Fall 2025 Market Commentary
By Marc Usem and the Affiance Financial Investment Committee
A Newsworthy Quarter
The third quarter of 2025 was chock full of activity potentially impacting clients and markets. We saw the release of the new tax law (One Big Beautiful Bill Act), which mostly helps middle income earners by increasing certain deductions. We saw the firing of Bureau of Labor Statistics (BLS) head, Erika McEntarfer, by President Trump, when the agency reported weaker than expected jobs report in July. Tariffs were raised on India, Brazil, and Canada, while agreements were reached with E.U. and sharp increases paused for China (which halted U.S. soybean imports). OpenAI made a stunning commitment of $300 billion over five years to use Oracle Cloud Infrastructure. We saw the independence of the Federal Reserve challenged with the President attempting to fire Fed Governor Lisa Cook, with the final result awaiting an answer from the Supreme Court. We saw the Fed cut interest rates by 0.25% for the first time since December of 2024. And as of October 1, we saw the government shut down after Republicans and Democrats in Congress failed to reach an agreement to fund the government. What a quarter!
Amid all of the headline news, the S&P 500 stormed ahead to gain 8% during the quarter and is now up nearly 15% for the year to reach an all-time high. This is on top of annual gains of 25% in 2024 and 26% in 2023 with a three-year total return of 95%. Clearly, markets have been kind to investors. Three-year calendar total returns of 100% or more have happened seven times since 1926 with the most recent being in 2021.
After lagging the U.S. for most of the past 15 years, international and emerging markets have led this year. The emerging markets index, mostly weighted in China, has outpaced the S&P 500 with a gain of 11% for the quarter and 29% for the year. International markets have also outperformed, gaining 4.5% for the quarter and 25.5% for the year. International markets have benefitted from the tailwind of a weakening U.S. dollar, which has declined by about 8%.
Across the style and size factors, large cap growth continues to lead with small cap value lagging by the largest spread in recent history – achieving less than 25% of the large cap growth returns since January of 2023. At the same time, the largest companies in the S&P 500 (the Magnificent 7 plus 3) have grown to a record of 40% of the index market cap and account for a record 25% of S&P 500 earnings. Historically, the top 10 companies have been about 20% of the index market cap. Investors in the S&P 500 index seeking to diversify among 500 companies must understand they are highly concentrated compared to history. Market returns this year continue to bolster confidence in our investment strategies and the clear benefits of holding a globally diversified portfolio.
We believe that the monopoly power embedded in the largest technology companies will continue to accrue, largely unchecked by U.S. or international government antitrust resistance. This likely allows them to continue to dominate the technology industry going forward. The Artificial Intelligence (AI) race has just started, but has rapidly advanced with massive investments in people, data centers, and the electric power needed to run AI on a global scale. AI is propelling market leaders with staggering technology adoption rates and revenue gains with a still unmet expectation of high profits. Expectations are high, and we expect those profits to materialize in time, unlike the dot.com boom, which generated clicks and visits but often with little or no profits.
Our basic premise is that a strong economy, room for continued consumer spending, and a bias toward lower interest rates, can keep GDP growing and markets trending higher over time. However, rapidly rising markets and record valuations likely increase the probability of a market downturn at some point. Given the current level of interest rates, the Fed has room to go lower, which could help cushion a potential downturn. Regardless, we recommend highlighting cash management for any planned or unplanned withdrawal needs as part of your conversations with your advisor. We continue to rely on our disciplined investment processes to provide well-designed, tax-efficient, globally diversified portfolios that suit our clients’ investment planning needs.
Thank you for your continued confidence in our work.
Sources: YCharts, Federal Reserve Board, IRS, Economic Policy Institute, Politico, Congress.gov, St. Louis Fed, Visual Capitalist, Apollo Academy, Axios
The views represented in this commentary are not meant to be construed as advice, testimonial or condemnation of any specific sector or holding. Investors cannot invest directly in an index. Unmanaged indexes do not reflect management fees and transaction costs that are associated with some investments. Different types of investments involve varying degrees of risk. Past performance and detailed processes do not guarantee future results. Please remember to contact Affiance Financial if there are any changes in your personal/financial situation or investment objectives. Asset allocation, rebalancing, and diversification will not necessarily improve an investor’s returns and cannot eliminate the risk of investment losses.
