Market Commentary
- Markets were widely positive in the third quarter of 2025 with fixed income, equities, and diversifying assets all posting gains. Despite recent shifting labor dynamics, the broader economy has remained resilient. Easing monetary policy, a favorable earnings season, and clarity on trade agreements, particularly with Europe, helped drive markets higher.
- While the economy appears steady, cracks are emerging in the labor market. Unemployment has risen to 4.3%, and recent jobs reports show sharp downward revisions, with non-farm payroll growth slowing month after month. These signs of weakness supported the FOMC’s decision to cut its target rate by 25 basis points in September, lowering the target range to 4.00–4.25% after nearly a year-long pause. The Fed’s tone has turned more dovish as labor market conditions soften, even as inflation remains stubbornly above its 2% target.
- Global markets outside the U.S. have surged this year, with standout performers such as China and Korea delivering returns of more than 50% year-to-date. This strength reflects a combination of factors, including more attractive valuations relative to U.S. equities, a weaker dollar, and reduced policy uncertainty. U.S. small cap equities have also rebounded recently as investors expect the companies to benefit more from falling interest rates.
Fixed Income
- Interest rates declined in the third quarter as the FOMC cut its target rate by 25 basis points. The rate cut drove short-term yields lower, while softening labor data and looming government shutdown risks pulled long-term yields down. The move lower in interest rates boosted fixed income assets, with the Bloomberg U.S. Aggregate Bond Index climbing 2.0%.
- The Bloomberg U.S. High Yield Index gained 2.5% despite stretched valuations, supported by strong demand for income, solid corporate fundamentals, and expectations of further monetary easing that tightened credit spreads. Valuations in credit remain elevated, as spreads hover near their tightest levels in a decade.
Equity
- U.S. equities delivered strong gains in the third quarter, supported by easier monetary policy and tariff rates that settled below initial peaks. Small caps (Russell 2000 Index +12.4%) led the charge, outperforming large caps (S&P 500 Index +8.1%), fueled by expectations of a September rate cut and continued policy easing. Investors expected smaller cap companies to gain more from falling interest rates, given their higher leverage compared to larger peers. Optimism about stronger earnings growth in 2026 reinforced their edge during the quarter.
- International markets finished higher overall, though performance varied across regions. Emerging markets stood out with double-digit returns (MSCI EM Index +10.6%), driven in part by China’s surge of more than 20%, supported by easing trade tensions and robust AI-related growth. Developed markets delivered more modest returns (MSCI EAFE Index +4.8%), supported by favorable currency moves, attractive valuations, and accommodative policies that may sustain momentum.
Real Assets
- U.S. equity REITs benefited from falling interest rates in the quarter, delivering modest gains overall. The FTSE NAREIT All Equity REITs Index returned 2.7%. Health care led performance as defensive sectors outpaced the broader market, while retail posted strong returns thanks to resilient consumer spending despite labor market shifts.
- Commodity markets delivered mid-single-digit gains for the quarter (Bloomberg Commodity Index +3.6%), powered by a sharp rally in precious metals (+19.2%), led by gold hitting new highs. The surge was fueled by the Fed’s rate cut, persistent inflation, and heightened concerns over a potential government shutdown.
This report is intended for the exclusive use of clients or prospective clients (the “recipient”) of HCR Wealth Advisors and the information contained herein is confidential and the dissemination or distribution to any other person without the prior approval of HCR Wealth Advisors is strictly prohibited. Information has been obtained from sources believed to be reliable, though not independently verified. Any forecasts are hypothetical and represent future expectations and not actual return volatilities and correlations will differ from forecasts. This report does not represent a specific investment recommendation. The opinions and analysis expressed herein are based on HCR Wealth Advisor research and professional experience and are expressed as of the date of this report. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice. Past performance does not indicate future performance and there is risk of loss.
Comparisons to any indices referenced herein are for illustrative purposes only and are not meant to imply that actual returns or volatility will be similar to the indices. Indices cannot be invested in directly. Unmanaged index returns assume reinvestment of any and all distributions and do not reflect our fees or expenses.
Bloomberg Aggregate Bond Index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
Bloomberg US Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt. Eurobonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included.
S&P 500 Index is a capitalization-weighted index designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Russell 2000 Index consists of the 2,000 smallest U.S. companies in the Russell 3000 index.
MSCI EAFE Index is an equity index which captures large and mid-cap representation across Developed Markets countries around the world, excluding the U.S. and Canada. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
MSCI Emerging Markets Index captures large and mid-cap representation across Emerging Markets countries. The index covers approximately 85% of the free-float adjusted market capitalization in each country.
Bloomberg Commodity Index is calculated on an excess return basis and reflects commodity futures price movements. The index rebalances annually weighted 2/3 by trading volume and 1/3 by world production and weight-caps are applied at the commodity, sector and group level for diversification.
FTSE Nareit All Equity REITs Index is a free-float adjusted, market capitalization weighted index of U.S. equity REITs. Constituents of the index include all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property.
Material Risks Disclosures
Fixed Income securities are subject to interest rate risks, the risk of default and liquidity risk. U.S. investors exposed to non-U.S. fixed income may also be subject to currency risk and fluctuations.
Domestic Equity can be volatile. The rise or fall in prices take place for a number of reasons including, but not limited to changes to underlying company conditions, sector or industry factors, or other macro events. These may happen quickly and unpredictably.
International Equity can be volatile. The rise or fall in prices take place for a number of reasons including, but not limited to changes to underlying company conditions, sector or industry impacts, or other macro events. These may happen quickly and unpredictably. International equity allocations may also be impact by currency and/or country specific risks which may result in lower liquidity in some markets.Real Assets can be volatile and may include asset segments that may have greater volatility than investment in traditional equity securities. Such volatility could be influenced by a myriad of factors including, but not limited to overall market volatility, changes in interest rates, political and regulatory developments, or other exogenous events like weather or natural disaster.
All investing involves risk including the potential loss of principal. Market volatility may significantly impact the value of your investments. Recent tariff announcements may add to this volatility, creating additional economic uncertainty and potentially affecting the value of certain investments. Tariffs can impact various sectors differently, leading to changes in market dynamics and investment performance. You should consider these factors when making investment decisions. We recommend consulting with a qualified financial adviser to understand how these risks may affect your portfolio and to develop a strategy that aligns with your financial goals and risk tolerance.