Each quarter offers new insights, as fluctuations in interest rates, global events, and policy changes continuously shape the financial landscape. Successful investors typically remain versatile and well-diversified, allowing them to partake in market gains while keeping an eye on long-term objectives.
Performance of Major U.S. Stock Indices
Technology is continually influencing investment strategies, with consumer resilience helping the S&P 500 and Nasdaq reach new peaks. This momentum is led by the “Magnificent 7” tech giants, now making up about 35% of the S&P's market cap.
Excitingly, the rally extended beyond these major tech giants, with small and mid-cap stocks joining the upward trend for the first time in months. This development highlights the market's underlying strength, though rising valuations, particularly in AI sectors, remind us to balance opportunity with caution.
Projections as of September 26th indicate that the S&P 500 expects third-quarter earnings growth of 7.9% year-over-year, an increase from the 7.3% estimated on June 30.
In Q3, significant gains were recorded as follows:
- S&P 500 rose by 7.79%
- Nasdaq 100 surged by 8.82%
- Dow Jones increased by 5.22%
U.S. Economic Themes
The third quarter of 2025 highlighted the competitiveness of the U.S. economy, with robust growth, dominance in AI-driven sectors, and steady consumer spending. However, trade tensions, shifts in monetary policy, and a slowing housing market suggest caution is still necessary.
Consumer Spending Trends
U.S. GDP growth is expected to remain strong in Q3, with the Atlanta Fed’s GDP tracker predicting 3.9% growth, up from a prior 3.3% estimate. The primary growth driver remains consumer spending, with discretionary purchases leading the charge this quarter.
Business investments gained pace due to robust consumer demand, with capital goods and machinery orders experiencing a boost in August. The narrowing U.S. trade deficit has also mitigated tariff impacts, supporting overall growth.
Insights on Consumer Behavior
Beneath the surface, consumer behavior reveals a divide. Higher-income groups continue spending on luxury items and travel, while lower-income segments face inflation-driven pressures. Even so, the consumer savings rate remains at 4.6%, an indication that reserves are being used but not exhausted.
This complex picture means premium brands thrive, whereas budget retailers face challenges.
Housing Sector Challenges
The U.S. housing market encounters hurdles this quarter, with building permits falling to pandemic-era lows and new single-family home starts dropping by 10% since last year. High prices and borrowing costs deterred many potential buyers, increasing inventory.
Although mortgage rates dropped slightly after the Fed's September rate cut, affordability concerns keep many sidelined. Builders remain cautious, and investors are keeping watch for shifts in rates and policies, requiring patience and perspective.
Trade Tensions and Economic Policy
Trade tensions continue as a significant influence. Companies are adapting by reshoring operations and managing inventories more carefully, showcasing agility amid persistent policy risks.
This environment leads to volatile trade-sensitive sectors, with domestic companies potentially enjoying more stability. Rising input costs and economic stagnation worries are also on the horizon.
The Fed's Balancing Act
With core PCE inflation at 2.9%, the Fed executed a quarter-point rate cut in September to 4.25%, characterized as a “risk-management” move to ease borrowing costs. The labor market presents mixed signals, with unemployment steady at 4.3% but slowing job growth and moderated wage increases.
Investors shifted from defensive to growth stocks, indicating increased risk-taking confidence. Moving forward, the Fed's challenge involves managing inflation concerns with indications of softer growth, likely causing market segment shifts.
Opportunities Amid Risks
Overall, the U.S. economy shows remarkable resilience, driven by tech advancements and strong consumer and business performance. Despite concerns in the housing market and potential policy risks, diversification remains crucial for minimizing volatility.
The Fed’s future actions on inflation and rates will likely influence sector rotations, reiterating the need for flexibility and a long-term perspective. With ongoing global policy changes and geopolitical uncertainty, adaptability and prudent risk management remain valuable strategies.
As always, any questions or interest in a portfolio review are welcome. We're here to help navigate the market confidently, regardless of future developments.