Complex Navigations

This year’s third quarter witnessed global and domestic economies navigating a complex landscape characterized by resilient growth, stubborn inflation, and rising policy uncertainty. Despite headwinds from higher tariffs and slowing labor markets, the U.S. economy continued its growth, driven by robust consumer spending and ongoing investment in artificial intelligence (AI) infrastructure. Inflation remained a persistent concern, prompting the Federal Reserve to cut rates cautiously in September, though the ”higher for longer” sentiment continues to dampen expectations for an aggressive easing cycle.

Market performance was strong, with all major U.S. indices hitting record highs during Q3. The tech-heavy Nasdaq index led the charge, fueled by AI enthusiasm and solid corporate earnings. Small-cap stocks also outperformed, and robust earnings reports, especially from the tech sector, reinforced a positive market sentiment. In contrast for fixed-income investors, slowing economic growth and Fed accommodation led to a drop in interest rates and a rally in bond prices.

Following a strong first half in 2025, economic growth as measured by GDP (Gross Domestic Product) looked to be cooling in Q3 but remained positive. The Atlanta Federal Reserve’s GDPNow model projected a real GDP growth rate of 3.8% for Q3, a slight deceleration from Q2 but still indicative of solid expansion. The Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters was more conservative, with a median forecast of 1.3% growth for the quarter. Key drivers of growth included continued consumer spending, supported by higher wages (despite a cooling labor market), and significant AI-related business investment, with companies prioritizing tech infrastructure despite headwinds from higher interest rates.

The U.S. labor market showed clear signs of softening throughout the third quarter. Monthly job creation slowed significantly, averaging just 25,000 from May to August, a sharp decline from the 230,000 monthly average at the start of the year. Healthcare and government sectors were the primary engines of job growth, while professional services and manufacturing sectors lost jobs. The unemployment rate steadily climbed, reaching a four-year high of 4.3% in August. Average hourly earnings grew at a sluggish pace and the average workweek shortened, suggesting that businesses were tightening labor costs. The government shutdown that began as Q3 ended could exacerbate labor market weakness, particularly for federal workers.

Inflation remained persistent and a focal point for both policymakers and markets. Headline CPI (Consumer Price Index) accelerated to 2.9% (year-over-year) in August, its highest level since January, driven by higher import tariffs, gasoline, and supermarket costs. Services inflation, particularly shelter costs, remained robust, while goods inflation showed a more moderate increase. This suggests that the full effect of tariffs has yet to be fully passed on to consumers. Consumer inflation expectations picked up in July and August, potentially signaling a risk of entrenched inflation.

The Federal Reserve was at the center of financial market attention during Q3. In a widely anticipated move, the Fed cut the federal funds rate by 25 basis points in September, the first such reduction in 2025. The decision was influenced by the cooling labor market, though stubborn inflation figures presented a challenge. Despite the cut, comments from some Fed officials signaled a continued ”higher for longer” policy stance, stressing the priority of fighting inflation. The Fed’s September economic projections revised 2025 GDP growth higher while keeping unemployment projections stable, indicating a belief in a softer landing.

Global economic growth is projected to slow to 2.9% in 2025, down from 3.3% in 2024. This deceleration is attributed to heightened U.S. tariffs, persistent policy uncertainty, and geopolitical tensions. Growth in developed economies is expected to be muted, particularly in the Eurozone and Japan, as exports are impacted by U.S. tariffs. Emerging economies are also facing headwinds, though they are expected to outperform developed countries.

U.S. equity markets posted strong returns in Q3, with major indices reaching all-time highs with lofty valuations. The technology sector, particularly AI-related stocks like Nvidia and Western Digital, drove market gains. Strong corporate earnings in tech, finance, and energy supported market confidence. Healthcare was the only S&P 500 sector in negative territory year-to-date, despite a modest Q3 gain. Foreign equities outperformed U.S. equities on a Q3 and year-to-date basis, indicating broader global market strength beyond the U.S.

Fixed-income markets performed well as interest rates fell across the yield curve causing bond prices to rise. The rally was fueled by increasing investor confidence that slowing economic growth would lead to more accommodative Fed policy, despite persistent inflation worries. Gold continued its stellar year-to-date performance, gaining over 46%. This reflected a combination of investor anxiety over economic uncertainty and geopolitical risks, alongside a desire for portfolio ballast.

The fourth quarter begins with a mix of optimism and caution. The strong equity market performance in Q3 contrasts with clear signs of economic softening, particularly in the labor market. The Fed’s cautious rate cut and mixed signals from policymakers suggest a delicate balance is being sought between supporting the economy and controlling inflation. The federal government shutdown and uncertainty surrounding tariffs will continue to influence market sentiment and economic activity.

Earnings expectations drive equity prices, and a sustained market rally depends on continued robust corporate earnings. The upcoming Q3 earnings season will be critical for validating market optimism and management guidance for Q4 and 2026. Geopolitical tensions and the risk of an escalated global trade war remain significant threats to the global economic outlook. The outsized performance of AI-related stocks raises questions about market concentration and potential bubble risks, though for now, strong fundamentals in the sector are supporting valuations.

In this environment, market volatility is expected to continue. Investors should remain focused on their long-term goals and a diversified approach, recognizing that the path forward is unlikely to be a straight line. Investors with intelligent financial plans, broadly diversified portfolios, adequate cash reserves and sound guidance from a team of dedicated professionals can confidently turn their attention to their families, careers and personal interests, ignoring the crisis-obsessed financial media.

Best wishes for a great fall.

Sam Taylor, CIMA®, AIF®, CRPC®