Market Update for Q4 2025: Understanding Mixed Economic Signals

Market ups and downs are a normal part of investing. This year has seen plenty of both. When markets fall(like during the tariff sell-off), it can feel scary. But lower prices can also be a good time to invest. When markets hit new highs, some investors worry even when company's performance are strong. In both cases, it's important to have a portfolio built for the long term.

As we start the last quarter of 2025, the economy is sending mixed signals. Stock prices hit new highs in the third quarter, helped by strong company profits and excitement about artificial intelligence. But the job market has gotten weaker since the summer, raising concerns about the economy and consumer spending. Still, economic growth has been solid and inflation has stayed mostly under control.

What Happened in Q3: Key Numbers

·      The S&P 500 gained 7.8% in the third quarter and is up 13.7% for the year. The Nasdaq rose 11.2% (up 17.3% for the year), and the Dow Jones Industrial Average climbed 5.2% (up 9.1% for the year).

·      Bonds(measured by the Bloomberg U.S. Aggregate Bond Index) gained 2.0% in the quarter and are up 6.1% this year.

·      International stocks in developed markets rose 4.2%, while emerging market stocks increased10.1%.

·      Gold reached a record high of $3,841 per ounce, up 16% for the quarter.

·      The Federal Reserve cut interest rates by 0.25% in September to a range of 4% to 4.25%.

·      Job growth slowed sharply, with only 22,000 new jobs created in August.

Stock prices are high compared to company earnings

One important way to judge if stocks are expensive is to look at valuations. This means comparing stock prices to what companies actually earn. The chart shows the Shiller price-to-earnings ratio (P/E ratio) for the S&P 500. At 38 times earnings, this is well above the 35-year average of 27 times. It's approaching levels last seen during the dot-com bubble of the late 1990s.

High valuations aren't surprising given the strong market rebound. The S&P 500 has climbed 34% since April 8. Technology stocks have led the way up. The Magnificent 7 stocks have risen 61% since the market bottom. While some question whether spending on artificial intelligence will pay off, it has been a major driver of market gains.

It's important to know that valuations don't predict short-term market moves. However, they can help guide investment decisions. While overall market valuations are high, some areas are more reasonably priced. Small companies, value stocks, and international stocks have lower valuations than large companies, growth stocks, and U.S. stocks right now.

The Fed is cutting interest rates as job growth slows

The Federal Reserve cut interest rates by 0.25% in September 2025. This decision reflects the Fed's effort to balance inflation (which remains above its 2% goal) with a weakening job market. The rate cut was expected and has helped support markets.

This rate-cutting cycle is unusual. Typically, the Fed cuts rates during recessions or economic crises. While there are some signs of weakness today, overall growth remains healthy. The Fed is adjusting policy after raising rates quickly in 2022.

The weakening job market is the main reason for the Fed's decision. The unemployment rate of 4.3% is still low, but job creation has slowed dramatically. August saw only 22,000 new jobs added, well below earlier averages. Even more concerning, government data shows that 911,000 fewer jobs were created over twelve months than originally reported. This would be the largest revision in history.

For investors, rate cuts typically help both stocks and bonds if the economy stays strong.

Market uncertainty has calmed for now

After significant market swings earlier this year due to tariffs, measures of uncertainty have improved. The VIX (a measure of expected stock market volatility) is around 16.3, below the long-run average of 18.

However, calm periods can change quickly. Recent years have seen many episodes of high volatility due to inflation, trade wars, Fed policy, and geopolitical conflicts. Current issues like the government shutdown and tariff policies could rattle markets in the short term.

While uncertainty can feel uncomfortable, it's a normal part of investing. Successful long-term investors recognize this and use it as an opportunity to position their portfolios for the future.

Final Note: While Markets are near all-time highs, economic signals are mixed. This environment highlights the importance of maintaining a well-balanced portfolio and staying focused on long-term financial goals.

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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Examples are for illustrative purposes only. All investing involves risk of loss including the possible loss of all amounts invested.