During the third quarter of 2025, the U.S. markets demonstrated notable resilience despite facing a complex mix of trade tensions, policy shifts, and economic sector-specific developments. Tariff rates saw a significant increase, with President Trump announcing new tariffs targeting pharmaceuticals, heavy trucks, certain furniture items, and foreign-made films, including a dramatic 100% tariff on non-U.S. produced movies and a potential domestic semiconductor production mandate. While these actions heightened uncertainty, some relief was provided by bilateral trade agreements and a 90-day postponement of additional tariffs on China. Despite these challenges, corporate America delivered a strong Q2 earnings season, with year-over-year EPS growth approaching 12% — surpassing the expected 4.9% as companies effectively implemented tariff mitigation strategies.
The AI investment theme continued to drive markets, highlighted by Nvidia’s $5 billion investment in Intel (boosting Intel shares by 23% the day of the announcement) and a commitment of up to $100 billion to OpenAI. The U.S. government further supported the sector by easing restrictions on semiconductor sales to China, allowing Nvidia to sell its H20 AI chip there. This momentum fueled sector dispersion, with technology leaders like Nvidia (+12.6% in July), Tesla (+33.2% in September), and Google (+14.2% in September) outperforming, while others such as Meta and Amazon lagged. Semiconductors rallied 12.4% in September, and strength was also seen in homebuilders, oil services, airlines, industrial metals, and larger-cap banks. Conversely, sectors like athletic apparel, cruise lines, energy, media, restaurants, food and beverage, casinos, trucking, casual diners, chemicals, regional banks, and credit cards underperformed.
Economic indicators were generally positive, with the Citi Economic Surprise Index reaching its highest level of the year. However, the labor market showed signs of softening, as the September Consumer Confidence survey indicated the narrowest labor market differential since early 2021. The housing market was mixed—while existing and pending sales were weak in July, pending home sales surprised with a 4.0% month-over-month increase in September. Consumer spending remained solid, supported by strong control-group retail sales and positive sentiment at industry events.
Political developments further contributed to uncertainty. The Trump administration’s announcement to dismiss Fed Governor Cook on fraud allegations raised concerns about the independence of the Federal Reserve, and the federal government faced a possible shutdown at September’s end due to a lack of a funding agreement. Despite these headwinds, the dominant narrative was one of strong corporate earnings, robust sector performance in AI and innovation-driven segments, and companies’ continued adaptability.
The third quarter was marked by broad-based gains across asset classes, investment styles, sectors, and regions. Gold had its best start to a year since at least 1980, and the MSCI Emerging Markets Index was on track for its strongest year since 2009, primarily due to China’s performance. In contrast, the U.S. dollar logged its weakest first nine months since 1986. Despite concerns regarding tariffs, margins, valuations, labor conditions, and Fed policy, the market delivered some of its best returns in years, with the S&P 500 advancing 7.8% in Q3—its best third quarter since 2020—and posting its strongest September rally since 2010.
Emerging markets stood out, as the MSCI Emerging Markets Index gained 12.2% in Q3 and 24.3% year-to-date in local currency terms (10.6% and 27.5% in U.S. dollar terms, respectively). The MSCI EAFE Index also posted gains of 5.4% in Q3 and 13.6% year-to-date (4.8% and 25.1% in dollar terms). Gold surged 16.6% in the quarter and 45.9% year-to-date, leading all asset classes amid inflation and currency concerns. The S&P GSCI index saw modest gains, while oil prices declined. The U.S. Dollar Index rose 1.1% in Q3 but remained down nearly 10% for the year, and T-bills lagged as investors favored riskier assets following the Fed’s rate cut.
Among equity styles, small-cap and mega-cap growth stocks led in Q3, with mid-caps and large-cap value stocks trailing. Small caps rebounded on expectations of lower borrowing costs, and the Russell 2000 outperformed both the Russell Top 200 and Midcap indices. The Russell Top 200 Growth index rose 11.1% in Q3, ranking as the fourth strongest style. Mid-caps underperformed, and while Growth outpaced Value in large caps, Value did better in smaller caps. Year-to-date, large-cap Growth led with a 17.1% gain, followed by large-cap Value at 12.9%, and most style boxes saw double-digit returns.
S&P 500 factor analysis revealed that short-term growth factors, such as EPS and sales growth, outperformed long-term ones in Q3. Strong quarterly results fueled outperformance in earnings revision and surprise factors. While Growth factors led, value-oriented factors like sales/price, EBITDA/EV, and book/price also posted positive returns. Shareholder yield and repurchase yield underperformed, and dividend strategies delivered moderate gains. Risk-on factors—such as cyclical versus consumer beta and small versus large beta—excelled, while high versus low quality beta lagged. Momentum strategies outperformed mean reversion.
Growth leadership dominated the S&P 500, especially in Technology, Communication Services, and Consumer Discretionary, which together accounted for the bulk of quarterly gains. Consumer Staples was the only sector to post a loss. Cyclical sectors outperformed defensives, with Technology and Communication Services up over 20% year-to-date. Utilities also performed well, while Health Care, Consumer Staples, and Real Estate lagged.
Bonds advanced in Q3, particularly those with longer durations, as labor market concerns prompted the Fed to resume rate cuts. The Bloomberg U.S. Aggregate Bond Index returned about 2% for the quarter and over 6% year-to-date, with all sectors posting gains. Long-term maturities and municipal bonds outperformed, investment-grade credit edged out high-yield corporates, and emerging market debt delivered a 3.4% return. The U.S. was the best-performing fixed income market, while foreign bonds lagged for U.S. dollar-based investors as the dollar strengthened.
By Thomas Martin, CFA
Originally published on October 3, 2025
Originally published on ETF Trends
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