Markets broadly reached new highs in the third quarter of 2025 as they overlooked political noise to focus on economic drivers. Bonds posted solid gains and equities were driven by two primary signals: the promise of productivity gains from artificial intelligence and expectations for lower rates from the Federal Reserve. Despite a government shutdown and persistent uncertainty around the implementation and impact of trade policy, the result was another strong quarter for diversified, multi-asset portfolios.
The central task for investors in this environment is to separate the signal from the static. Political headlines and policy debates may dominate financial news, but might not alter the long-term trajectory of economic growth or corporate profitability. The resilience of markets in Q3 underscores the importance of a disciplined investment process grounded in economic rationality rather than reactive adjustments to headline risk. Our approach remains focused on building robust portfolios optimized to capture economic growth, while managing the risks that inevitably arise in a complex and changing world. This quarter serves as a strong validation for this philosophy of broad, risk-managed diversification.
Markets
Market Performance
Global markets extended their gains in the third quarter of 2025, with both equities and bonds posting positive returns across the board despite mixed macroeconomic signals. Equity markets reached new all-time highs, driven largely by the continued strength of U.S. large-cap growth, fueled by leading AI-related companies, and renewed momentum in Emerging Markets.
U.S. equities advanced about 8% for the quarter. Weaker labor market data, but no imminent recession risk, provided a positive catalyst for asset valuations amid higher expectations of further Fed rate cuts, while inflation stayed broadly in line with forecasts but remained above the Fed’s target. The gains were led by large growth stocks, up about 10%. Small-cap performance varied by index, with the Russell 2000 up a spectacular 12.4%, while other small cap indices, such as the CRSP US Small Cap Index, gained 7.5%, supported by lower borrowing cost expectations and a solid economy.
International markets also performed well. Emerging markets outperformed developed with a 9.8% return, led by China and Taiwan where AI enthusiasm and softer trade tensions supported local sentiment. Canada followed with 9.4%, and the Asia-Pacific region gained 6.9%, led by Japan. European equities rose modestly by 2.9% after a strong first half of the year.
In fixed income, expectations of additional Fed rate cuts contributed to positive returns for all major fixed income asset classes. The U.S. aggregate bond returned 2.1% as Treasury yields declined, especially at the front end, leaving the curve modestly steeper than in June. Credit spreads remained historically tight, with investment-grade corporates slightly outperforming high yield. Global bonds gained 0.6%, with Emerging Market debt as the notable outperformer at 4.1%.
Gold deserves special mention, rising another 16.7% in the quarter. Persistent central bank buying to diversify reserves and strong demand for a risk hedge amid elevated policy uncertainty kept the metal among the best-performing assets of 2025. For many investors, gold has been the preferred store of value amid concerns about inflation, geopolitical risk, currency debasement, and high equity valuations.
Strategy Performance
New Frontier’s ETF portfolios delivered solid absolute and relative results in Q3, with both equity and fixed income allocations contributing positively.
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Global Core portfolios posted positive returns across all risk profiles, benefiting from broad-based gains in global markets. Lower-risk profiles outperformed their respective benchmarks, supported by diversified bond exposure across maturities and sectors. Duration, credit, and Emerging Market debt allocations added to relative performance. Gold was again a major contributor and remained the top-performing diversifier. On the other hand, allocations to minimum volatility equities and an underweight to U.S. large-cap growth modestly detracted from relative performance.
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Tax-Sensitive performed largely in line with Global Core, with slightly better relative results across risk profiles. Outperformance came from municipal bonds, which exceeded the returns of taxable bonds, and from structurally higher allocations to U.S. large-cap growth equities due to tax efficiency, which helped capture more of the equity rally.
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Multi-Asset Income (MAI) portfolios outperformed their benchmarks across all risk levels. The portfolios benefited from our selection of high-dividend ETFs diversified by methodology and region. The newly added high dividend ETFs continued to outperform the funds they replaced. Convertible bonds were another key contributor, benefiting from exposure to the technology sector. The S&P 500 covered call ETF remained an effective and diversified income source, generating a high yield driven by option premiums. The portfolios continued to meet their objective of delivering attractive and stable income, with yields around 5%.
Model Reallocations
No rebalancing was triggered this quarter. Portfolios had been optimized for a higher-risk regime earlier in the year, which resulted in relatively defensive positioning. As market conditions and updated risk estimates normalized in Q3, our Intelligent Rebalancing™ process allowed the portfolios’ risk profile to drift with the market’s positive momentum. This naturally tilted the portfolios toward more aggressive ETFs without requiring a formal rebalance, demonstrating the adaptive nature of our process.
New Frontier uses Intelligent RebalancingTM, the Michaud-Esch portfolio rebalance test, to guide portfolio reallocation and rebalancing decisions. This framework allows us to simultaneously consider changes to the risk characteristics of portfolios from price movements, and changes to optimal portfolio exposures from new capital market expectations.
Economic & Policy Insights
The economic narrative of the quarter was a study in contrasts: a resilient but slowing economy grappling with a complex and often contradictory policy environment.
The Fed
The Fed lowered rates in an acknowledgment that the economy is a greater concern than inflation. Instead of lowering rates to stimulate the economy – because it could – in light of low inflation, it lowered rates to stimulate the economy – because it had to – given indisputable signs of a slowing economy from weaker labor market data. While the Fed’s data-driven approach is reasonable, it exists in tension with both market expectations, which may anticipate data not yet available to the Fed, and political pressure, which may have an objective beyond maximal employment with stable prices.
The Federal Reserve's policy remains data-dependent, but this quarter revealed a change in the data it prioritizes. With the labor market softening, the Fed is now signaling a greater focus on its employment mandate, choosing to look through the inflationary effects of tariffs which lie largely outside its control. This is not without risk since the decision to subjectively discount inflation data is reminiscent of the “transitory” misjudgment in 2021 and carries similar credibility stakes. The implication is a potential willingness to tolerate inflation modestly above the 2% target to support growth – a trade-off the long end of the yield curve appears to be pricing in, even as U.S. policy rates remain elevated relative to global peers.
Government Shutdown
The market’s muted reaction to the government shutdown was rational. The event was widely anticipated, with prediction markets assigning almost even odds months in advance, allowing investors to price in the risk gradually. Historically, shutdowns are low-impact events that have resolved with little lasting economic damage and have been roughly neutral for equity returns. While volatility can sometimes increase, volatility data around past shutdowns shows only limited and transitory effects. On the other hand, prediction markets are also giving substantial weight that this will be the longest shutdown in U.S. history.
Tariffs
The direct economic impact of tariffs remains a source of debate. While the effective tariff rate continues to rise, we have not yet seen the significant inflationary spike some feared. This is not because tariffs are without cost, but because their effects are complex and delayed. Initially, many businesses front-loaded inventory to get ahead of the price hikes. Now, the costs are being absorbed in various parts of the supply chain – multi-stage producers, importers, and distributors. A brief tariff-scare on gold earlier this year provided a perfect natural experiment: as a transparent global commodity, its price reacted immediately. For most consumer and industrial goods, however, the same inflationary forces are operating but are obscured by inventories, sticky list prices, and multi-layer supply chains. The price impact is gradual and will remain a persistent upward pressure on inflation for some time.
AI Revolution: Build-Out vs. Implementation
Enthusiasm for Artificial Intelligence has once again been a dominant driver of returns and raising questions about a potential bubble. As the 2025 Economics Nobel attests, technology is the key driver of enduring economic growth. From a historical perspective, we are likely in the build out phase of a technological revolution. This phase is characterized by massive capital expenditure, intense competition for resources, and returns that are highly concentrated among direct enablers of AI infrastructure such as chipmakers, data centers, and model builders.
Even if AI lives up to the hype, valuations may prove to be excessive given that current valuations of some industry leaders are likely too high to be sustained. However, unlike pure speculative bubbles, the investment in technology will almost certainly generate large long-term productivity gains. After such a massive investment cycle, two outcomes are plausible: the technology becomes commoditized, leading to many winners but at much lower valuations as competition erodes margins; or natural monopolies form, creating a few big winners along with many losers. Regardless, many investors that are wary of a bubble continue to invest, hoping to ride the momentum.
The more impactful phase will be when the practical technological advances are implemented. This is where the productivity gains from AI are diffused throughout the broader economy, benefiting a wide range of industries far beyond technology. While the build-out phase is exciting and creates concentrated wealth, the implementation phase has the potential to broadly increase economic growth and corporate profitability. Therefore, long-term investors may be better served investing in the many companies that will benefit from the efficiency and innovation of AI rather than speculate on the few winners of the race today.
Private Assets: The New Equilibrium?
Investors look to private equity for high returns, hoping to replicate the success of endowments like Yale in the 1980s. However, expectations should be lower as the immense flow of capital into private markets has transformed the asset class. Much like the concept of conservation of energy in physics, there is a finite amount of economic growth and therefore market return profit to be distributed among investors. As private assets grow from a niche strategy into a multi-trillion-dollar market, their returns must, by definition, converge toward the overall market return over the long term.
This influx of capital has several effects (not all bad): a lower cost of capital for private companies, which in turn leads to lower future returns for investors; lower management fees due to competition; and greater access for more investors. More companies stay private for longer because the cost of capital has fallen relative to public markets. This may also explain historically disappointing returns to the public small-cap universe, which once contained many of these high-growth companies. As a result, private equity will likely become a less exciting asset class – less risky, but also with lower returns than historically. This shift can be implicitly observed from industry shifts toward less mainstream illiquid assets, like infrastructure, in the hunt for the next source of high returns.
Market Implications & Asset Classes
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Broad-Based Returns and Diversification: The market’s strength in Q3 was notably broad. Not only are all New Frontier multi-asset indices at new highs, but so are international stocks, commodities, and aggregate bonds on a total return basis. Substantial market returns are being driven by more than just a few mega-cap names and well-diversified portfolios are being rewarded for taking on broad economic risk.
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The Enduring Case for Treasurys: In a complex world of AI valuations, private market opacity, and geopolitical risk, U.S. Treasurys offer simplicity and security. They are not designed to be the highest-returning asset class, but their liquidity, transparency, and low correlation to risk assets make them one of the most effective risk management tools available. In the current environment, their role as a core portfolio diversifier is as important as ever.
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The Hunt for High Equity Returns: The search for returns continues to lead investors to small-cap and emerging markets. While these asset classes have not consistently outperformed U.S. large-caps in recent years, the theoretical premise remains. These markets carry higher risk and should, over the long term, offer a return premium. The challenge is that this premium is not guaranteed in any given period. For fixed income, the story has been more straightforward, with credit, high-yield, and emerging market bonds providing higher returns as expected for their additional risk.
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Comparing Bitcoin and Gold: There are conceptual similarities in terms of scarcity and independence from financial institutions. While both have had spectacular returns of late, bitcoin tends to lose value in times of crisis while gold does not. This gives them fundamentally different roles in a portfolio.
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The Dollar’s Decline: The U.S. dollar experienced another significant decline this quarter. A currency is not like a stock; it cannot grow in value indefinitely and tends to revert to fair value over time. The dollar’s recent weakness can be attributed to falling U.S. interest rate expectations relative to the rest of the world. A weaker dollar can be modestly inflationary domestically by raising the cost of imports, providing a policy incentive to prevent continued declines.
Conclusions
The third quarter demonstrated the market’s ability to focus on powerful, long-term themes like technological productivity and monetary policy, even amidst significant short-term political noise. While large technology companies were once again a driver of headline returns, the positive performance across nearly all global asset classes rewarded a diversified approach.
Looking ahead, the central economic tensions remain. The Fed must navigate a path between supporting a slowing economy and controlling inflation in a difficult policy environment. The long-term impacts of tariffs and other policy shifts are still unfolding. In this landscape, we believe our core principles are more critical than ever. A disciplined, globally diversified, and forward-looking optimization process remains the most robust framework for constructing portfolios designed to be resilient across a range of potential economic outcomes. We continue to position portfolios to capture returns from durable economic growth and innovation while managing the inevitable risks that arise in a dynamic global market.
Disclosures: New Frontier Advisors LLC (“New Frontier”) is a federally registered investment adviser based in Boston, MA. The commentary discussed here is for informational purposes only. Past performance does not guarantee future results. As market conditions fluctuate, the investment return and principal value of any investment will change. Diversification may not protect against market risk. There are risks involved with investing, including possible loss of principal. Before investing in any investment portfolio, the investor and Financial Advisor should carefully consider the investor’s investment objectives, time horizon, risk tolerance, and fees. The opinion reflected is as of the date of distribution and is not intended as personalized investment advise.
About New Frontier
New Frontier is a leading investment technology firm that has been delivering advanced portfolio optimization solutions since 1999. Our Michaud Optimization™ process—validated through rigorous academic research and recognized with multiple patents for its pioneering investment innovations—powers market-adaptive, risk-managed portfolios designed to align with investor objectives. Our robust technology and deep quantitative expertise equip financial advisors and institutions to navigate market uncertainty and pursue more consistent, reliable investment outcomes. As an ETF strategist pioneer, we have a 20-year track record of constructing ETF portfolios that help advisors deliver consistent, long-term value to their clients.
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