Executive Summary
- Large and small caps reached new all-time highs in Q3
- Cyclical sectors reach new relative highs versus defensive
- Gold is having its best annual performance since 1979
- S&P 500 corporate earnings are forecasted to grow 7.9% YoY in Q3
- All 11 large- and small-cap sectors are positive YTD
- Stocks and bonds gain during government shutdowns in last 30 years
“Every bull market climbs its own wall of worries” is an old Wall Street adage that may never be more apropos than what we are witnessing this year. The list of market concerns in 2025 has been extensive, and growing, starting with tariffs and trade wars, rising geopolitical tensions, inflation, policy uncertainty, social unrest, cracks in the labor market, soft housing data, and as of today a government shutdown. Yet despite extreme volatility in the Spring accompanied by size drawdowns of 20% for the S&P 500, 25% for the Nasdaq 100, and 30% for the Russell 2000, the stock market has stormed back to record highs with healthy breadth and cyclical leadership.
The broad U.S. equity indices were higher across the board in both September and Q3. For the S&P 500 and Nasdaq-100, September marked their 5th and 6th consecutive monthly gains, respectively. And for the S&P 500, this was its 2nd best September (+3.6%) in 27 years.
The gains were broad-based evidenced by the Russell 2000 taking the leadership baton in Q3 (+12.4% total return) while reaching new highs, albeit briefly, for the first time since November 2021.
Sector Performance
Large-cap sectors have been led by cyclicals over defensives throughout both the near-term September (MTD) and Q2, and longer-term timeframes (YTD) in 2025. While Communications and Technology remain the performance leaders, all eleven sectors are higher YTD including solid absolute performances by Industrials, Financials, and Materials.
Some of the higher beta small-cap sectors have seen a greater recovery off their 52-week lows due in part to their greater sensitivity (beneficiary) to lower rates.
While the delay in tariffs drove the initial gains off the April lows in Q2, the continued momentum across Q3 was driven in part by resilient economic data, corporate earnings strength, AI investment, and the resumption of a fresh rate cut cycle
Despite soft economic measures such as housing and consumer sentiment being weak, hard economic data used to define recessions (real GDP, industrial output, personal income, consumer spending, etc.) are still in uptrends. While August payrolls were disappointing, conversely, initial claims and job openings are improving.
Core goods inflation is pushing higher due in part to tariffs, yet service inflation driven by housing and wages has been slowing over the past couple of years. 5-year forward breakeven, a common market-measure of inflation, is currently 2.31% and signaling the market sees inflation at that level when looking out five years.
Corporate earnings growth for the S&P 500 was 12.7% in Q2, far exceeding expectations of 7.2%. Over 80% of companies beat EPS estimates, continuing a streak of earnings surprises. For Q3 2025, the estimated earnings growth rate for the S&P 500 is 7.9% YoY, according to FactSet. Eight of the eleven sectors are expected to report year-over-year earnings growth, led by the Information Technology, Utilities, Materials, and Financials sectors.
The Federal Reserve cut rates by 25 bps at the September FOMC, and the updated Summary of Economic Projections (SEP) was more dovish than anticipated. It showed a median expectation for an additional 50 basis points of cuts this year, along with improved employment and economic growth trends relative to the June SEP. The long UST 10yr yield (upper panel), last 4.12%, is down 70bps from its January high but remains more than 25bps above its April lows. However, the shorter UST 2yr yield (lower panel), a barometer of Fed policy, is testing a 3-year support level at the 3.55% level.
The US Dollar Index (DXY) stabilized in Q3 (+0.9%) following one of its worst first half performances on record. In 1H 2025 the DXY declined 10.7% for its worst 1H since the 1970’s, and its worst rolling 6-month performance since August 2009 (-11.2%) and February 2004 (-11%).
The weak dollar is one tailwind behind the surge in precious metals which. Gold had its best month (+11.9%) since August 2011 while silver (+17.4%) had its best month in more than five years (July 2020). Gold is having its strongest annual gain (+47% YTD) since 1979, while silver is having its best annual performance (+64% YTD) since 2010.
Looking Ahead
While uncertainty looms around the length of the current government shutdown, historical data offers a reassuring perspective. According to Nasdaq’s Economic Research, markets have consistently weathered shutdowns well over the past 30 years. Stocks rose in the last five shutdowns (left chart below), going back to the mid-90s, including a +9% gain in the last (35 day) shutdown (blue line). 10-year Treasury yields fell during the last five shutdowns (middle chart), seeing safe-haven demand (and often fell before the shutdown, too). The US dollar has been weaker in 5/6 of the last shutdowns (right chart). 1990 was the last time US equities and/or bonds were down during a shutdown.
Looking at the “message of the market”, we are encouraged to see widespread participation evidenced by the aforementioned new highs reached by the Russell 2000…
Continued leadership from one of this bull market’s top performing industries, semiconductors…
Relative strength in the cyclicals, evidenced by the Equal Weight Discretionary Index (cyclical) making new highs versus the defensive Equal Weight Staples Index (defensive)…
… and Banks at new highs, evidenced by the BKX Index.
The information contained herein is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. All information contained herein is obtained by Nasdaq from sources believed by Nasdaq to be accurate and reliable. However, all information is provided “as is” without warranty of any kind. ADVICE FROM SECURITIES PROFESSIONAL IS STRONGLY ADVISED.