2025 Third Quarter Review and Outlook
Dear Clients,
In the midst of tariff turmoil last April, few observers could have anticipated that financial markets would produce above average gains this year. By the end of the third quarter, however, investors in both equities and fixed income had been amply rewarded for staying the course. The S&P 500 returned +14.8% for the period, while the MSCI All-Country World ex USA Index, reflecting a weakened dollar, gained 26.6%. The Bloomberg US Aggregate Bond Index meanwhile returned +6.13%.
The resilience of global stock markets can be attributed to AI-related capital expenditures, continued consumer spending, and double-digit growth in corporate earnings more broadly.
Investor exuberance notwithstanding, the US economy is slowing. Third quarter GDP is likely to come in at roughly 3%, down from 3.8% in the second quarter.[i] Consumer spending has been largely sustained by wealthier households, but lower income families are stretched, as reflected by rising levels of consumer debt, and auto and credit card delinquency rates.
Though unemployment rates have held steady, this is largely due to the shrinking labor force. Job openings are trending down, and layoffs are up, but the Trump administration’s draconian immigration and deportation policies have shrunk the labor force and led to fewer people seeking jobs. As a result, while hiring has fallen as the economy slows, the balance between job openings and the number of people looking for employment has remained stable.[ii]
Inflation, currently at 2.7%, is rising largely due to tariffs on imported goods. Though manufacturers and retailers have absorbed some of the cost increases thus far, this buffering effect will be gradually phased out, and the inflation rate is expected to reach 3.5% next year as costs are passed on to consumers.[iii]
The housing market meanwhile is sluggish, and consumer confidence declined sharply in September to its lowest level since April.[iv]
Fourth quarter economic data is likely to reflect the combined effect of tariffs, slower federal spending, and a protracted government shutdown. Public sector layoffs will only compound the effects.
Nevertheless, markets may already be looking beyond the final months of this year, to the expansive effects of the recently passed tax bill. Backdated to the beginning of 2025, the so-called BBB will result in roughly 70% of households receiving tax refunds of up to $4,000 in early 2026. Combined with a more stimulative monetary policy and lower interest rates, consumers could go on a spending spree, producing a surge in economic activity.
Barring further fiscal stimulus, however, this uptick might be short-lived. After the sugar high of the tax break, we may well wake up to a slow-growth hangover later next year.
2025 thus far has been the third strong year in a row for equity markets. But investors would do well to bear in mind that the US stock market is priced at the highest level since the dot.com bubble a quarter century ago, and money concentrated in the ten largest US companies represents a record 40% of the total market. [v] Slowing growth could lead to a period of disappointing returns for many who have grown accustomed to double-digit annual gains.[vi]
High prices and slowing growth make us cautious, but we do see opportunities for investors. We believe that the gains in international markets still have room to play out, as earnings growth for foreign companies catches up with the US. After a fourteen-year upswing, the dollar has room to weaken further, which will add to the performance of international stocks. A broadly diversified US portfolio, meanwhile, should help alleviate the risk of concentration in the largest tech companies, while capturing potential earnings expansion in other sectors as interest rates fall. And fixed income investors can capture yields in excess of 4.5% for investment grade bonds, an attractive complement to more volatile asset classes.
On a housekeeping note, we will be in touch if there are Required Minimum Distributions (RMDs) still to be taken from your retirement accounts before year-end. For Qualified Charitable Distributions from retirement accounts, we will aim to have instructions submitted to Schwab by December 1st to ensure that all goes smoothly.
We and the LongView team wish you a joyful holiday season over the coming months and, as always, we welcome your questions and are grateful for your trust.
The LongView Team
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Photo by Raychel Sanner on Unsplash.
[i] JP Morgan Q3 Guide to the Markets p.18
[ii] JP Morgan Q3 Guide to the Markets p.19
[iii] JP Morgan Q3 Guide to the Markets p.24
[iv] The Conference Board, US Consumer Confidence Declines Again in September, September 30, 2025
[v] JP Morgan Q3 Guide to the Markets p.10
[vi] JP Morgan Q3 Guide to the Markets p. 5