Q3 2025 Market Update

We closed the books on the third quarter of 2025, and what a year we’ve had so far. Markets were down sharply to start the year during the “tariff-tantrum” but recovered just as swift as trade tensions eased and market fundamentals came into focus. As of September 30^th, the S&P 500 is up 13.72% and the Nasdaq 100 is up 17.46% year-to-date.

Interest rates are lower so far this year, even as the global governments added to deficits and debt. The 10-year Treasury started out the year at 4.5% and is now trading just above 4%. And while we may experience some nearer-term volatility, we expect the markets to rally into year-end.

Legendary investor Peter Lynch wisely noted, "If you spend 13 minutes a year on economics, you've wasted 10 minutes." In this manner, let’s spend just a few minutes on the economy.

Equities: Tech Leads the Charge Amid Record Highs

U.S. equities surged to new heights in Q3, propelled by the unrelenting momentum in artificial intelligence and a pivotal Federal Reserve rate cut. The S&P 500 closed the quarter at an all-time high above 6,600, capping a remarkable recovery from earlier-year tariff-induced lows. Technology stocks, including standouts like Nvidia, Alphabet, and Broadcom, drove the rally, with the sector posting double-digit gains fueled by robust AI-related earnings (Nvidia's data center revenue alone skyrocketed 142% year-over-year.) Oracle's Q2 earnings report was particularly telling, with cloud revenue jumping 52% on AI-driven demand, signaling the AI boom is far from over. Indeed, Oracle surprised the market with an additional $455 billion in computing backlog. We are likely in the midst of the 4^th Industrial Revolution.

When asked about the risk of overspending on compute, Meta's Mark Zuckerberg put it, "I would say the risk is higher on the other side. So you can not invest enough and be behind, and that will make you irrelevant. Or you can invest and maybe miss a couple hundred billion dollars" a sentiment echoing across tech giants doubling down on AI infrastructure.

The hyperscale companies would rather waste a couple hundred billion dollars (on top of the hundreds of billions of planned spending) than fall behind.

Small-cap stocks also gained ground, offering competitive returns for the first time in recent quarters as rate relief bolstered cyclical sectors.

Broader market breadth improved, with all 11 S&P sectors advancing since April's trough, though consumer defensives lagged amid softening demand signals. Valuations remain elevated, with the S&P 500's forward P/E at around 20.5x, but corporate profit margins held firm, supporting optimism for sustained earnings growth into 2026.

Fixed Income and Interest Rates: A Soft Landing all-but Secured

The bond market found its footing as the Fed delivered its first rate cut of the cycle, trimming the federal funds target by 25 basis points to 4.00%-4.25% in September. Markets now price in two additional cuts by year-end, reflecting a cooling labor market and moderated inflation pressures. The 10-year Treasury yield dipped toward 4.00%, the lower end of its 2025 range, providing a tailwind for duration-sensitive portfolios. Investment-grade corporate spreads tightened modestly to 83 basis points, with yield-to-worst falling to 4.99%.

We expect two more rate cuts in 2025 by the Fed. President Trump will select a new Fed Chairman in May 2026 and we all know he is only asking 2 questions to candidates: will you cut rates and by how much? Investors can expect the Fed rate to normalize around 2.5% in short order. This should be a significant tailwind to almost all asset classes.

Credit strategies outperformed rate-sensitive ones, underscoring the value of selective fixed-income allocation in a volatile environment.

Navigating the Government Shutdown: Volatility, But Resolution Ahead

The partial federal government shutdown, which began October 1 over stalled spending negotiations, has injected short-term uncertainty thus furloughing nearly half of IRS staff and delaying payments across agencies. Although this could produce some volatility, history tells us these episodes are temporary: Congress has resolved every prior shutdown, often swiftly once pressure mounts (watch the October 15 military payday as a potential catalyst). The reopening is as certain as death and taxes, so expect a funding bill soon, minimizing long-term drag on growth.

CHINA Trade Tensions

In a stark resurgence of U.S.-China trade hostilities, Beijing escalated tensions this week by imposing sweeping export controls on rare earth metals, requiring licenses for even trace amounts in global products and effectively embargoing shipments to military-linked entities, suspiciously timed just ahead of a potential Trump-Xi summit in South Korea.

President Trump fired back swiftly, announcing a 100% tariff hike on Chinese imports effective November 1, layered atop existing duties, vowing to counter what he deemed a "hostile" bid to hold the world captive on critical minerals.

Markets reeled, with the S&P 500 and Nasdaq posting their steepest single-day drops since the April tariff-tantrum, while the VIX (Wall Street's fear gauge) spiked ~31.8% on Friday, October 10^th.

This volatility surge, while jarring, often proves short-lived in historical trade spats; extreme VIX moves of 30% or more have preceded S&P 500 rallies in the short term, as initial panic gives way to negotiated resolutions and bargain hunting, signaling the current pullback may be more blip than bust.

On Sunday, October 12^th, President Trump made the following post on Truth Social:

We don’t think that Trump wants to cause the amount of volatility that we saw in April, so we believe these tensions will be resolved quickly.

Consumer Credit

After student loan repayments came back in 2023, credit card and auto debt delinquencies started climbing as well. The American consumer is getting pinched with higher prices and electing to Buy-Now-Pay-Later (BNPL) on many items, including groceries. Rising insurance costs add to the burden of auto affordability.

At the same time, Mortgage and HELOC delinquencies have remained muted. We believe that the consumers making between $50k-$100k per year are the most affected and this could impact car sales and other retail buying significantly. Some estimates have come in that the economy is only growing ~0.5% outside of the massive AI and datacenter spending going on. The demand for credit is slowing.

Indeed, revolving consumer credit, which covers credit cards, dropped $6 Billion in August, marking the largest drop since the 2020 COVID crisis. Auto-repossessions are on track to top 3 million this year, surpassing the peak in the 2008 Great Financial Crisis.

This could spell out an opportunity to buy great retail and auto companies at a discount while we harvest rewards from the AI and Enterprise related bull market. In many ways, we have a tale of two economies. Almost everyone was calling for a recession back in 2022 and since then we have had many micro-level recessions, contained in separate industries. Unlike the ’08 Financial Crisis, the recessions have not spread systematically to the entire economy.

Thank you for your continued trust in BrightHaven Financial Advisors. 

We're here to discuss how these dynamics align with your goals, so please reach out anytime. Together, we're building wealth that endures.