Q3 2025 Review
The third quarter saw strength across all major indexes, with the S&P 500, NASDAQ, and Dow reaching all-time highs. The S&P 500 finished the quarter up 8.1% and has rallied over 38% from its low in early April. Large Cap Growth outpaced its Value peer by a modest 59 basis points during the quarter, but still holds a significant advantage over the past year, which can be seen in the style box from Morningstar[1].
Small-cap stocks showed improvement as investors waded back into riskier assets. The Russell 2000 led domestic markets for the quarter with a return of over 12%.
Investors have continued to increase their equity allocations from the Liberation Day lows. Aggregate financial asset allocation across investors reached 55% in Q3[2]. For context, the reading was 51% at the height of the Tech Bubble in 2000 and below 30% at the low point of the Global Financial Crisis. The cyclical nature of markets strongly suggests that the current elevated equity allocation figure is a headwind to future returns.
Earnings growth continues to surprise as corporations have continued to weather the economic uncertainties. The S&P 500 grew earnings by 7.9%, marking the ninth consecutive quarter of growth[3]. Revenue growth improved from previous quarters and grew 7.3%3.
The Federal Reserve cut interest rates in September, following a nine-month pause. The bond markets priced the cut in earlier in the quarter and bond investors benefited from it. Core bonds were up 2.04% and long-term treasuries were up 2.51% in the third quarter.
The yield curve steepened as the short end of the curve moved lower at a faster pace due to still heightened long-run inflation risks. The 10-year Treasury yield finished the quarter with a yield of 4.16% while the 2-year Treasury yield closed at 3.58%.
Q4 2025 Outlook
Equity Market
“Every bull market climbs its own wall of worries”, an old Wall Street adage, feels like an appropriate description for the current environment. As we move into the final quarter of the year, we believe that it is important for investors not to become complacent and expect the recent market moves to continue with little to no volatility. We believe that breadth and concentration, along with valuations, should warrant a disciplined approach through the remainder of the year. And let’s not forget that October has historically been one of the most volatile months of the year.
Consider that the weight of the top 10 holdings in 1999 was 25.5%. That number was 29.9% in 2021 (prior to the 2022 bear market) and has now increased to 38.3%[4]. A market that is overly dependent on a few names is inherently riskier, as the risk is not spread across different segments of the economy. Importantly, index investors in the current environment are not diversified, as nearly 40% of their money is tied up in just 10 companies.
The S&P 500 is currently trading above 23x forward four-quarter earnings[5]. These multiple include an optimistic outlook on earnings growth. These two factors expose the market to heightened risk of volatility and pullbacks. Historically, valuations have led to subpar long-term forward returns, which can be seen in the chart from JP Morgan[6].
While we can’t project the next three months in the markets, historically the final quarter of the year as tended to be the best quarter of the year, going back to 1928, with a positive result at the S&P 500 Index level nearly 75% of the time[7]
We acknowledge some potential warning signs for stock market investors, including household equity exposure, market concentration, deterioration of market breadth, and elevated valuations. It’s prudent to remember that we’re in an environment with very easy financial conditions, creating expanding liquidity in the system, and thus continuing to serve as a tailwind for risk assets, broadly.
Fixed Income Market
The recent fall in rates has tempered our outlook for fixed income in the near term, but for long-term investors, the current yield market remains attractive. Following the spike in bond market volatility in early April, following the tariff announcements, the bond market has experienced very low volatility1. We believe we could see a return of volatility in the final quarter. It is important to note that not only has our Federal Reserve started monetary easing, but central banks globally have also. Through September 25, 2025, there have been 168 rate cuts globally, the second-highest number in the last 15 years, following the 196 cuts in June 2020, during the COVID-19 pandemic[8]. We believe real returns going forward for fixed income investors remain attractive, especially considering the restart of rate cuts. The graph below from PIMCO shows longer-run returns for various fixed-income categories through an easing cycle[9].
Conclusion
Every market has its risks and tailwinds, but what is of utmost importance is ensuring that your allocations align with your desired level of risk. Having an appropriate strategic allocation allowing you to achieve your long-term financial goals with your desired risk level is the biggest help when navigating challenging markets.
At Krilogy®, we are committed to helping you effectively navigate the ever-changing market environment. As long-term investors, we believe it is critical to remain patient and stick to the plan that was developed for your unique situation to arrive at a personal allocation target. Our entire team remains dedicated to helping you achieve your financial goals.
Sources:
[1] Morningstar Research, Inc https://www.morningstar.com/markets/13-charts-q3s-tech-driven-rally
[2] Goldman Sachs Global Investment Research https://www.isabelnet.com/equity-aggregate-financial-asset-allocation-among-households-mutual-funds-pension-funds-and-foreign-investors/
[3] FactSet Research, Inc https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_092625A.pdf
[4] Goldman Sachs Global Investment Research
[5] LSEG I/B/E/S https://lipperalpha.refinitiv.com/wp-content/uploads/2025/09/TRPR_82221_819.pdf
[6] JP Morgan Asset Management https://am.jpmorgan.com/us/en/asset-management/institutional/insights/market-insights/guide-to-the-markets/guide-to-the-markets-slides-us/equities/gtm-peratio/
[7] Bespoke Investment Group – Chart of the Day Q4 Strength
[8] The Kobeissi Letter and BofA Global Research, and Global Investment Strategy Bloomberg 9/28/25 https://x.com/KobeissiLetter/status/1972326936136290343
[9] PIMCO, Advisor Playbook Ahead of the Curve
Important Disclosures
Investment Advisory Services offered through Krilogy®, an SEC Registered Investment Advisor. Please review all prospectuses and Krilogy’s Form ADV 2A carefully prior to investing. This is neither an offer to sell nor a solicitation of an offer to buy the securities described herein. An offering is made only by a prospectus to individuals who meet minimum suitability requirements. All expressions of opinion are subject to change. This information is distributed for educational purposes only, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Diversification does not eliminate the risk of market loss. Investments involve risk and unless otherwise stated, are not guaranteed. Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. Investment risks include loss of principal and fluctuating value. There is no guarantee an investing strategy will be successful. Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor’s Index Services Group. Services and products offered through Krilogy® are not insured and may lose value. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein.
