The third quarter of 2025 was filled with the kind of headlines that typically send investors fleeing: slowing job creation,growing fears of a looming government shutdown, stepped-up immigration raids across U.S. cities, saber-rattling on tradepolicy, and whispers of global slowdown. For many, the mood was anxious—if not outright dour. And yet, the markets climbed. Not in speculative fits and starts, but in a surprisingly steady ascent. The S&P 500, alongwith many international equity markets, posted consistent gains throughout the quarter. It was a slow grind higher—onethat ran counter to the emotional temperature of the news cycle. Risk assets rose as if investors were reading a differentset of headlines than everyone else. Maybe they were. Underneath the surface, inflation continued to ease modestly, labor markets remained fundamentallystrong despite some softening at the margins, and housing retained its price discipline. The Fed cut short-term rates, not inresponse to imminent collapse, but to guard against the vague discomfort of slowing momentum. In many ways, this is what a “climate controlled” economy looks like—one where central banks act preemptively, volatility isdampened, and mild discomfort (or the threat thereof) is treated with policy intervention. Whether that’s a feature or a flawof the current environment is something we’ll unpack further; but one thing is clear: despite the noise, the market continuesto behave as if the room is still at a comfortable temperature.
How the Markets Fared
Financial markets broadly pressed higher in Q3, buoyed by growing optimism and hopes for lower interest rates. The Federal Reserve finally delivered its long-telegraphed pivot, cutting its overnight lending rate by 25 basis points in September (and once again a the October meeting). In response, the benchmark 10-year Treasury yield declined modestly, slipping from 4.23% at the start of Q3 to around 4.15% by quarter’s end. That move gave a modest lift to bond prices, adding to coupon income across most of fixed income. Longer-duration bonds outperformed slightly, but overall, performance across sectors was fairly even. Credit spreads remained tight, signaling that bond investors see little risk of a meaningful downturn.
Equities marched steadily upward with a notable surge from U.S. large-cap growth stocks. The Russell 1000 Growth index, advancing by 10.5%, more than doubled its Value counterpart, as AI optimism and momentum in tech continued to dominate. But the real surprise came from the small-cap space, where the Russell 2000 Index leapt 12.4%, out performing its large-cap peers. Here, both Value and Growth segments contributed meaningfully
International stocks also advanced, though developed markets generally lagged the U.S. One notable exception: developed market Value stocks outperformed their Growth peers by nearly five percentage points. Meanwhile, Emerging Markets equities continued their rebound, with the MSCI EM Index gaining 11.0% for the quarter — now up 28.2% year-to-date. A falling U.S. dollar during the period also helped boost the returns of non-U.S. assets when translated back into dollars. Commodities delivered more modest gains. The Dow Jones UBS U.S. Commodity Index returned 3.7% for the quarter, bringing its year-to-date gain to a respectable 9.4%. But it was a fragmented rally. Precious metals stole the show — gold rallied nearly 17% to top $3,800per ounce for the first time in history (and would later go on to eclipse $4,200 in early October). In contrast, energy pricessank during the quarter, with oil falling nearly 5%, pulling down the broader energy complex.
Unemployment Temperature: Holding Steady Q3 labor data confirmed what many suspected: the job market is cooling—but not collapsing. August nonfarm payrolls roseby a mere 22,000, and downward revisions to June and July dragged those prior months even lower, including a net loss of13,000 jobs in June. Despite that weakness, the unemployment rate ticked up only slightly to 4.3%, while the broader U-6measure—which includes underemployed workers—rose more sharply, from 7.9% to 8.1%. However, both readings stillreflect a relatively tight labor environment, largely due to the continued absence of meaningful layoffs.
Despite the lack of new jobs added, the recent JOLTS report remained surprisingly firm, showing 7.1 million jobs still unfilled and a modest pace of separations. While fewer workers are voluntarily quitting, they’re also not being fired.
One of the best indicators available is the sustained pace of wage growth. Although average hourly earnings rose 3.7%year-over-year in August, which was down from 3.9% in July, wage growth still comfortably outpaces inflation, reinforcing the view that workers still retain the upper hand. So, while the job market may be cooling, it’s certainly not in crisis. And yet, as we’ll discuss later, the Fed appears to be responding as if a deep freeze is on the way.
House It Goin’? The housing market remained sluggish through Q3—not due to fading demand, but because supply remains elusive. According to the National Association of Realtors, the median existing-home sales price rose 2.1% year-over-year to $415,200 in September. Inventory climbed to 1.55 million units, up 14.0% from a year earlier, yet still well below historical norms. At the current sales pace, that equates to a 4.6-month supply—shy of the 6-month threshold considered a balanced market.
Although the average 30-year mortgage rate drifted from the upper to lower 6% range during the quarter, many homeowners remain locked into sub-4% loans and have little incentive to move. That said, some early signs of thaw maybe emerging. As the Fed cut rates and short- and intermediate-term yields retreated, mortgage rates followed suit, falling to their lowest levels in nearly three years. If these declines hold, housing activity could see a modest rebound in the coming months.
Whining and Dining Despite sour headlines and sentiment surveys flashing warning signs, the American consumer kept spending in Q3. Retail sales were up 5% year-over-year in August, underpinned by low unemployment and wage growth that continues to outpace inflation.
Yet reported consumer mood is in the dumps. The Conference Board’s Expectations Index fell to 71.5, and the University of Michigan’s counterpart dropped to 50.3—both levels historically associated with recession signals. Inflation expectations ticked slightly higher, souring outlooks further.
Households are still spending, even as they grumble. If you have a job and own a home, odds are you’re feeling stable enough to keep shopping. For those without either, the picture is less rosy: early delinquencies are rising in credit cards and auto loans, and student loan defaults are spiking now that repayment has resumed. Perhaps that’s part of the reason the Fed seems so eager to cut rates. Or perhaps—like a weary parent—it’s just trying to quiet the complaining.
Simmering A good part of the reason consumers are distraught is their expectation of future inflation. The average 12-month inflation outlook from the Conference Board rose to 5.9%, and the University of Michigan survey pegged it at 4.6%. Yet despite the consumer’s grumbling, inflation hasn’t come roaring back—but it hasn’t gone away either. Prices continued to rise in Q3, with the Consumer Price Index (CPI) up 3.0% year-over-year in September. Core CPI, which strips out food and energy, also landed at 3.0%, only marginally lower than prior months. On the surface, this suggests some progress—but the devil, as always, is in the details. Shelter inflation remained stubbornly high, up 3.6% year-over-year, while services inflation(excluding rent) ticked in at 3.7%. These are categories that tend to hit lower-income and younger Americans harder—and the Fed knows it.
At the wholesale level, producer prices (PPI) offered a slightly more reassuring signal. Core PPI rose just 2.8% over the year—retreating from its recent peak. Still, with wage gains holding in at 3.7%, real incomes are still outpacing inflation.Consumers might not be feeling the pinch—but they’re bracing for it. And with the Fed aggressively cutting interest rates,perhaps these fears are well founded.
Middling, Not Mayhem Both factories and service providers seemed to lose momentum in Q3, with the latest data confirming the trend. The ISM®Manufacturing PMI® dipped to 48.7 in October, marking the eighth consecutive month in contraction. While new ordersticked up slightly to 49.4, they, too, remained in negative territory. That suggests manufacturers are still cautious, andbacklogs aren’t building—but they aren’t shrinking aggressively either.
The ISM® Services PMI® rebounded to 52.4 in October after declining to 50.0 in September (the threshold between growth and contraction). As the services side of the business-to-business economy is nearly double that of the manufacturing input, this important rebound adds to the story that the economy is not stalling-out as many might think.
Business activity isn’t plunging, but it is stagnating—and sentiment is souring. Like the consumer, corporate America isn’t introuble… but it’s far from comfortable. If the Fed is cutting rates to preempt a downturn, the ISM data might be part of whatit’s reacting to (or overreacting to).
G-D-Perplexing Second quarter real GDP came in strong at 3.8% and excited many market participants—but the excitement may be misplaced. A closer look reveals that much of the apparent strength was a rebound effect from Q1’s artificial weakness, itself distorted by a one-time import surge ahead of anticipated tariffs. (We detailed that anomaly last quarter.) That spike in Q1 imports inflated the trade deficit and pulled down growth, only to reverse in Q2 when inventories corrected. Strip out that volatility, and what’s left is a far more modest pace of economic expansion.
To be clear, this isn’t a recessionary story. The economy continues to hum along with stable consumer spending, a reasonably healthy labor market, and solid—if not spectacular—business activity. But this is not a 3%+ growth environment either. It’s uneven, noisy, and heavily influenced by policy side effects rather than organic momentum. Trading on this data is questionable, and setting monetary policy by it is potentially treacherous.
Piering Ahead The Fed Fights Phantoms: The Federal Reserve, once chastised for being behind the curve in fighting real inflation, now appears to be way out ahead of it—even if that means slashing rates into an economy that’s still standing. Employment remains sturdy, wage gains persist, inflation is simmering but not flaring, and consumer spending hasn’t cracked. Yet the Fed is now administering preemptive comfort as if hardship has already set in. But here’s the rub: the data the Fed is leaning on may be flawed. The GDP figures that excited so many in Q2 were likely distorted by the timing noise of front-loaded Q1 imports (see chart right) ahead of tariff changes—a statistical echo rather than a clean signal. And those echoes reverberated through economic data everywhere in the first half of the year, not just in GDP. The Fed is reacting not to trends, but to tremors.
Like a helicopter parent trying to ease every whiff of a child’s discomfort, the Fed is trying to fend off not just distress, but even the idea of it—micromanaging the economy in a way that may do more harm than good. Its job is not to ensure perpetual comfort, but to foster stable, sustainable conditions. In trying to shield the economy from every bruise, it may be stunting the economy’s ability to self-regulate and adapt.
Credit Markets Are Calm – Why Isn’t the Fed? Fixed income markets and managers—often the grownups in the room—aren’t flashing recession. Credit spreads remain razor tight, implying default risk is seen as low and the underlying and impending economy is healthy. That should be comforting. If bonds are calm, why is the central bank panicking?
And yet, by cutting rates into strength and stoking further liquidity, the Fed may be encouraging risk-taking rather than tempering it—another chapter in the long book of moral hazard. Once again, central banks seem intent on ensuring no one ever has to feel a chill.
Valuations and the AI Halo: Meanwhile, equity markets continue to price in perfection. The S&P 500 trades near peak multiples, and although the “Magnificent 7” mega-cap tech names still dominate leadership, their stratospheric valuations are increasingly being justified by expectations of a productivity revolution tied to artificial intelligence. If that optimism is warranted—if AI truly ushers in a new era of margin expansion and growth—then it’s fair to believe that the rest of the S&P, and indeed global equities and economies as a whole, should also benefit.
That’s the pivot point. Either the market is overpricing a narrow handful of names, or it’s underpricing a broader economic uplift. Either way, the Fed’s comfort-first posture is acting as an accelerant in an already frothy environment. Should any cracks form—whether from geopolitical risk, political dysfunction, or consumer credit strain—the fragility of this comfort controlled system could quickly be exposed.
Fall 25 Market & Economic Commentary:
The third quarter of 2025 was filled with the kind of headlines that typically send investors fleeing: slowing job creation,growing fears of a looming government shutdown, stepped-up immigration raids across U.S. cities, saber-rattling on tradepolicy, and whispers of global slowdown. For many, the mood was anxious—if not outright dour.
And yet, the markets climbed. Not in speculative fits and starts, but in a surprisingly steady ascent. The S&P 500, alongwith many international equity markets, posted consistent gains throughout the quarter. It was a slow grind higher—onethat ran counter to the emotional temperature of the news cycle. Risk assets rose as if investors were reading a differentset of headlines than everyone else.
Maybe they were. Underneath the surface, inflation continued to ease modestly, labor markets remained fundamentallystrong despite some softening at the margins, and housing retained its price discipline. The Fed cut short-term rates, not inresponse to imminent collapse, but to guard against the vague discomfort of slowing momentum.
In many ways, this is what a “climate controlled” economy looks like—one where central banks act preemptively, volatility isdampened, and mild discomfort (or the threat thereof) is treated with policy intervention. Whether that’s a feature or a flawof the current environment is something we’ll unpack further; but one thing is clear: despite the noise, the market continuesto behave as if the room is still at a comfortable temperature.
How the Markets Fared
Financial markets broadly pressed higher in Q3,
buoyed by growing optimism and hopes for
lower interest rates. The Federal Reserve finally
delivered its long-telegraphed pivot, cutting its
overnight lending rate by 25 basis points in
September (and once again a the October
meeting). In response, the benchmark 10-year
Treasury yield declined modestly, slipping from
4.23% at the start of Q3 to around 4.15% by
quarter’s end. That move gave a modest lift to
bond prices, adding to coupon income across
most of fixed income. Longer-duration bonds
outperformed slightly, but overall, performance
across sectors was fairly even. Credit spreads
remained tight, signaling that bond investors see little risk of a meaningful downturn.
Equities marched steadily upward with a notable surge from U.S. large-cap growth stocks. The Russell 1000 Growth index, advancing by 10.5%, more than doubled its Value counterpart, as AI optimism and momentum in tech continued to dominate. But the real surprise came from the small-cap space, where the Russell 2000 Index leapt 12.4%, out performing its large-cap peers. Here, both Value and Growth segments contributed meaningfully
International stocks also advanced, though developed markets generally
lagged the U.S. One notable exception: developed market Value stocks
outperformed their Growth peers by nearly five percentage points. Meanwhile, Emerging Markets equities continued their rebound, with the MSCI EM Index gaining 11.0% for the quarter — now up 28.2% year-to-date. A falling U.S. dollar during the period also helped boost the returns of non-U.S. assets when translated back into dollars. Commodities delivered more modest gains. The Dow Jones UBS U.S. Commodity Index returned 3.7% for the quarter, bringing its year-to-date gain to a respectable 9.4%. But it was a fragmented rally. Precious metals stole the show — gold rallied nearly 17% to top $3,800per ounce for the first time in history (and would later go on to eclipse $4,200 in early October). In contrast, energy pricessank during the quarter, with oil falling nearly 5%, pulling down the broader energy complex.
Unemployment Temperature: Holding Steady
Q3 labor data confirmed what many suspected: the job market is cooling—but not collapsing. August nonfarm payrolls roseby a mere 22,000, and downward revisions to June and July dragged those prior months even lower, including a net loss of13,000 jobs in June. Despite that weakness, the unemployment rate ticked up only slightly to 4.3%, while the broader U-6measure—which includes underemployed workers—rose more sharply, from 7.9% to 8.1%. However, both readings stillreflect a relatively tight labor environment, largely due to the continued absence of meaningful layoffs.
Despite the lack of new jobs added, the recent JOLTS report remained surprisingly firm, showing 7.1 million jobs still unfilled and a modest pace of separations. While fewer workers are voluntarily quitting, they’re also not being fired.
One of the best indicators available is the sustained pace of wage growth. Although average hourly earnings rose 3.7%year-over-year in August, which was down from 3.9% in July, wage growth still comfortably outpaces inflation, reinforcing the view that workers still retain the upper hand. So, while the job market may be cooling, it’s certainly not in crisis. And yet, as we’ll discuss later, the Fed appears to be responding as if a deep freeze is on the way.
House It Goin’?
The housing market remained sluggish through Q3—not due to fading demand, but because supply remains elusive. According to the National Association of Realtors, the median existing-home sales price rose 2.1% year-over-year to $415,200 in September. Inventory climbed to 1.55 million units, up 14.0% from a year earlier, yet still well below historical norms. At the current sales pace, that equates to a 4.6-month supply—shy of the 6-month threshold considered a balanced market.
Although the average 30-year mortgage rate drifted from the upper to lower 6% range during the quarter, many homeowners remain locked into sub-4% loans and have little incentive to move. That said, some early signs of thaw maybe emerging. As the Fed cut rates and short- and intermediate-term yields retreated, mortgage rates followed suit, falling to their lowest levels in nearly three years. If these declines hold, housing activity could see a modest rebound in the coming months.
Whining and Dining
Despite sour headlines and sentiment surveys flashing warning signs, the American consumer kept spending in Q3. Retail sales were up 5% year-over-year in August, underpinned by low unemployment and wage growth that continues to outpace inflation.
Yet reported consumer mood is in the dumps. The Conference Board’s Expectations Index fell to 71.5, and the University of Michigan’s counterpart dropped to 50.3—both levels historically associated with recession signals. Inflation expectations ticked slightly higher, souring outlooks further.
Households are still spending, even as they grumble. If you have a
job and own a home, odds are you’re feeling stable enough to keep shopping. For those without either, the picture is less rosy: early
delinquencies are rising in credit cards and auto loans, and student loan defaults are spiking now that repayment has resumed. Perhaps that’s part of the reason the Fed seems so eager to cut
rates. Or perhaps—like a weary parent—it’s just trying to quiet the complaining.
Simmering
A good part of the reason consumers are distraught is their expectation of future inflation. The average 12-month inflation outlook from the Conference Board rose to 5.9%, and the University of Michigan survey pegged it at 4.6%. Yet despite the consumer’s grumbling, inflation hasn’t come roaring back—but it hasn’t gone away either. Prices continued to rise in Q3, with the Consumer Price Index (CPI) up 3.0% year-over-year in September. Core CPI, which strips out food and energy, also landed at 3.0%, only marginally lower than prior months. On the surface, this suggests some progress—but the devil, as always, is in the details. Shelter inflation remained stubbornly high, up 3.6% year-over-year, while services inflation(excluding rent) ticked in at 3.7%. These are categories that tend to hit lower-income and younger Americans harder—and the Fed knows it.
At the wholesale level, producer prices (PPI) offered a slightly more reassuring signal. Core PPI rose just 2.8% over the year—retreating from its recent peak. Still, with wage gains holding in at 3.7%, real incomes are still outpacing inflation.Consumers might not be feeling the pinch—but they’re bracing for it. And with the Fed aggressively cutting interest rates,perhaps these fears are well founded.
Middling, Not Mayhem
Both factories and service providers seemed to lose momentum in Q3, with the latest data confirming the trend. The ISM®Manufacturing PMI® dipped to 48.7 in October, marking the eighth consecutive month in contraction. While new ordersticked up slightly to 49.4, they, too, remained in negative territory. That suggests manufacturers are still cautious, andbacklogs aren’t building—but they aren’t shrinking aggressively either.
The ISM® Services PMI® rebounded to 52.4 in October after declining to 50.0 in September (the threshold between growth and contraction). As the services side of the business-to-business economy is nearly double that of the manufacturing input, this important rebound adds to the story that the economy is not stalling-out as many might think.
Business activity isn’t plunging, but it is stagnating—and sentiment is souring. Like the consumer, corporate America isn’t introuble… but it’s far from comfortable. If the Fed is cutting rates to preempt a downturn, the ISM data might be part of whatit’s reacting to (or overreacting to).
G-D-Perplexing
Second quarter real GDP came in strong at 3.8% and excited many market participants—but the excitement may be misplaced. A closer look reveals that much of the apparent strength was a rebound effect from Q1’s artificial weakness,
itself distorted by a one-time import surge ahead of anticipated tariffs. (We detailed that anomaly last quarter.) That spike in Q1 imports inflated the trade deficit and pulled down growth, only to
reverse in Q2 when inventories corrected. Strip out that volatility, and what’s left is a far more modest pace of economic
expansion.
To be clear, this isn’t a recessionary
story. The economy continues to
hum along with stable consumer
spending, a reasonably healthy
labor market, and solid—if not
spectacular—business activity. But
this is not a 3%+ growth environment either. It’s uneven, noisy, and heavily influenced by
policy side effects rather than
organic momentum. Trading on this
data is questionable, and setting
monetary policy by it is potentially
treacherous.
Piering Ahead
The Fed Fights Phantoms: The Federal Reserve, once chastised for being behind the curve in fighting real inflation, now appears to be way out ahead of it—even if that means slashing rates into an economy that’s still standing. Employment remains sturdy, wage gains persist, inflation is simmering but not flaring, and consumer spending hasn’t cracked. Yet the Fed is now administering preemptive comfort as if hardship has already set in. But here’s the rub: the data the Fed is leaning on may be flawed. The GDP figures that excited so many in Q2 were likely distorted by the timing noise of front-loaded Q1 imports (see chart right) ahead of tariff changes—a statistical echo rather than a clean signal. And those echoes reverberated through economic data everywhere in the first half of the year, not just in GDP. The Fed is reacting not to trends, but to tremors.
Like a helicopter parent trying to ease every whiff of a child’s discomfort, the Fed is trying to fend off not just distress, but even the idea of it—micromanaging the economy in a way that may do more harm than good. Its job is not to ensure perpetual comfort, but to foster stable, sustainable conditions. In trying to shield the economy from every bruise, it may be stunting the economy’s ability to self-regulate and adapt.
Credit Markets Are Calm – Why Isn’t the Fed? Fixed income markets and managers—often the grownups in the room—aren’t flashing recession. Credit spreads remain razor tight, implying default risk is seen as low and the underlying and impending economy is healthy. That should be comforting. If bonds are calm, why is the central bank panicking?
And yet, by cutting rates into strength and stoking further liquidity, the Fed may be encouraging risk-taking rather than tempering it—another chapter in the long book of moral hazard. Once again, central banks seem intent on ensuring no one ever has to feel a chill.
Valuations and the AI Halo: Meanwhile, equity markets continue to price in perfection. The S&P 500 trades near peak multiples, and although the “Magnificent 7” mega-cap tech names still dominate leadership, their stratospheric valuations are increasingly being justified by expectations of a productivity revolution tied to artificial intelligence. If that optimism is warranted—if AI truly ushers in a new era of margin expansion and growth—then it’s fair to believe that the rest of the S&P, and indeed global equities and economies as a whole, should also benefit.
That’s the pivot point. Either the market is overpricing a narrow handful of names, or it’s underpricing a broader economic uplift. Either way, the Fed’s comfort-first posture is acting as an accelerant in an already frothy environment. Should any cracks form—whether from geopolitical risk, political dysfunction, or consumer credit strain—the fragility of this comfort controlled system could quickly be exposed.
Share This: