discretionary (+9.5%) also outperformed. Consumer staples (-2.4%) was the worst-performing sector. Real estate (+2.6%) and materials (+3.1%) also underperformed.

Europe
European equities (+3.9%) advanced in the third quarter. After months of contentious negotiations, the European Union (EU) and US established a framework agreement on trade, which caps US tariffs at 15% on most EU goods and eliminates the 10% European tariff on US goods. The region’s economy remained resilient despite significant global trade uncertainty, with second-quarter eurozone GDP rising 1.4% compared to a year earlier and business activity expanding modestly in the third quarter. The HCOB Flash Eurozone Composite PMI advanced to 51.2 in September — the ninth consecutive monthly increase and fastest pace of expansion since May 2024 — as a sharp rebound in Germany’s services sector helped to offset a thirteenth consecutive contraction in French business activity amid ongoing political turmoil. Notably, new orders stagnated after briefly expanding in August, raising concerns regarding the sustainability of the bloc’s economic growth. Eurozone employment was unchanged in September, ending a six-month sequence of job creation. Amid relatively favorable economic data, the ECB held interest rates steady at 2% during the quarter, with investors dialing down expectations for further policy easing over the coming months. However, ECB President Christine Lagarde surprised the markets by suggesting the potential for further rate cuts amid concerns about the economic impact of tariffs and diminishing inflation risks. The central bank of Switzerland left interest rates unchanged, while the central banks of Norway, Sweden, and the UK lowered rates. Annual eurozone headline inflation rose to 2.2% in September, while core inflation remained steady at 2.3%. Talks between the US, EU, and Ukraine pushed for direct negotiations between Presidents Vladimir Putin and Volodymyr Zelensky, but negotiations paused as tensions escalated after NATO shot down Russian drones over Poland. According to LSEG, second-quarter earnings for companies in the STOXX 600 Index are forecast to increase 4.0% from a year earlier.

In September, Europe’s manufacturing sector slipped back into contraction after expanding in August; the HCOB Eurozone Manufacturing PMI dipped to 49.8 as new orders decreased at the fastest pace in six months and employment dropped. Input costs fell for the first time in three months, and output prices decreased marginally. The HCOB Flash Eurozone Composite PMI for September revealed that the services sector strengthened for the fourth straight month. Inflation pressures softened, with both input costs and output prices rising at softer rates. The European Commission’s Economic Sentiment Indicator increased to 95.5 in September, from 94.0 in June, on an improvement in both industry and consumer confidence.

Germany’s (-1.2%) parliament approved the annual budget for 2025 after a reformed fiscal framework was introduced in March, which loosened fiscal rules to enable record-sized investments to revive the economy and higher defense spending. The ZEW Indicator of Economic Sentiment unexpectedly rose modestly in September despite the uncertain impacts of US tariffs and Chancellor Friedrich Merz's "autumn of reform." The UK’s (+7.8%) economy stagnated in July after better-than-expected growth in the second quarter, and the S&P Global Flash UK PMI Composite Output Index expanded only modestly in September and at the slowest pace since May. Concerningly, headline inflation remained unchanged at an elevated 3.8% annual pace in August, straining household finances, casting doubt on further interest-rate cuts, and increasing pressure on the government ahead of the Autumn Budget in November. In France (+3.1%), President Emmanuel Macron appointed defense minister Sébastien Lecornu as the new prime minister after François Bayrou was ousted in a confidence vote over his unpopular fiscal package.

Pacific Basin
Pacific Basin equities (+8.6%) registered good gains. In Japan (+10.6%), Prime Minister Shigeru Ishiba announced his resignation after two consecutive election losses stripped the Liberal Democratic Party’s (LDP’s) coalition of its majority in both chambers of Parliament. The BOJ kept its benchmark interest rate at 0.5% during the quarter but took another step toward normalizing monetary policy with a plan to gradually unwind its holdings of ETFs and real-estate investment trusts. BOJ Governor Kazuo Ueda cited steady economic progress and reduced trade uncertainty following the US–Japan trade deal, with markets growing increasingly confident that the central bank will continue to raise interest rates this year. Despite an uncertain political outlook and concerns about the economic fallout from US tariffs, strong corporate profits, tight labor conditions, rising wages, and elevated inflation reinforced the BOJ’s view of a developing wage-price cycle, which supports the case for further policy tightening. The core Consumer Price Index rose 2.7% year over year in August, slowing from 3.1% in July but remaining well above the BOJ’s 2% inflation target. Japan’s economy expanded much faster than anticipated in the second quarter; GDP grew at a 2.2% annualized pace, significantly higher than an initial estimate of 1.0%. However, third-quarter economic growth was pressured by a decline in exports in July and August, with US tariffs impacting auto and steel shipments.

In Australia (+2.3%), the Reserve Bank of Australia (RBA) maintained its cautious, data-dependent policy stance, leaving interest rates unchanged at 3.6% in September after recent data suggested that inflation may be higher than anticipated in the third quarter. Core inflation was steady at 2.6% in August, but headline inflation rose to 3.0% — the highest in a year and at the top of the RBA’s target range. RBA Governor Michele Bullock noted that the recent acceleration in consumer spending, supported by increasing incomes, steadily rising home prices, and stock market gains, could boost economic growth and potentially reduce the need for further policy easing. Investors reduced expectations for a November rate cut, with some economists now forecasting that the RBA will refrain from additional rate cuts until 2026. The labor market remained tight, but data suggested some softening; the unemployment rate was steady at 4.2% in August, the number of full-time jobs declined by 5,400, and labor force participation slipped. In July, Australia’s trade surplus widened to A$7.3 billion, led by gold and natural gas exports.

In Singapore (+9.9%), private home prices accelerated 1.2% in the third quarter — the fastest pace in nine months — as lower interest rates and developer incentives fueled renewed buying. The government raised its 2025 growth forecast to 1.5% – 2.5% after second-quarter GDP rebounded, with growth of 4.4% year over year and 1.4% compared to the previous quarter helping the economy avoid a technical recession. However, downside risks to economic growth emerged after US tariffs took a toll on exports in July and August. New Zealand’s (+4.5%) weak economy amplified pressure on the central bank and Prime Minister Christopher Luxon, who has made economic growth a key priority ahead of the 2026 general election.

Emerging markets
Emerging markets (EM) equities (+12.5%) surged in the third quarter. Asia led the gains, followed by Europe, the Middle East, and Africa (EMEA), and Latin America.

In Asia (+13.5%), China (+19.8%) and the US agreed to extend their tariff deadline until mid-November as trade negotiations continued. Optimism about AI, innovation, and larger stimulus from the government and central bank overshadowed the slowing economy as US tariffs took a toll. Weaker-than-expected economic activity in August was underscored by decelerating industrial output and retail sales, slumping public and private investment, and renewed consumer price deflation amid lackluster domestic demand. However, financial markets reacted positively in September to near-term stimulus pledges by the central bank and new policy-based support measures from the government, including lower interest rates and bank reserve requirements, greater fiscal spending, and aid for the ailing real-estate market. Exports to the US plunged 33% year over year in August, but overall exports climbed 4.4% thanks to strong demand from other regions. In Taiwan (+19.6%), strong global AI demand lifted industrial production 14.4% year over year in August, while exports achieved another record high. In August, the country’s statistics agency raised its 2025 GDP growth forecast to 4.5%, from 3.1%, and sharply increased its 2025 export growth forecast to 24.0%, from 9.0%. In Korea (+17.3%), factory activity expanded for the first time in eight months as exports beat expectations, with 12.7% year-over-year growth in September amid strong semiconductor demand.

In EMEA (+8.4%), OPEC+ members agreed to raise oil output by a relatively modest 137,000 barrels a day in October, compared to a larger 547,000 increase in September, despite concerns about a looming supply glut. Saudi Arabia’s (+6.5%) second-quarter GDP grew 3.9% compared to the same quarter last year, driven by non-oil activity growth of 4.6%. Industrial production jumped 6.5% year over year in July, and annual inflation ticked up to 2.3% in August. South Africa’s (+17.0%) second-quarter GDP grew 0.8% from the prior quarter — the fastest pace in two years — helped by a rebound in the manufacturing and mining sectors. The central bank cut its main repo rate to 7% in July, and inflation slowed to 3.3% year over year in August, from 3.5% in July.

In Latin America (+8.2%), Brazil’s (+6.2%) trade surplus jumped 35.8% in August compared to a year earlier despite steep US tariffs. The IBC-Br index, a proxy for GDP, fell by a greater-than-anticipated 0.5% from the previous month, leading the Finance Ministry to trim its 2025 economic growth forecast to 2.3%, from 2.5%. However, the central bank signaled that ultra-tight monetary policy would remain in place for a prolonged period due to signs of resilience in the economy and a tight labor market, with the unemployment rate declining to 5.6% in July — the lowest level since records began in 2012. In Mexico (+10.0%), the central bank reduced interest rates by 50 bps during the quarter, to 7.5% in September, after the economy contracted on an annual and monthly basis in July. President Claudia Sheinbaum announced tariffs as high as 50% on more than 1,400 products from China and other Asian countries to support domestic producers that are grappling with US tariffs.

Fixed Income
The US reached several major trade agreements — including with the EU, UK, and Japan — while its trade truce with China was extended for 90 days. US data integrity came under scrutiny after the dismissal of the Bureau of Labor Statistics commissioner, and institutional credibility concerns surfaced following the attempted removal of Fed Governor Lisa Cook, which was ultimately blocked by the Supreme Court. Credit spreads tightened further, and most fixed income sectors outperformed government bonds.

Political instability remained a key theme, with the US government shutting down after Congress failed to pass a funding bill amid heightened political polarization and legislative gridlock. France’s political woes deepened after a failed confidence vote led to the government’s collapse. Sébastien Lecornu became the new prime minister and the fifth individual to hold the position in less than two years. The UK faced rising borrowing costs and elevated gilt yields, with fiscal pressures mounting ahead of the Autumn Budget. Japan’s ruling coalition lost its majority in Parliament, leading to the resignation of Prime Minister Shigeru Ishiba and a LDP leadership election in October.

Inflation rose across major economies and remained above central bank targets, prompting divergent policy responses. The Fed delivered its first rate cut of 2025, indicating a shift in focus from inflation to labor market risks. The ECB held rates steady, potentially signaling the end of its easing cycle. Resilient economic data and elevated inflation strengthened the case for a near-term interest-rate hike by the BOJ. Sovereign yields diverged across developed markets. North American yields trended lower, led by dovish signals from the Fed and Bank of Canada. In contrast, European and Asia Pacific yields generally rose. German bunds and UK gilts climbed as the ECB likely concluded its easing cycle and as UK inflation remained elevated. Japanese yields increased on resilient economic growth and elevated inflation. EM sovereign yields broadly fell, led lower by South Africa and Mexico, as investors rotated out of US assets. Chinese yields bucked the trend, rising on robust domestic demand.

Currencies

The US dollar rebounded, supported by robust GDP growth and consumer spending, which tempered expectations for aggressive policy easing by the Fed. Most major currencies weakened against the dollar, although the Swedish krona and Norwegian krone posted gains. EM currencies generated mixed performance, with Latin American currencies outperforming and several Asian and European currencies under pressure.

Commodities

Energy (+2.0%) rose during the period. Gas oil (+9.7%), gasoline (+6.6%), heating oil (+5.5%), and crude oil (+1.8%) gained following a US-EU trade agreement, an extension of the US-China tariff pause, and President Donald Trump’s warning of additional sanctions on Russia should it fail to agree to a peace deal with Ukraine. Nevertheless, oil markets were volatile over the quarter amid geopolitical tensions and shifting fundamentals. Airstrikes in Russia and Ukraine stoked supply concerns, while a weaker US dollar, a surprise US inventory build, Saudia Arabia’s price hikes for Asian customers, and an output increase by OPEC+ increased market turbulence. Natural gas (-15.1%) was severely pressured by near-record production levels, although losses were mitigated by below-average temperatures forecasts across large portions of the Eastern US and Midwest through October.

Industrial metals (+3.8%) ended higher. Zinc (+9.5%) was bolstered by a weaker US dollar and tighter inventories. Additionally, industry projections indicated that China's output would likely decrease due to renewed government measures to reduce excess capacity in major industrial sectors in order to curb deflation. Aluminum (+4.1%) climbed after the US Commerce Department announced higher tariffs on over 400 imported products, including consumer goods, auto parts, construction equipment and farming machinery. Expectations for lower interest rates and ongoing supply constraints provided additional support. Copper (+4.1%) was lifted by disruptions at a major Indonesian mine, which exacerbated concerns about global supplies. Nickel (-0.1%) was pressured by weaker demand, oversupply, and the expiration of a US$7,500 electric vehicle tax credit in September 2025. Lead (-3.9%) fell as sluggish downstream demand outweighed early winter stockpiling in China.

Precious metals (+17.4%) surged. Silver (+28.6%) and gold (+16.4%) were boosted by higher demand for safe-haven assets due to concerns about the US government shutdown, an uncertain Fed policy path, and geopolitical tensions. Lower US interest rates made bullion more attractive, while a weaker dollar increased gold’s affordability for international buyers.

Agriculture & livestock (+3.7%) ended higher. Coffee (+29.0%) surged on dry weather in Brazil’s Minas Gerais region, constrained US supply, and recent frost damage. Feeder cattle (+17.9%) and live cattle (+11.5%) rose sharply amid concerns about the spread of New World Screwworm to livestock. Additionally, cattle supplies were very tight, with the Cattle Inventory Report showing the smallest US herd on record. Corn (-3.2%) declined as growing conditions improved during the summer. Wheat (-8.2%) was dragged lower by the US Department of Agriculture’s report of larger-than-expected inventory and declining Russian exports due to slowing demand. Cocoa (-21.3%) plunged on lower demand for premium chocolate and improved weather conditions in key producing regions such as Côte d’Ivoire and Ghana, which improved the supply outlook.