Insights

Third Quarter, 2025 Market Review

October 16, 2025

Halloween decorations are lighting up streets again, with pumpkins glowing and orange lights flickering throughout the neighborhoods. It’s a reminder of the season’s haunted houses and sudden scares. In many ways, the markets have their own version of this. But unlike a haunted house, the market’s frights don’t have to send you running. In fact, they often reveal opportunities for those who stay steady and keep moving forward.

Take the market drop we experienced back in April. For a moment, it looked like the start of another monster correction, with stocks quickly falling nearly 19%. But the downturn was short-lived. Markets recovered and rallied strongly through the end of the third quarter, reminding us that sharp pullbacks are often followed by equally sharp recoveries. Historically, markets decline on average around 14% at some point during the year. It always feels unsettling in the moment but lasting damage is rare. As 2025 has shown, those who stayed patient and disciplined were the ones who came out ahead.

Market Highlights for the Quarter

Equities

U.S. stocks continued to rise, but this time, the rally wasn’t limited to the usual tech giants. Leadership broadened to include small-cap value and international equities, which have been overlooked for some time.

• The S&P 500 climbed 8.1% in the third quarter and is now up 14.8% year-to-date.
• Small-cap stocks rose 9.1% in the quarter.
• International equities returned 7.4% in Q3 and gained an impressive 25.7% so far this year, which shows strong momentum outside the U.S. market.

Fixed Income

Bonds found some relief as the Federal Reserve cut interest rates. Yields declined slightly, and expectations of further cuts gave the bond market a tailwind.

• The Aggregate Bond Index was up 2.0%, supported by easing rate pressure.

Global Perspective

Developed Europe and emerging markets outpaced the U.S. at various points this quarter, which reinforces the benefit of maintaining global diversification.

Economic Conditions

Inflation continued its gradual decline, yet wage growth and housing costs remain sticky. Economic growth slowed but stayed in positive territory, which has reduced concerns about a near-term recession.

Staying Disciplined with the LM All Equity Portfolio

In this kind of environment, the LM All Equity Portfolio shows why discipline can matter more than prediction. Our approach relies on evidence-based, factor-driven strategies and broad global diversification. One important contribution to performance this year has been a practice that doesn’t always get the attention it deserves: rebalancing.

For much of the last decade, U.S. stocks, especially large-cap technology, pulled far ahead of other markets. It became tempting to abandon lagging areas and focus only on what was winning. But by consistently rebalancing, we trimmed exposure to areas that had surged and maintained positions in undervalued markets.

Now that international stocks are gaining ground, that discipline is paying off. Our clients’ portfolios were already positioned to benefit. Rebalancing isn’t about trying to guess who’s next to lead. It’s about keeping your portfolio aligned with your goals and making sure no single market runs unchecked.

A Closer Look at the Quarter

The Federal Reserve cut interest rates by 0.25% in September, marking its first reduction in several years. More cuts are expected, though there’s debate about how fast and how many will follow. The figure below shows expectations from two sources: the Fed’s own projections and the fed funds futures market. While both see additional cuts coming, the futures market is pricing in a quicker pace than the Fed has suggested.

Rate cuts typically lift investor sentiment, but Fed Chair Jerome Powell added some caution and reminded markets that equity prices still appear “fairly highly valued.” That wasn’t exactly what investors wanted to hear. Still, strong corporate earnings and steady economic growth helped markets hold their ground. GDP is tracking between 2% and 3% for the year, inflation has cooled to the 2.5% to 3% range, and unemployment, while edging up, remains historically low.

What Do Lower Interest Rates Mean for Investors?

One of the major questions we’ve been hearing lately is how falling interest rates might affect stock returns. It’s a reasonable concern, especially with more rate cuts projected for the end of 2025. Markets and the Fed seem to agree on the near-term outlook, expecting two more cuts by year-end. Looking beyond that, opinions begin to diverge. The market expects additional cuts early in 2026, while the Fed is signaling a more gradual path.

This difference in opinion leads to a more important question — how do changes in interest rates impact stock performance? Research from Avantis offers some helpful insights.

What the Research Says

• Market expectations matter
  Stock returns aren’t driven only by the direction of interest rates, but also by how actual moves compare to what markets have already priced in. A surprise cut can lift stocks, while a smaller-than-expected move can cause disappointment.
• Stocks have historically performed well in a variety of rate environments
  Avantis looked at stock market performance from 1973 through 2024. They analyzed one-year periods during which the 10-year Treasury yield either rose by more than one percent, stayed stable, or fell by more than one percent. The findings showed that stocks tended to perform slightly better when rates fell, but returns were positive on average even when rates rose. The broader takeaway is that long-term investors have generally been rewarded regardless of rate movements.

• Fundamentals in small-cap stocks matter
  Avantis also examined small-cap stocks, focusing on those with low price-to-book ratios and high profitability. These companies tended to outperform the broader market across different rate environments. The research reinforces the value of selecting investments based on sound fundamentals, rather than reacting to interest rate shifts alone.

Looking Past the Mask

It’s natural to want to predict what’s next. But the truth is, no one can predict short-term market moves with consistency. Not the Fed, not market analysts, and not the friend with stock tips. While high valuations may suggest more modest returns in the future, history has shown that selling just because stocks seem expensive often ends up being more damaging than staying invested.

There will always be noise in the market. There will always be reasons to worry. Our role isn’t to sidestep every scare. It’s to build portfolios that can handle them. Rebalancing helps keep you from overloading on popular areas like AI-driven tech stocks while neglecting others like bonds or international equities that may be crucial to a healthy portfolio.

And if the latest headlines ever leave you unsettled, we’re always here to help you stay grounded and focused on what really matters — your goals.

As always, thank you for your continued trust and partnership.

THE LOURDMURRAY TEAM

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