14 Oct Market Update: Third Quarter 2025
Market Update: Third Quarter 2025
The long days are gone, the leaves are falling, and we might be on our way to another fantastic year for US and international markets. Stocks posted strong returns again for the third quarter, with the S&P 500 Index up 8.18%. While the quarter ended with the US headed towards a government shutdown, the market gained steam. A friend of mine called it, “Can’t stop, won’t stop stocks.” Technology stocks outpaced other sectors during the quarter as continued excitement around artificial intelligence (AI) drove stocks like NVIDIA to reach new all-time highs. The NASDAQ Composite Index returned 11.41% for the quarter!
While technology’s dominance has been a trend over the course of this year, the third quarter also saw strong returns for small cap stocks, which had lagged earlier this year. The Russell 2000 Index was up 12.39% for the third quarter, outpacing large cap stocks. Global stocks were up, returning 5.60% for the quarter. Emerging markets outpaced developed stocks as the MSCI Emerging Markets IMI Index rose 9.88%. Despite this quarter, non-US markets overall are outpacing the US market’s gains year-to-date with the MSCI All Country World Index up 25.97% year-to-date.
Fixed income investors also enjoyed a decent quarter as the Fed’s policy shift pulled down both long and short-term yields. Short-term Treasuries gained +1.1%, while intermediate-term bonds rose +1.7%.
Investors finally got the interest rate cut they were expecting when The Fed reduced its target federal funds rate by 0.25% on September 17. Rate cuts tend to make equity investors optimistic: They figure lower interest rates will reduce borrowing costs, goosing economic activity and hopefully boosting corporate earnings and stock prices. Some believe the Fed cut helps validate the S&P 500’s nearly 35% gain since it bottomed in early April.
However, a week after cutting rates, Fed Chair Jerome Powell uttered these words:
“By many measures…equity prices are fairly highly valued.”
Powell’s seemingly innocuous statement sounded like a loud needle scratch to some investors. Fed chairs don’t often comment on stock prices, so the fact that he chose this moment to highlight steep valuations raised questions.
Is Powell—a renowned economist with more and better information than just about anybody—saying stocks are too highly valued? Are prices about to drop? Should you sell before it’s too late?
On the surface, it’s hard to quibble with Powell’s take. The most common way to gauge the broad stock market’s valuation is to look at the price-to-earnings (P/E) ratio of the S&P 500. And it’s high: As of September 26, the S&P 500’s P/E was 20%above the average of the past 10 years.[1]
But the topic deserves a little more context. Certain parts of the stock market are driving up the average, so it’s probably more accurate to say that some equity prices are fairly highly valued.
Specifically, tech stocks have risen on investor optimism about the potential for AI to drive future earnings. The tech sector had a P/E ratio over 30 as of October 1, compared to about 23 for the S&P 500 as a whole. By contrast, the energy, financials, health care, materials, and utilities sectors all had P/Es in the teens.[2]
As a reminder, a P/E ratio shows how much investors are willing to pay for each dollar a company earns, helping measure whether a stock seems expensive or cheap. If a PE ratio is high, it means folks are paying a lot for it, i.e. the price is high. Conventional wisdom tells us we are supposed to sell when prices are high, right?
The short answer: no. Everybody knows the investing adage “Buy low, sell high.” So it may be surprising to learn that selling out of stocks when their valuations look steep has often been a huge mistake. A study by LPL Financial comparing historical stock market valuation to returns over the next 12 months found “no relationship whatsoever.”[3]
It’s not that valuations are irrelevant. High valuations may dampen long-term returns.[4] But you already have a mechanism in place to keep your investments aligned with your needs and goals over time, whether prices are high, low or in between. It’s called rebalancing.
Run-ups in the prices of some investments can throw off your asset allocation—the percentage of your portfolio you have devoted to specific investment types. That’s why we periodically rebalance your portfolio, resetting your allocations to your long-term targets. This process automatically reduces how much you have in assets that have gained the most and redirects those resources toward assets that have lagged.
With markets seemingly reaching new all-time highs each week, it’s understandable to wonder whether now is the time to get defensive. History reminds us that record levels are not unusual. They’re a natural part of long-term market progress. Timing the next pullback is nearly impossible, and missing just a handful of strong days—which often occur right after periods of volatility—can significantly diminish long-term returns. Rather than reacting to headlines, the focus should remain on maintaining appropriate allocations and addressing cash-flow needs. Rebalance when positions drift but resist the urge to abandon a disciplined plan. The goal of investing isn’t to buy every low or sell every high—it’s to stay invested through the cycle, capturing the market’s long-term upward bias while managing risk intelligently. Whether markets are setting records or consolidating, discipline and diversification remain the most reliable sources of lasting success.
Please give us a call if you would like to discuss your allocation or financial plan.
[1] FactSet Earnings Insight, September 26, 2025. P/E based on forward earnings.
[2] Yardeni Research, October 2, 2025. P/Es based on forward earnings.
[3] LPL Financial, “Valuations Aren’t Great Timing Tools,” March 6, 2024.
[4] LSEG, “Do valuations correlate to long-term returns?” January 23, 2025
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