Q3 2025 Market and Economic Commentary

Quarter in Review

• U.S. stocks continued their charge higher, bolstered by strong corporate earnings, solid economic data, and optimism around massive artificial intelligence (AI) investments from big tech names.
• International stocks also enjoyed an AI-led surge, as tech-heavy Asian markets overwhelmed economic sluggishness in Europe.  
• Yields fell precipitously leading into the Fed’s first rate cut of the year, driving bonds to a positive finish for the quarter. Emerging market bonds outperformed on a softer dollar.
• The Fed cut its benchmark interest rate by 0.25% as expected, but guidance from Chairman Powell and some questionable labor market data makes the path of future cuts less certain.
• Inflation has stalled above the Fed’s 2% target, with headline and core personal consumption expenditures (or PCE, the Fed’s preferred measure) inching higher during the quarter despite softening shelter prices.
• Estimates for Q3 GDP growth are hovering just under 4%, and combined with Q2 upward revisions, the economy appears to be in solid shape (figure 1). Despite shockingly low job growth and higher prices, the American consumer has simply kept spending.
• The trade landscape remained uncertain, as encouraging trade deals with certain countries were met with new (and changing) tariffs on others. More impactful was another legal loss for the administration’s emergency tariff powers, setting the stage for a Supreme Court hearing in November.

Market Highlights: Tech Still Leading the Way

Someone forgot to tell investors that September has historically been the worst month for stocks, as markets not only surged to all-time highs in the final month of the quarter but delivered the strongest September since 2013. The AI spending boom, marked by some of the biggest deals to date (such as Open AI contracting Oracle to produce two Hoover Dams worth of energy over the next five years), drove tech stocks higher and momentarily caused Oracle Chairman Larry Ellison to eclipse Elon Musk as the wealthiest man on earth. But large-cap tech was not the only game in town, as an accommodative Fed cut against a robust economic backdrop set the stage for strong small and mid-cap performance as well.

The impact of the AI trade was not isolated to the U.S., with tech-heavy Asian markets also performing admirably and driving both developed (Japan) and emerging (China, South Korea) markets higher. A sluggish European economy was held back by more industrial oriented countries (Germany), but emerging markets outperformed the S&P 500 for the quarter (figure 2) with the help of a weaker dollar and improving trade and business relationships (Tik Tok) with the U.S.

Economic Outlook

Trump’s Fed: President Trump’s pressure on the Federal Reserve, highlighted not only by threats of lawsuits, audits, and firings, but by the direct placement of his own Fed Governor in Steve Miran, is unlikely to abate even after rate cuts finally arrived. In September’s meeting, Miran’s lone dissent, pushing for a 0.5% rate cut instead of the 0.25% that took place, along with his deeply out-of-consensus push for five more cuts in 2025, signaled Trump’s desire for more and faster rate cuts. More interesting, as we look forward, are Miran’s public comments on the often-dismissed third part of the Fed’s mandate, which notes that in addition to unemployment and inflation, the monetary cohort should also focus on maintaining “moderate long-term interest rates.” Counter to the long-accepted idea that this would follow naturally if inflation and unemployment were kept in check, Miran’s actions may indicate a shift in how the administration sees the role of the Fed, meaning that calls may grow louder for it to take a more active role in helping to fund the government. However, even with Powell’s seat up for grabs next year, concerns around such fiscal dominance of monetary policy appear limited, as long-term inflation expectations remain well-anchored.  

Macro Roaring Back:  While shockingly low job growth dominated the recent headlines, causing recession fears to creep in and ensuring the Fed’s September rate cut, the broader U.S. economy showed little sign of slowing. Despite sticky inflation and still-elevated interest rates, the consumer kept spending and businesses kept investing – both of which will likely be further supported by the recently passed One Big Beautiful Bill (OBBB). Even housing, which has languished since the Fed started hiking rates, is beginning to show life again. And while the labor market appears to be the one exception to this strengthening trend, zooming out shows a slightly rosier picture than painted by the payroll data alone, with unemployment claims holding steady and turnover (hires, layoffs, and quits) sending few warning signals. That said, the potential for stronger headwinds persists, especially as we await the full impact of the tariffs that finally went into effect in August. However, business tax cuts from the OBBB appear to be heavily offsetting what importing firms are paying the U.S. government so far, sterilizing some of that otherwise negative impact on corporate profits.

Trump’s Tariffs Back in Court: While progress was made on the trade front, most notably with a major U.S./EU trade deal and improved relations with China, the tariff picture remains uncertain. August saw long-delayed tariffs hitting Canada and India, September brought dramatic shifts in which goods were exempt from reciprocal tariffs, and now President Trump has announced 100% tariffs on branded pharmaceuticals. But the real story is of legality, as the reciprocal tariffs put into place under the International Emergency Economic Powers Act were once again struck down in court, this time by the U.S. Federal Court of Appeals. The Supreme Court is set to hear the case in early November, and given the normal gap between hearing and decision, the final word on these tariffs is likely months away. The administration has made the case that, should these tariffs be ruled unconstitutional, the repayment of collected customs revenue and weakened ability of the U.S. to project its trade power would be highly detrimental. However, this ruling is likely to determine only how, not if, tariffs are kept in place, as President Trump has many other avenues through which to pursue them. The silver lining, however, is that while such repayment may hurt the government deficit in the short-term, this money flows back to the U.S. business that paid them, providing another potential boost to their balance sheets.  

Congressional Brinksmanship: As of this writing, the government is shut down since Congressional leaders could not reconcile their differences on healthcare funding. But while shutdowns rarely end well for the party that instigated them (and may result in some voter pushback during midterms), the impact on the economy is typically benign. Indeed, the last shutdown in late 2018, which lasted for a lengthy 34 days, hardly registered as a blip on GDP for that quarter. The larger concern, at least for those of us tasked with keeping an eye on the economy, is that we could miss major data releases, with agencies like the Bureau of Labor shutting down all activity and making the current job market even more opaque. While the heart of this debate is Medicaid spending, something we have highlighted before as a major area in need of reform to fix our fiscal woes, the marginal shifts on the table do very little to alter the course of our deficit and debt problems. Luckily, however, neither will the potential loss of tariff revenue should SCOTUS slap down the emergency act levies, as federal revenue projections are quite similar regardless of how that plays out.ⁱ To put it bluntly, the subjects of Capitol Hill squabbles are rarely the things that matter long-term.  

Europe’s Ukraine Problem: President Trump, who had for months argued that a ceasefire would likely require Ukraine to give up some of the territory Russia had claimed since the war began, changed his tone at a recent UN meeting, proclaiming that Kyiv should be able to “fight and win all of Ukraine back in its original form.” Notably, however, the President also stated this will be done “with the support of the European Union,” or more correctly, at the expense of the European Union (i.e., built by the U.S. and financed by Europe).ⁱⁱ This expense is likely only to grow, as rhetoric and military action neared a fever pitch in recent weeks, including Russian violations of Polish airspace and discussion of the U.S. granting Ukraine access to missiles capable of reaching Moscow. Additionally, EU sanctions on Russian trade partners are ramping up and there are plans to use frozen Russian assets to make a considerable 140-billion-euro loan to Ukraine in order to “systematically and massively raise the costs” of the war for Russia.ⁱⁱⁱ These ideas have proven to be relatively ineffective so far and will likely increase the economic pain for Europe as well. Sprinkle in the ongoing political, social, and fiscal quagmire that is France, and even with massive spending plans from Germany and the European Council itself, it is difficult to see marked economic progress in Europe in the near term.  

ⁱhttps://taxfoundation.org/blog/ieepa-tariff-revenue-trump-debt-economy/
ⁱⁱhttps://www.politico.com/news/2025/07/14/trump-sends-weapons-ukraine-00451109
ⁱⁱⁱhttps://www.yahoo.com/news/articles/merz-proposes-using-frozen-russian-164217638.html

This report was created by First Command Advisory Services, Inc. an investment advisor. The information contained herein does not represent a recommendation to buy or sell securities. Nor does this information constitute an offer to sell or a solicitation of an offer to buy any security. Nothing in this commentary should be construed as providing specific investment, tax or legal advice. All information is believed to be from reliable resources; however, First Command makes no representation as to its completeness or accuracy.

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