Third Quarter Market Update 2025: The Rally Continued
The temperature here in Michigan has been sweltering. Summer has seemed to drag on, and until recently, it brought a drought with it! The unfortunate circumstances for farmers have not extended to markets, however.
The third quarter brought huge gains across stock markets and modest gains across bond markets.
As you can see above, the 3-month style box returns show exceptional results on everything from large-cap value to small growth stocks.
The question is WHY?
Several key factors contributed to these results.
1. Federal Reserve Interest Rate Cut and Monetary Easing:
- The Federal Reserve (Fed) cut the fed funds rate by 25 basis points (bps) in September, its first cut of the year, and signaled the potential for further easing. This is something I have been talking about for quite some time.
2. The Continued Artificial Intelligence (AI) Boom:
- Excitement and significant investment around the AI sector continued to fuel the market.
- Technology and growth stocks, particularly those related to AI infrastructure and large tech companies (often referred to as the "Magnificent Seven"), led the equity rally, driving major U.S. indices like the S&P 500 and Nasdaq to new all-time highs.
3. Global Equity Market Strength and Divergence:
- Emerging Markets Outperformance: Emerging market stocks, particularly those in Asia (e.g., China and Taiwan, which benefited from tech/semiconductor cycles), outperformed developed markets. China's market surged on policy support for domestic chipmakers and easing trade tensions with the U.S.
- Broadening Rally: While tech giants led, the rally broadened, with small-cap stocks also outperforming large-cap stocks for much of the quarter, buoyed by rate-cut optimism.
- Trade Tensions Easing: A perceived de-escalation of trade tensions (like the extension of a US-China trade truce and a US-Japan trade deal) helped boost global sentiment and export-heavy markets.
In more detail below, you can see the impact of these three factors across market indices for the year and the longer term.
At FSG, we have been strong believers in some of the asset classes that have outperformed this year, such as emerging markets and international developed markets. Although lagging in performance in recent years, the outperformance of this year shows to trust the benefits of diversification!
We don’t anticipate any major portfolio changes before year end at this point, but that does not mean we’ve stopped working! Every day, analytics are run on our portfolios to make sure they are properly aligned. Our investment team meets every quarter and does a comprehensive review of our holdings and our allocation.
If I were to summarize our current portfolio tilt, I would say we are more cautiously optimistic about the future while maintaining proper risk hedges in the risk-adjusted portfolios.
Written by: Brice Carter
This commentary on this website reflects the personal opinions, viewpoints, and analyses of the Financial Strategies Group, Inc employees providing such comments, and should not be regarded as a description of advisory services provided by Financial Strategies Group, Inc or performance returns of any Financial Strategies Group, Inc Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Strategies Group, Inc manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.