It’s hard to believe that we’re already in the final quarter of 2025. I’m happy for cooler weather and for football season (go Deacs!), but I’ll admit that I always miss summer when it’s gone. It’s nice having daylight when I get home in the evening.
Nonetheless, several economic developments are shaping the investment landscape, including a partial government shutdown, Federal Reserve policy shifts, and evolving global trade dynamics. I believe that most of it is noise, not real news, and that the fundamentals of the market are supportive of stocks going forward. Let’s dive a little deeper.
A partial government shutdown is upon us, but essential services like Social Security, Medicare, and defense operations should continue uninterrupted. Non-essential services, such as national parks, may close temporarily, and furloughed federal workers could reduce consumer spending in the short term. Historically, shutdowns have had minimal long-term impact on markets, with the S&P 500 averaging a 13% gain in the 12 months following past events. While short-term volatility is possible, the broader economy and corporate earnings are driven by fundamentals like GDP growth, which could create buying opportunities during any market dips. Importantly, a shutdown does not affect the U.S. debt ceiling, which was recently raised, ensuring no risk of default. Recall that the most recent shutdown lasted from December 22, 2018 to January 25, 2019 – the longest in U.S. history. The S&P 500 was up nearly 13.5% in that one month alone, so the market seemed glad for the shutdown!
The Federal Reserve recently cut interest rates by 0.25% in response to weakening job numbers, despite ongoing inflation concerns, signaling a shift toward balancing inflation control with employment support. This move sparked a rally in small-cap stocks, which are more sensitive to rate changes, leading to a broadly positive month across sectors. Markets are pricing in several rate cuts by the end of 2026, but economic indicators show mixed signals: job openings in July fell to pre-pandemic levels, manufacturing continued to contract, and private construction spending dropped in August. Meanwhile, tariffs remain a looming concern. Companies have mitigated their impact by relying on existing inventories and front-loading tactics, but as these strategies reach their limits, Q3 earnings season may reveal rising costs. Despite this, equities have surged to record highs, though the true impact of tariffs may soon emerge.
The third quarter was strong for stocks, with the S&P 500 hitting 23 record highs. Tech and Communication Services led with 13% and 12% gains, respectively, fueled by robust AI investment, but 10 of 11 sectors posted positive returns, showing broad market participation. Small-cap equities outperformed the S&P 500 for the first time in four quarters, reaching their first record high since 2021. There’s a reason that those huge tech companies have been leaders—they have grown their earnings by 108% since October 2022, compared to just 5% for the rest of the S&P 500.
On the global stage, gold and precious metals hit record highs. Emerging markets outperformed, while European equities lagged despite good performance year-to-date. We continue to favor U.S. equities for their stronger growth potential and tech exposure. U.S.-China trade relations took a step forward with U.S. control of 80% of TikTok and planned high-level meetings, though China’s push for tech independence, including restrictions on some computer chips, adds complexity. Legal developments also warrant attention: a U.S. Court of Appeals ruling limited the president’s ability to impose tariffs unilaterally, with a Supreme Court decision expected in early 2026. Additionally, a case involving the firing of Fed Governor Lisa Cook could impact the Fed’s independence.
On the calendar, October 13 is a bank holiday, although stock markets remain open, and October 15 is the deadline to file your extended income tax return. After your tax preparer uncovers from the October 15 deadline, the remainder of the year is a good time to meet with him or her to start planning for 2026 and to see if there are any strategic moves you could make for 2025, like IRA contributions or establishing a donor advised fund. We’ll be making moves inside portfolios to reduce capital gains implications, so if you have gains or losses elsewhere, please let us know.
—-Very importantly, if you have not completed your IRA distributions for 2025, PLEASE call our office soon to do that. Beneficiary IRAs are also required to make a distribution this year, and penalties can be steep.
Despite uncertainties from a potential shutdown, tariffs, and a cooling labor market, the economy and consumer spending remain resilient. With the Fed resuming rate cuts and GDP growth expected to strengthen in 2026, we maintain a positive outlook for equities, with opportunities for broader market gains. Our team is closely monitoring these developments to position your portfolio for long-term success. Please reach out to your financial advisor with any questions or to discuss your investment strategy. We’re here to guide you through these dynamic times.
