Investment Review for Third Quarter 2025

Risky assets rise.

Domestic U.S. large companies accelerated by 8.1% in the third quarter, driven primarily by the tech-heavy Magnificent Seven and other AI-related names. In contrast, equal-weight indices lagged behind as weaker performers. U.S. small companies rebounded with a 9.1% rally, recovering from a sluggish first half of the year. Meanwhile, foreign stocks continued to build on their strong momentum from earlier in the year, with emerging market stocks rising 10.6%.

When these third-quarter results are combined with the gains from the first half, it becomes clear that international stocks are having a tremendous year. Foreign large and small companies have gained 25.1% and 27.9%, respectively, while emerging markets have increased by 27.5%. This sustained performance highlights the broad strength across global equity markets.

Federal Reserve rate cut.

The Federal Reserve cut short-term interest rates by 1/4 percentage point to a target range of 4 to 4-1/4 percent, attributing the move to signs of labor-market softening and slowing growth, while still viewing inflation risks as manageable. In its Summary of Economic Projections, Federal Reserve participants indicated the potential for an additional ½ percentage point decrease by year-end, and financial markets have priced in an 85% probability of that occurring—even as concerns persist that tariffs could reignite price pressures.

This focus on inflation is further reflected in the August Consumer Price Index report, which showed prices rising 2.9% over the past 12 months. Excluding volatile food and energy prices, core inflation was even higher at 3.1%. Both figures remain above the Fed’s 2% goal, though they are lower than levels experienced at the start of the year. These inflation readings help explain the Fed’s cautious approach to rate cuts, as policymakers balance the need to support growth against the risk of renewed price pressures.

Labor market cooling.

In August, job openings increased by 19,000 to reach 7.2 million, while the openings rate held steady at 4.3%. This modest rise, following several months of gradual decline from pandemic-era peaks, suggests that firms still have plenty of vacant roles—even as hiring plans begin to cool slightly.

Voluntary separations (“quits”) remained largely unchanged at 3.1 million. As quits often indicate employee confidence, reflecting a willingness to pursue improved opportunities, the unchanged data suggests ongoing stability in workforce morale.

Layoffs and discharges also showed little month-to-month movement, totaling roughly 1.7 million and leaving the layoff rate at 1.1%. The absence of a jump in involuntary separations indicates that employers are willing to retain staff, even as economic growth moderates.

Collectively, these trends suggest that while the labor market continues to experience tight conditions, it appears to be progressively moving toward a state of equilibrium.

Economic growth.

Real gross domestic product (GDP) rose at a 3.8% annualized rate in Q2 2025, rebounding from a 0.6% contraction in Q1 and representing an upward revision of 0.8 percentage points from the advance estimate. The increase in the second quarter was primarily driven by a decrease in imports—which are subtracted in the calculation of GDP—as front-loaded pre-tariff stockpiling unwound, along with an acceleration in consumer spending. However, growth was partly offset by declines in private fixed investment and exports.
Real final sales to private domestic purchasers, which exclude distortions sometimes caused by changes in inventories and net exports, rose 2.9%. This figure was revised upward by 1.0 percentage point from the previous estimate, signaling stronger underlying domestic demand.

Looking ahead, as of October 1, 2025, the Atlanta Fed’s GDPNow model projects Q3 2025 real GDP growth at 3.8%. This continued strength in GDP, alongside robust domestic demand, suggests that the economy is maintaining momentum even as certain sectors face headwinds.

Another government shutdown.

Over the past four decades, we have seen 20 gaps in federal government funding. Each government shutdown can disrupt federal operations, weaken economic data collection, and reduce GDP growth, leading to increased unemployment and diminished investor confidence.

During a shutdown, non-essential services are paused, resulting in furloughs for hundreds of thousands of federal workers. While essential services continue, many employees are required to work without pay, placing significant strain on household finances. The impact also extends to federal contractors, who may lose work, which in turn affects private sector jobs that depend on government projects.
This reduction in government activity directly slows GDP growth, especially if the shutdown is prolonged. Delays in spending within sectors reliant on federal funding, such as defense and infrastructure, can ripple through the broader economy.

Additionally, the suspension of key economic reports—such as those tracking jobs and inflation—hampers the Federal Reserve’s ability to make informed decisions regarding interest rates. As a result, policymakers and investors are left operating with impaired vision, thereby increasing uncertainty in financial markets.