Domestic equities enjoyed an exceptionally strong quarter, with major market indices (S&P 500 +8.1%, Nasdaq +11.4%, and Dow Jones +5.7%) advancing to new all-time highs. The relative strength of the S&P/Nasdaq vs the Dow further solidifies the dichotomy between growth and value, as continued momentum in AI/technology stocks fueled much of the rally for the quarter. To expand on this, of the 8.1% total return on the S&P 500 for third quarter, more than half, or 4.3 percentage points of that total return came from information technology stocks alone. The performance concentration in tech highlights the deteriorating breadth in equity markets, with mega-cap info-tech and comm-services stocks carrying equity index returns YTD, while most non-tech related sectors lagged considerably.
Despite the continued strength in equities and the extreme concentration of both total market capitalization and return contribution attributable to the Mag-7, investors remain tolerant of the ever-increasing valuations of these tech firms. While some fundamental data supports a bullish outlook for equities, valuations are stretched thin, with the CAPE (Cyclically Adjusted PE) Ratio at 40, well above the average of 18, a level not seen since the dot-com bubble.
Across the pond, international equities were strong across most sectors for the third quarter. Developed markets such as the MSCI EAFE (+4.9%) and MSCI Europe (+3.6%) posted moderate gains, while emerging markets (MSCI EM +10.9%) saw double digit returns for the quarter. Asian equities did exceptionally well, with China (+19.7%) and Japan (+10.6%) benefitting from easing trade tensions and continued investment in chipmakers and AI related tech companies. In addition to these tailwinds, a weakening U.S. Dollar helped further boost both developed and emerging markets for the quarter.
Commodities saw mixed performance across sectors, as precious metals (gold and silver) hit new all-time highs amid defensive investor interest and a weaker dollar. Meanwhile, energy struggled, with crude oil (+0.5%) experiencing a volatile quarter and ending up nearly flat, driven by increased geopolitical tensions between Russia and NATO, higher output from OPEC, and lower demand; Natural gas (-17.1%) closed significantly lower on oversupply and softer demand. Agricultural commodities (cotton, corn, soybeans, sugar, wheat) ended the quarter lower, facing similar headwinds as energy, experiencing surplus expectations and weaker demand.
Digital assets posted significant gains for the quarter, with the three largest cryptocurrencies by market cap, Bitcoin (+6.3%), Ethereum (+65.3%), and XRP (+23.9%) all closing higher. Crypto continues to benefit from ongoing regulatory and political tailwinds surrounding U.S. Dollar-pegged stablecoins and the tokenization of U.S. Treasuries. Additionally, the increasing adoption of crypto on the world’s largest payment platforms continues to bolster demand and consumer confidence in digital assets.
U.S. fixed income outperformed global, led by strength in MBS and Credit. U.S. yields bull steepened on the quarter amidst weakening labor data and a dovish Fed backdrop (U.S. 2Y -11.2bps, U.S. 2s10s 3.8bps steeper, U.S. 2s30s 6.8bps steeper). Canada’s yield curve saw similar steepening (Canada 2Y -12.1bps, Canada 2s10s 3bps steeper) as both the Federal Reserve (Fed) and Bank of Canada cut their benchmark rate by 25bps. While the Bank of England also lowered their benchmark rate 25bps, U.K. curve steepening was driven by a selloff in longer tenors (U.K. 2Y +16.8bps, U.K. 2s10s 4.2bps steeper).
The European Central Bank (ECB) held rates constant over the quarter, with euro curves such as Germany and Italy bear flattening (Germany 2Y +16.1bps, Germany 2s10s 5.6bps flatter, Italy 2Y +17.7bps, Italy 2s10s 12bps flatter).
While corporates outperformed MBS on an absolute yield basis, spreads meaningfully came in over the quarter, while AAA credit traded sideways (AAA spreads -4bps tighter QoQ, Agency MBS CC -21bps tighter QoQ). Mortgage rates started to see some relief alongside long-dated treasuries (Freddie Enhanced PMMS U.S. 30 Year Fixed Mortgage Rate -37bps QoQ to 6.30%, -74bps from a high of 7.04% in January).
High Yield (HY) credit spreads tightened meaningfully over the quarter, outperforming AAA Investment Grades (IG) as risk-on assets rallied, continuing a trend from Q2.
Rising inflation and a deteriorating labor market were at the forefront of the Fed’s focus in Q3, with risks increasing on both sides of their dual mandate.
Inflation ticked up over the quarter (August CPI and PCE rose to 2.9% YoY and 2.7% YoY, respectively), driven by rising prices of Core and Durable Goods. Even with these increases, it’s unclear what the full impact of tariffs will be on price levels. This uncertainty (and previous resilience in Core Services) has been a cause for caution from the Fed.
At the same time, the Fed was unable to ignore signs of weakness in the labor market. While the rate of new jobs added was resilient in Q2, meaningful downside shocks (and even contractions) to both government and private sector payrolls changed the balance of risks to the Fed’s dual mandate, necessitating a more dovish approach.
Despite its hawkishness in Q2, the Fed expressed an openness to lower rates at Jackson Hole, even lowering the target rate by 25bps in September. Future policy remains to be seen, but the consensus amongst Fed Funds Futures traders has been a ballpark of two 25bp rate cuts by the end of 2025.
Disclaimer
The content in this note is for informational purposes only and is not a recommendation to purchase securities or investment advice. Unless otherwise specified, the data in this note is sourced from Bloomberg. We do not represent that the information in this note is correct, complete, or accurate. This note reflects the views of Secure Asset Management, LLC on the date it was written and may change without notice. CC refers to “Current Coupon,” MBS refer to “Mortgage-backed securities,” CPI refers to the “Consumer Price Index,” PCE refers to “Personal Consumption Expenditures,” YoY refers to “Year over Year,” TTM refers to “Trailing Twelve Month.” Unless otherwise stated, performance numbers are total return and assume dividend reinvestment. Unless otherwise stated, Q2 is the period starting 03/31/2025 and ending 06/30/2025, Q3 refers to the period starting 06/30/2025 ending 09/30/2025, YTD refers to the period starting 12/31/2024 ending 09/30/2025. Unless otherwise specified, yield changes in US treasuries are derived from Bloomberg’s Mid YTM closes in the Graph Curves function, and forward rates are calculated using Bloomberg’s Forward Curve Analysis function. Indices are unmanaged and cannot be directly invested into and past performance is not indicative of future results. Change in Nonfarm Payrolls revisions data may differ from previous Newsletters as revisions are released by the Bureau of Labor Statistics (BLS) twice following each month’s print and can be revised in the BLS annual benchmarking revision, which targets two years of trailing data. Secure asset management does not register as a commodities firm and as such, advisors may not recommend commodities or cryptocurrency outside of packaged products.
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