The US economy experienced a slowdown in the first half of 2025, with annualized growth averaging 1.4%, down from 2.8% year/year in 2024. Yet, in the third quarter of the year, US equities delivered a solid run, with major indexes reaching fresh all-time highs amid robust earnings growth, optimism over potential Federal Reserve (Fed) interest rate cuts and strong enthusiasm around artificial intelligence (AI) investments.
More specifically, all major segments of the equity market posted strong positive returns in the third quarter, led by US small cap stocks (Russell 2000® Index), emerging markets (MSCI Emerging Market Index) and large cap growth stocks (Russell 1000® Growth Index), up 12.4%, 11.0% and 10.5%, respectively. Large cap value stocks (Russell 1000® Value Index) and developed markets (MSCI EAFE Index) lagged but still posted solid returns, up 5.3% and 4.8%, respectively.
So far this year, the mix of strong market performance and rising political and economic uncertainty highlights a central paradox: risks are mounting yet returns remain robust. We see four takeaways:
- Interest rates are likely to trend lower
- Inflation risks are real but manageable
- The dollar may weaken further
- Consensus earnings growth for U.S. equities remains robust
Shrugging off political news has been a good strategy for investors so far and the ongoing federal government shutdown doesn’t change that. But a collision between the White House’s tariff threats and the Fed’s aim to keep inflation down is still the biggest risk heading into the final months of 2025. Yet, we see upside in sectors of the equity markets. International and emerging markets stocks look particularly attractive as do US value, small and midcap stocks.
For more detail, please click on this link: Q3 2025 Review & Outlook. And, please click here for your individual performance report or set up a call.
In closing, we take wisdom from three famous investors who have seen this movie before. A synopsis of quotes from Warren Buffett (Chairman, Berkshire Hathaway), Peter Lynch (legendary Fidelity fund manager) and John Bogle (Founder of Vanguard Group):
“The market may be high, but history rewards the patient – fortune flows to those who stay invested, not those who try to time it.”
Thank you for your trust in us!
Your PCM Team