Q3 2025 Review & Outlook

Rate Cuts, Trade Deals, and Strong Earnings Power Stocks Higher in Q3

Stocks reached all-time highs in the third quarter as economic growth remained steady, tariff increases proved milder than feared, and the Federal Reserve initiated its long-awaited interest rate-cutting cycle.

Markets began the quarter by extending the year-to-date rally, buoyed by the passage of the One Big Beautiful Bill Act in early July. The legislation made the 2017 tax cuts permanent and committed billions of dollars to domestic industry development, providing the markets and the economy with a fresh dose of fiscal stimulus.¹

In mid-July, second-quarter corporate earnings came in stronger than expected² and, importantly, showed few signs that tariffs or policy uncertainty were weighing on results. Later that month, the Trump administration announced new trade agreements with key U.S. partners, including the EU, Japan, and South Korea.³ The U.S. and China also agreed to extend their trade "truce" while negotiating toward a larger trade agreement.⁴ These "deals" eased investor anxiety about renewed reciprocal tariffs and lowered trade-related concerns more broadly.⁵ These factors, along with stable economic and inflation readings, helped push the S&P 500 steadily higher through July.

Early August brought a brief pause to the rally following a weaker-than-expected July jobs report, which included downward revisions to May and June employment data. The softer labor numbers raised concerns that the job market might be losing momentum and hinted at a potential economic slowdown. However, expectations for a Federal Reserve rate cut grew in response, and Chair Jerome Powell reinforced those expectations at the Jackson Hole Economic Symposium by signaling that a September rate cut was likely.⁶ The prospect of lower rates helped offset employment worries, allowing stocks to continue their climb.

In September, the rally accelerated despite further signs of the labor market softening. The August jobs report showed only 22,000 new jobs–well below forecasts⁷–but optimism around additional rate cuts kept markets supported. As expected, the Fed cut interest rates at its September meeting and indicated through its "dot plot" that two more cuts were likely before year-end.⁸ The start of the rate-cutting cycle, coupled with strong AI-related earnings from companies such as Oracle and Broadcom,⁹ propelled U.S. equity indices to new all-time highs.

Outlook for the Fourth Quarter

Overall, the third quarter was resoundingly positive for both the economy and financial markets. Growth remained solid, inflation stable, fiscal stimulus in effect, and the Fed's policy pivot well underway. As we enter the final quarter of 2025, the macroeconomic backdrop remains constructive: interest rates are moving lower, tariffs have yet to disrupt the economy, and growth continues at a steady pace.

That said, this environment should not be mistaken for risk-free. Several potential challenges warrant close attention.

Labor Market Softening

Multiple employment indicators suggest the labor market is losing momentum. While not yet signaling a broader slowdown, a continued rise in the unemployment rate could dampen investor confidence and pressure markets, as most analysts are not currently expecting an economic deceleration.

Persistent Inflation

Headline CPI remains just under 3%, above the Fed's 2% target. Tariffs are beginning to affect more sectors of the economy, and while many analysts expect only a one-time price adjustment, there's a risk they could drive inflation higher. If inflation reaccelerates, the Fed may need to reconsider further rate cuts—an outcome that could unsettle markets.

Policy and Trade Uncertainty

Trade and tariff policy remain sources of potential volatility. The Supreme Court is set to hear arguments on reciprocal tariffs in November. If the Court upholds a lower-court ruling invalidating certain tariffs, markets could experience short-term swings. While tariff removal might initially lift equities, renewed uncertainty around future trade policy could offset those gains.

In Summary

The macroeconomic landscape remains favorable, supported by Fed rate cuts, fiscal stimulus (via the One Big Beautiful Bill Act), and continued enthusiasm for AI-driven innovation. Still, risks around employment, inflation, and policy uncertainty remain on the horizon.

We remain vigilant in monitoring these developments and their potential impact on both the economy and your portfolio. As always, our team is dedicated to helping you navigate this evolving market environment and ensuring your financial plan stays on course.

Please do not hesitate to contact us with any questions, comments, or to schedule a portfolio review.