Q4 2025 Market Update: Managing Mixed Economic Indicators

Sean Gross, CFP®, AIF® | Co-Founder & CEO

October 2, 2025

Market volatility is an inherent aspect of investing, and 2025 has certainly demonstrated this reality. Though downturns—like the tariff-induced selloff—can feel unsettling, they often present chances to purchase assets at better prices. Conversely, when markets rebound and reach new peaks, investors may experience anxiety despite solid underlying fundamentals. In either case, maintaining portfolios designed to endure various market phases while keeping long-term financial objectives in mind becomes increasingly crucial.

Entering the year's fourth quarter, investors confront mixed signals. During Q3, the S&P 500 hit fresh all-time highs, buoyed by robust corporate earnings and artificial intelligence excitement. Simultaneously, the labor market has deteriorated notably since early summer, sparking worries about economic fundamentals and consumer financial stability. Yet GDP growth has remained solid, and inflation has been relatively contained.

Such market conditions highlight the value of long-term investment strategies and financial planning. Instead of responding to news cycles and economic data releases, investors should maintain well-designed portfolios capable of adapting to market transitions. This demands comprehension of the fundamental trends that will influence markets in coming quarters.

Primary Market and Economic Factors in Q3

• During Q3, the S&P 500, Nasdaq, and Dow Jones Industrial Average posted gains of 7.8%, 11.2%, and 5.2% respectively, all achieving new record highs in September. For the year through Q3, they have advanced 13.7%, 17.3%, and 9.1%.
• The Bloomberg U.S. Aggregate Bond Index increased 2.0% during Q3 and has risen 6.1% year-to-date. The 10-year Treasury yield closed the quarter at 4.15% after touching 4.02% in September.
• International developed market equities (MSCI EAFE) climbed 4.2% while emerging market stocks (MSCI EM) advanced 10.1% in the quarter.
• Gold surged to a record high of $3,841 per ounce, marking a 16% quarterly increase.
• Bitcoin finished at $114,641, below its August high.
• The U.S. Dollar Index dropped to 96.63 in September before closing at 97.78 for the quarter. Year-to-date, the dollar has fallen 9.9%.
• The Bureau of Labor Statistics' latest report showed just 22,000 net new jobs in August. Since May, monthly job gains have averaged only 26,800.
• The Federal Reserve reduced rates by 0.25% to a 4% to 4.25% range at its September meeting.

For long-term investors, overall market valuation levels represent a critical consideration. Beyond simply examining market prices, valuations reveal what investors receive for those prices in terms of earnings, cash flow, sales, dividends, and other corporate fundamentals. While elevated valuations indicate investor optimism, they also suggest expectations may be excessive in certain market segments.

Market valuations approaching historical peaks

The above chart illustrates this through the Shiller price-to-earnings ratio for the S&P 500. The current 38x reading significantly exceeds the 35-year average of 27x and nears levels last observed during the dot-com bubble. This metric offers a longer-term view than traditional P/E ratios by incorporating a ten-year earnings history adjusted for inflation.

These valuation levels aren't surprising given the powerful rally of the past two quarters. The S&P 500 has surged 34% since April 8, producing a double-digit annual gain. Technology stocks across multiple sectors have driven the market higher, just as they led the decline. The Magnificent 7 stocks, for example, have jumped 61% from their lows. Though investors increasingly question whether corporate artificial intelligence spending will yield positive returns, this has undeniably been a major catalyst for the broader market and business investment.

Importantly, valuations don't forecast near-term market direction and shouldn't be used for market timing. Rather, they function as essential inputs for asset allocation decisions. While broad market valuations are elevated, this doesn't apply uniformly across all market segments. Small-caps, value stocks, and international equities currently trade at more attractive valuations than large-caps, growth stocks, and U.S. equities. This presents opportunities for investors with diversified perspectives and extended time horizons.

Federal Reserve reduces rates as employment weakens 

In September 2025, the Federal Reserve lowered interest rates by 0.25%, continuing its easing cycle after maintaining steady rates throughout much of the year. This move reflects the Fed's effort to balance persistent inflation above the 2% target against a deteriorating labor market. Markets widely anticipated this rate cut, which has provided support in recent months.

Multiple factors distinguish this easing cycle as unique. Historically, the Fed has reduced rates in response to economic crises or recessions. While some weakness exists today, overall growth remains solid. Recent cuts therefore represent something distinct: an effort to normalize policy following the aggressive tightening cycle that commenced in 2022. This explains why the Fed is easing policy despite ongoing economic expansion and markets trading at record levels.

The deteriorating job market has been perhaps the most significant factor influencing the Fed's decision. Though the 4.3% unemployment rate remains historically low, job creation has decelerated sharply. August added merely 22,000 new payrolls, well below the 123,000 average from earlier in the year.

More striking still are payroll revisions which indicate 911,000 fewer jobs were created during the twelve months through March than initially reported, as the chart above demonstrates. The Bureau of Labor Statistics annually revises payroll figures based on more precise data than available during monthly job reports. While these numbers remain preliminary, a revision of this scale would mark the largest in history, revealing the job market has been weaker than previously understood.

Consequently, the Fed is reducing rates because, according to the latest FOMC statement, it "judges that downside risks to employment have risen." For investors, rate cuts generally support both stocks and bonds when the economy maintains strength.

Policy uncertainty and market volatility currently subdued

Following substantial volatility from tariffs and taxes earlier this year, economic policy uncertainty measures have improved. The VIX index of stock market volatility hovers near 16.3, below the long-run average of 18, while the MOVE index of bond market volatility has declined to 78, beneath the 87 average.

Long-term investors understand that calm market periods can shift rapidly. Recent years have witnessed numerous episodes of heightened volatility stemming from inflation, trade conflicts, Washington policy, the Fed, recession concerns, geopolitical tensions, and more. The current government shutdown represents just the latest event that could disturb markets short-term, even if long-term effects prove limited. Similarly, tariff policy outcomes and inflation impacts remain uncertain.

For investors, this uncertainty may feel uncomfortable, yet it's also what generates long-term portfolio results. Recent years also illustrate the gap between investor fears and actual market performance. Rather than treating uncertainty as something to avoid, successful long-term investors recognize it as a market characteristic that creates opportunities to position portfolios for future years.

The bottom line? With Q4 beginning, markets are trading near record highs amid conflicting economic data. This environment emphasizes the critical importance of maintaining proper asset allocation, a flexible investment approach, and remaining focused on long-term financial objectives.