Overview
The U.S. economy continued to expand in Q3 of 2025, though at a slower pace following the strong rebound of early in the year. After growing at an annualized rate of 3.8 % in the second quarter, real GDP is now expected to rise around 1 % to 1.5 % in Q3, according to forecasts. The moderation reflects a mix of resilient consumer spending offset by weaker business investment, trade volatility, and growing policy uncertainty.
Labor market conditions have softened. Monthly job growth slowed to about 75,000, with unemployment edging up near 4.2 %. Hiring has cooled across most sectors, and prior months’ data have been revised downward. Though the job market remains relatively stable, the slowdown signals a gradual transition from the overheated conditions of the previous two years. Weaker labor momentum has begun to weigh on consumer confidence and spending, even as household finances remain generally healthy.
Inflation pressures have eased but persist. Headline CPI is running near a 3 % annual rate, down from earlier peaks, while core inflation remains sticky. Tariff-related costs and steady wage growth have kept the Federal Reserve cautious. The Fed has held rates between 4.25 % and 4.50 %, maintaining a data-dependent stance and tempering expectations for significant rate cuts later this year.
Consumer activity remains the key engine of growth, but elevated prices, higher borrowing costs, and policy uncertainty are dampening business sentiment. Trade remains a swing factor following earlier import declines that inflated Q2 GDP.
Overall, the U.S. economy remains in a late-cycle phase—expanding modestly but with reduced momentum. Inflation is improving but not yet fully contained, the labor market is normalizing, and policy risks are rising. The outlook is one of cautious resilience heading into year-end 2025.
Global markets in the third quarter of 2025 reflected a mixed economic landscape marked by slowing growth, easing inflation, and rising policy uncertainty. After a strong first half, momentum in many advanced economies faded as higher interest rates and trade tensions weighed on business confidence. Europe’s economy remained fragile, with growth near 1 % as manufacturing and exports softened. Japan’s recovery also lost steam amid weak domestic demand.
In contrast, several emerging markets continued to outperform. India remained a standout, sustaining growth above 6 % on robust consumption and infrastructure spending, while parts of Southeast Asia and Latin America benefited from resilient domestic demand and moderating inflation. China’s expansion slowed further as the property sector and exports weakened, limiting the region’s broader momentum.
Equity markets outside the U.S. were generally positive but lagged American benchmarks. European and Japanese equities posted modest gains, supported by expectations of gradual central bank rate cuts later this year. Emerging market stocks showed uneven performance—India and Brazil advanced, while China and broader Asia ex-Japan indices declined.
Overall, international markets ended Q3 navigating late-cycle conditions: modest growth, cooling inflation, and elevated geopolitical and policy risk, with investors favoring regions showing stable earnings and credible monetary easing prospects.
U.S. Equities
U.S. large-cap stocks posted strong gains in the third quarter of 2025, with the S&P 500 rising roughly 8%, bringing year-to-date returns to about 15%. The rally was again concentrated inmega-cap technology and AI-related names, which dominated index performance. Companies such as Nvidia, Apple, and Alphabet led advances as investor enthusiasm around artificial intelligence, cloud infrastructure, and semiconductor demand continued to drive earnings momentum and valuations higher.
Optimism about potential Federal Reserve rate cuts later in the year also boosted growth-oriented sectors, as lower-rate expectations supported higher multiples for tech and communication services stocks. Corporate earnings were broadly better than expected, with several large-cap firms raising forward guidance, reinforcing confidence in corporate profitability despite a softer macro backdrop.
Overall, Q3 2025 was characterized by strong headline gains, powered by technology strength, resilient earnings, and easing inflation expectations, but underpinned by increasingly concentrated market leadership.
U.S. small- and mid-cap stocks posted strong but uneven gains in the third quarter of 2025. The Russell 2000 rose about 12%, outpacing most mid-cap benchmarks and narrowing the gap with large caps. Small-cap performance was broad-based, with all sectors advancing—led by industrials, technology, and consumer discretionary stocks. Gains were supported by attractive valuations, expectations for accelerating earnings growth, and investor rotation away from mega-cap concentration.
Mid-caps also rose but lagged slightly as investors favored either large-cap stability or small-cap recovery potential. Overall, improving inflation trends, resilient consumer demand, and hopes for eventual Fed easing fueled optimism. Q3 marked a period of renewed strength for smaller companies, though performance remained sensitive to interest rate and economic growth expectations.
International Equities
In Q3 2025, both developed and emerging market equities posted healthy gains, though their drivers and underlying dynamics differed.
Developed markets—especially in Europe and Asia—benefited from improved investor sentiment, prospects of monetary easing, and continued strength in technology and industrial names. Global demand normalization and lower inflation pressures allowed central banks to signal a more accommodative stance, bolstering equity valuations. The weakening U.S. dollar also amplified returns for U.S. investors in foreign assets.
Emerging markets outperformed their developed peers, fueled by a combination of favorable fundamentals and macro tailwinds. Many EM central banks have eased rates in response to softening inflation, helping boost growth prospects. Stronger earnings growth—especially in key EM tech, semiconductor, and export-led sectors—and increased investor flows into growth and AI-leveraged stories further lifted performance. The weakening U.S. dollar also supported emerging market returns, as currency gains added to local equity appreciation.
However, dispersion remained high: some EMs continued to grapple with structural vulnerabilities, commodity dependence, or policy volatility. Investors remained selective, favoring countries with stable macro policies, credible reforms, and solid corporate earnings outlooks.
Overall, Q3 2025 saw strong momentum in global equities, with emerging markets leading the charge thanks to more attractive valuations, supportive monetary policy, and cyclically favorable earnings trends.
Fixed Income
In Q3 2025, U.S. government bonds posted modest gains of about 1.5% as Treasury yields generally declined over the quarter. Shorter-term yields fell more aggressively, reflecting a shifting focus from upside inflation risks toward concerns about slower growth and a cooling labor market.
Credit sectors (investment-grade corporates and high-yield bonds) outperformed broader sovereigns. Tightening credit spreads—driven by strong demand for yield, optimism about monetary easing, and a benign default outlook—helped lift total returns in corporate credit. Emerging-market bonds also fared well, aided by a weaker U.S. dollar, improving appetite for carry, and mild spread compression.
Municipal bonds also showed strength, supported by robust coupon income, favorable technical flows, and a steep yield curve that enhanced the opportunity in tax-exempt bonds.
Looking ahead, the fixed income outlook is cautiously optimistic but uneven. Many strategists expect further modest gains, particularly in income-focused segments, so long as yields remain elevated and credit fundamentals hold. Duration will remain a balancing act: while lowering rates could boost bond prices, inflation surprises or fiscal pressure could push yields higher again. Quality and active credit selection are expected to matter more, as dispersion across sectors and issuers grows.
