U.S. equity markets continued to climb in Q3, with momentum driven by persistent inflows into AI-related themes across multiple sectors. The S&P 500 recorded 28 all-time highs through quarter-end.
International equities outperformed, with the MSCI ACWI ex USA beating the S&P 500 by the widest margin since 2009. Year-to-date, the ACWI ex USA returned 26.0%, versus 14.8% for the S&P 500.
The Federal Reserve delivered its first rate cut since 2024 at the September meeting, citing a softening labor market and moderating inflation. Chair Powell emphasized a “meeting-by-meeting” approach, pushing back against expectations for a full easing cycle.
The rally in artificial intelligence and its related industries has helped the S&P 500 rebound over 30% from its April lows. Gains within the growth category have been notably concentrated, with NVIDIA (NVDA) alone contributing roughly 25% of the index’s Q3 return and adding the combined impact of Tesla (TSLA), Broadcom (AVGO), and Microsoft (MSFT) accounting for over 55% of total gains during the quarter. At a sector level, technology drove 55% of growth index returns, and when combined with industrials and communication services, those three sectors made up 85% of the total contribution.
Despite ongoing concentration, U.S. equities extended their year-to-date rally in the third quarter. The S&P 500 Total Return Index is up 14.8% through September 30, notching 28 new all-time highs during the period. Investor enthusiasm around AI-driven productivity, improving corporate earnings, and shifting expectations for Fed policy continued to support risk assets.
Importantly, market breadth improved modestly in Q3. Small-cap equities outperformed large caps for the first time this year, with small-cap value, core, and growth all outperforming their mid- and large-cap counterparts.
One notable theme within this broader participation was a sharp rebound in unprofitable or early-stage tech companies, often viewed as proxies for speculative sentiment. With markets increasingly pricing in potential Fed rate cuts in Q4 and into 2026, retail traders and risk-on investors rotated into more volatile corners of the equity market. UBS’s “profitless tech” basket has outperformed profitable tech stocks by a wide margin — up 21% versus 2.1% since the end of July, and rallying nearly 60% from the April lows.
This rotation into unprofitable AI, quantum computing, and nuclear-related names underscores rising speculative activity and reinforces how rate expectations and liquidity shifts continue to influence risk appetite.
Retail traders, who have largely outperformed institutional investors in 2025, began pulling back from some of the market’s more speculative corners in September. While the “profitless tech” trade remained active, risk appetite showed signs of cooling, with notable outflows from cryptocurrencies and popular leveraged ETFs tied to the semiconductor sector and Tesla. Day traders — recently dubbed the “Casino Crowd” by Bloomberg — were early buyers of leveraged funds in January and added heavily during April’s lows, positioning them well for the year’s rally. However, recent retreat from riskier positions may reflect growing caution amid rising volatility, a looming government shutdown, and the lack of economic data releases due to federal agency disruptions.
Long-dated bonds saw notable yield compression in Q3. U.S. and Japanese 30‑year yields fell by roughly 20 basis points, while U.K. 30‑year gilts dropped about 10 bps. The rally reflected renewed demand as investors hunted for value in high-quality duration amid softening economic signals.
One of the key drivers behind the rally in long-duration bonds has been the shift in sovereign debt issuance strategies. Several major central banks are reducing their planned sales of ultra-long debt, easing supply pressures in markets already hungry for duration. Japan is scaling back its upcoming auctions of 30-year and 40-year bonds, while the Bank of England is lowering the proportion of long-term securities in its quantitative easing program starting next month. In Australia, officials have indicated that they are considering a reduction in ultra-long bond issuance due to rising borrowing costs and concerns about market volatility. These adjustments are helping to support prices across the long end of global yield curves.
Earlier in the year, weak demand from pension funds and insurers had weighed on bond markets. TS Lombard economist Davide Oneglia noted that these institutional investors were phased out of the long end due to tighter quantitative policy, but shifting supply dynamics have helped revive interest. Oneglia added that “more forceful action from authorities to reduce long bond issuance should present investors with decent opportunities”.
The September FOMC meeting marked the first rate cut since 2024. The dovish move was underpinned by weakening labor metrics and inflation trends aligning more closely with the Fed’s 2% target. However, Chair Powell emphasized a “meeting-by-meeting” approach, indicating cuts would not follow a predetermined path.
Markets currently price in one more cut in 2025, with about a 60% probability of a second. But the Fed’s next moves will depend heavily on employment data—particularly payrolls, jobless claims, and wage trends.
Inflation remains a key variable. The Dallas Fed’s trimmed‑mean PCE measure, which excludes outlier price moves, is now at its highest for the year and nearing the upper end of the Fed’s comfort zone. If inflation remains stickier than expected, the Fed may act more cautiously than markets hope.
The third quarter delivered broad-based strength across fixed income markets. In the U.S., convertibles led with a 10.4% gain, while core sectors like the Bloomberg U.S. Aggregate Bond Index rose 2.0%. Long-dated Treasuries added 2.5%, supported by cooling inflation and shifting Fed expectations. High yield also participated, though gains moderated toward the end of the quarter as risk sentiment pulled back.
Looking ahead, policy uncertainty poses a key risk. A prolonged U.S. government shutdown or renewed fiscal standoffs could erode investor confidence and delay critical economic data. While short-term disruptions may be absorbed, a drawn-out impasse could inject volatility into rate markets and credit spreads as the fourth quarter unfolds.
International equities continued to show resilience in Q3, with the MSCI ACWI ex USA Index returning 7.6%, again outperforming the S&P 500. Several markets posted double-digit gains, supported by improved risk sentiment and easing dollar strength.
In Europe, performance was mixed. Greece led developed markets with a 12.0% gain, followed by Spain (11.8%) and Luxembourg (11.3%), while Germany declined by 1.0%, dragged down by recession concerns and poor manufacturing data. France posted a modest 3.2% return amid political uncertainty and rising long-term yields. In the UK, equities rose 5.1%, aided by stabilizing inflation and expectations for Bank of England rate cuts.
Japan continued its equity rally with the S&P Japan BMI up 8.6%, supported by a weaker yen and robust export activity. Meanwhile, Korea (10.3%) and Mexico (12.2%) benefited from improving growth expectations and strong trade links to the U.S.
China stood out with the MSCI China A Index rallying 19.8%, one of the strongest country-level performances globally, as they were helped by new capital market reforms, tech sector momentum, and perceived policy support.
In Latin America, Mexico rose 12.2%, supported by strong U.S. trade flows and nearshoring tailwinds, while Brazil gained 7.4%. However, Argentina declined sharply (-31.9%) amid political and economic instability ahead of its presidential election.
With the fourth quarter underway and 2026 on the horizon, the global market backdrop remains uneven. The U.S. economy remains surprisingly resilient, but weaker consumer sentiment and growing concerns about the distribution of spending pose potential cracks under the surface. In September, the University of Michigan index fell to a four-month low, and inflation expectations among households rose to 4.7%, a level that could sap consumption if sustained.
Meanwhile, the U.S. dollar continues to soften, down around 10% year-to-date. This has been a tailwind for corporate earnings and global assets. However, the pace and magnitude of capital flows into the U.S. are increasingly hedged. Over 80% of equity inflows and about 50% of bond inflows into U.S. markets are now currency-hedged. This signals that global investors remain bullish on U.S. risk assets but are becoming more cautious about currency exposure.
GeoWealth's Market Commentary has converted from a monthly cadence to a quarterly cadence. This change allows us to provide deeper insights into market trends and developments. Click here to browse prior Market Commentaries.
Past performance is no guarantee of future returns.
The graphs and charts in this commentary are for illustrative purposes only and not indicative of any actual investment. Index returns do not reflect any fees, expenses, or sales charges. Stocks are not guaranteed and have been more volatile than other asset classes. Historical returns were the result of certain market factors and events which may not be repeated in the future. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgement in determining whether investments are appropriate for clients.
The information here is not intended to constitute an investment recommendation or advice.
Returns are based on the S&P 500 Total Return Index, an unmanaged, capitalization-weighted index that measures the performance of 500 large capitalization domestic stocks representing all major industries. Indices do not include fees or operating expenses and are not available for actual investment. The hypothetical performance calculations are shown for illustrative purposes only and are not meant to be representative of actual results while investing over the time periods shown. The hypothetical performance calculations for the respective strategies are shown gross of fees. If fees were included returns would be lower. Hypothetical performance returns reflect the reinvestment of all dividends. The hypothetical performance results have certain inherent limitations. Unlike an actual performance record, they do not reflect actual trading, liquidity constraints, fees and other costs. Also, since the trades have not actually been executed, the results may have under- or overcompensated for the impact of certain market factors such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. Returns will fluctuate and an investment upon redemption may be worth more or less than its original value. Past performance is not indicative of future returns. An individual cannot invest directly in an index.
This material has been prepared for information and educational purposes and should not be construed as a solicitation for the purchase or sell of any investment. The content is developed from sources believed to be reliable. This information is not intended to be investment, legal or tax advice. Investing involves risk, including the loss of principal. No investment strategy can guarantee a profit or protect against loss in a period of declining values.