The third quarter of 2025 delivered strong equity market gains, extending the positive momentum established earlier this year. Despite ongoing concerns about inflation, global growth, and monetary policy, risk assets broadly advanced, with particular strength in U.S. small-cap and international markets. Bonds, commodities, and real estate also contributed positive returns, though at a more modest pace.
U.S. Equity Markets
U.S. equities performed robustly in Q3, led by small-cap stocks.
Small-Cap Stocks (IWM) surged +12.3% in Q3, bringing year-to-date gains to +10.2%. This marked a sharp reversal from earlier underperformance, as investors rotated toward more cyclical and domestically focused companies.
Large-Cap Growth and Technology (QQQ) continued to deliver, up +8.7% in Q3 and +17.6% YTD, reinforcing their role as market leaders over the past decade (10-year average return: 20.6%).
Broad Market (IWV) posted +7.9% in Q3, +13.9% YTD, while the S&P 500 (VOO) gained +7.7% in Q3, +14.3% YTD.
Value Stocks (VTV) advanced +5.6% in Q3, lagging growth but still positive at +11.5% YTD.
This quarter emphasized the breadth of the rally, with gains extending beyond mega-cap technology into small-cap and factor-based strategies such as FNDX (+7.5% in Q3).
International Equity
International equities continued their remarkable outperformance relative to U.S. markets in 2025.
Developed Markets (SPDW) rose +5.3% in Q3 but remain the year’s standout at +27.1% YTD.
Emerging Markets (EEM) added +10.3% in Q3, bringing YTD returns to +28.4%, their best showing in years.
Fundamental Weighted International Stocks (FNDF) posted +7.3% in Q3, a stellar +30.0% YTD.
International diversification, often overlooked in recent years, has paid off meaningfully in 2025.
Fixed Income
The bond market delivered modest but positive results as yields remained range-bound:
Total Bond Market (BND) gained +2.0% in Q3 (+6.2% YTD).
Intermediate Bonds (VGIT) rose +1.3% in Q3 (+6.2% YTD), while Short-Term Bonds (SCHO) advanced +1.1% (+4.3% YTD).
Inflation-Protected Bonds (VTIP) added +1.6% in Q3 (+5.6% YTD).
Bond returns remain modest over longer horizons, with 10-year averages of 1–3%, but they provided stability and diversification this year.
Real Assets
Real Estate (VNQ) posted a gain of +3.2% in Q3 (+5.3% YTD), aided by stabilizing interest rates.
Commodities (DBC) advanced +3.7% in Q3 (+5.8% YTD), supported by energy and industrial metals demand.
Diversified Portfolios
Balanced strategies reflected the strong equity performance and modest bond support:
Aggressive Allocation (AOA – 80/20): +6.2% Q3, +15.9% YTD.
Moderate Allocation (AOR – 60/40): +5.1% Q3, +13.4% YTD.
Conservative Allocation (AOK – 40/60): +3.5% Q3, +9.6% YTD.
Looking Ahead
The third quarter reinforced the strength and breadth of the global equity rally in 2025. U.S. small-cap stocks finally joined large-cap technology leaders, while international equities delivered standout year-to-date gains not seen in over a decade. Bonds remain positive but modest, providing balance as equity markets surged.
As we enter the final quarter of the year, key questions remain: Will the Federal Reserve adjust policy as inflation trends evolve? Can international markets sustain leadership? And will U.S. small caps build on their recent momentum?
Investors with diversified allocations have been well rewarded year-to-date, highlighting the value of global diversification and disciplined portfolio management.
As always, these results serve as a snapshot and not a forecast. A well-structured financial plan should guide long-term investment decisions, rather than short-term market moves.