September Market Insights Report: Third Quarter Review
Market Highlights
Equity Markets
U.S. Stocks: The S&P 500 rose 8% in Q3, hitting 23 all-time highs in just 64 trading days. The Nasdaq also hit record levels, driven by tech leader NVIDIA, which became the first public company to reach a $4 trillion market cap.
Small Caps: Outperformed mid- and large-cap stocks across styles, with returns exceeding 12%.
Growth vs. Value: Growth stocks led the market, while value stocks lagged behind both domestically and globally.
Global Equities:
Developed international markets underperformed the U.S.
Emerging markets posted strong gains, with the MSCI Emerging Markets Index up 10.2%.
Fixed Income
Interest Rates: The Federal Reserve cut rates by 25 basis points in September, marking the first reduction since December 2024.
Yields: Despite the cut, yields remained attractive:
10-Year Treasury: ~4.15%
High-Yield Corporate Bonds: ~6.7%
Volatility: Fixed income markets were relatively calm compared to previous quarters.
Economic & Policy Landscape
U.S. Economy: Continued expansion, though inflation risks persist due to tariffs and tight labor markets.
Inflation: Core CPI rose 3.1% year-over-year in August, remaining above the Fed’s 2% target.
Trade Policy: The U.S. reached new trade agreements with the EU, UK, and Japan. However, uncertainty remains regarding tariffs on goods from China, India, and Mexico.
Investment Strategy Trends
Portfolio managers leaned modestly toward risk assets.
Increased allocations to gold and TIPS were reported by some managers as hedges against stagflation risks. Some managers are reporting increased allocations to gold and TIPS to hedge against stagflation risks.
U.S. stock valuations remain elevated, driving growing interest in non-U.S. equities and bonds for long-term value.
Analysis
The U.S. equity market is in its third consecutive year of strength following market weakness in 2022. Large-cap growth has led the way, although small-cap stocks have shown resilience in recent months. Markets are weighing the risks of stagflation and watching the Federal Reserve closely to see whether it will lean to battling inflation or supporting the labor market.
The economy remains deeply bifurcated. The latest GDP report showed 3.8% growth, and unemployment stands at 4.3% — both headline indicators of stability. However, beneath the surface, wealth concentration is at record highs. According to Mark Zandi of Moody’s, the top 10% of earners account for about 49% of spending, and that is a record level. In addition, according to the Fed, the top 1%, those with wealth greater than $11 million, added $4 trillion to their net worth over the last 12 months. Wealth continues to accelerate at the highest levels, largely due to strong stock and real estate values. The ability to continue to drive economic growth may be stretched if the other 90% of the country cannot maintain or expand spending.
As the fourth quarter begins, the federal government is shut down, and both sides have engaged in heavy finger-pointing. Thus far, the markets have largely shrugged off the shutdown, viewing it more as political theater than a substantive threat. Political posturing is largely occurring for each side to declare they are making the correct argument and equally hoping that this will accrue to their benefit for the midterm elections. In the longer term, the debt and deficit need to be handled, but the shutdown will likely be short-lived.
