2025 | 3rd Quarter
2025 Third Quarter Market Commentary
If the market’s volatility in the second quarter this year was akin to navigating choppy seas during a hurricane, the third quarter was a leisure cruise in the San Diego Bay. Despite headlines and concerns over tariffs, inflation, threats to the central bank’s independence, and a weakening labor market, markets remained calm. The S&P 500 closed higher for the fifth-straight month in September, up 8.1% for the quarter and bringing year-to-date performance to 14.8%.
Optimism over artificial intelligence (AI) continues to drive market performance in the U.S. The Technology and Communication Services sectors led with double-digit performance in the quarter and remained as the top contributing sectors year-to-date. While the AI-theme has also powered strong performance in the Utilities and Industrials sectors (due to the massive energy and infrastructure needed to run AI), the main themes over the past few years persist – Growth outperforming Value and Large Cap outperforming Mid and Small Cap. Despite this, we are starting to see some broadening of returns. The Russell 1000 Value Index is up 11.2% year-to-date, and Small Cap outperformed Large Cap for the quarter, with the hope of lower borrowing costs driving the Russell 2000 Index up 12.4%, bringing year-to-date performance to 10.4%.
International Equity markets continue to perform well. Developed Markets (MSCI EAFE Index) returned 4.8% for the quarter and are up 25.1% year-to-date. While a weaker dollar boosted returns, optimism persists in Europe with increased spending on defense and infrastructure. In China, the focus remains on a trade deal with the U.S., AI adoption and its potential to increase profits, and the need for the government to stimulate demand and address overcapacity. Positive headlines regarding those issues drove performance, helping Emerging Market Equities lead all equity markets for the quarter, up 10.6%, as well as year-to-date, up 27.5%.
The third quarter saw the Federal Open Market Committee (FOMC) resume their easing cycle, cutting the federal funds rate by 25 basis points (0.25%) for the first time in nine months. The 10-year Treasury Yield fell 8 basis points during the quarter, ending at 4.16%. Yields remain at attractive levels compared to the period from the Great Financial Crisis through the Pandemic. The Bloomberg Aggregate Bond Index returned 2% for the quarter and is up 6.1% year-to-date. Investment Grade (up 2.6% for the quarter, 6.9% YTD) and High Yield corporates (up 2.5% for the quarter, 7.2% YTD) outperformed slightly. Credit spreads remain tight, with both Investment Grade and High Yield spreads close to historical lows. While the credit quality of the bond market has increased and defaults have remained low, current spreads warrant a focus on quality and security selection in fixed income.
As we start the third quarter, equity markets continue to hit all-time highs as optimism around AI continues. While valuations (measured by price-to-earnings ratios) are elevated and markets are concentrated (the top 10 names in the S&P 500 account for around 40% of the index), analysts continue to expect double-digit earnings growth this year and next. If AI adoption leads to productivity gains, profit margins can remain healthy, and earnings can continue to grow at elevated levels. If companies do not see a return on their massive AI investment, markets may come under pressure.
Looking ahead, there are clouds on the horizon with a slowing labor market and the full impact of tariffs on the consumer not yet felt. Consumer spending has remained solid this year, and fiscal stimulus from the One Big Beautiful Bill Act (OBBBA) should provide a boost early next year. Additional Fed rate cuts this year and next should ease financial conditions for consumers and businesses.
Lastly, at the time of writing, we are currently on the 10th day of a government shutdown. There have been 21 shutdowns since 1950, and most have had little-to-no impact on economic growth, earnings, or equity returns. With the debt ceiling limit increased as part of July’s One Big Beautiful Bill Act, the current situation has no impact on the country’s ability to repay their debt. As the shutdown drags on and financial pain is felt by government workers and contractors, we expect the issue to be resolved.
Although we cannot change the direction of the wind, we can adjust the sails. We remain diversified with a focus on quality in equities and fixed income. As year-end approaches, now is a good time to review your financial plan, specifically around taxes, gifting, and required minimum distributions. We hope you enjoy the upcoming holidays with your family and loved ones. As always, please reach out to us with any questions.
Jonathan F. Kolle, CFA®
President, Chief Investment Officer
Daniel A. Morris, M.S.
Co-Chief Investment Officer
Timothy J. DeAngelo, CFA®
Portfolio Manager
Shawn R. Keane, CFP®
Vice-President
Cindy de Sainte Maresville, CFP®
Certified Financial Planner
Rusty Giles
Director of Marketing
The foregoing content reflects the opinions of Smithbridge Asset Management and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.
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