Alert

US stocks posted solid gains in the third quarter, with both the S&P 500 and Nasdaq Composite reaching record highs. Markets were driven by optimism surrounding the Federal Reserve’s September rate cut—along with expectations for additional easing before year-end—strong corporate earnings, and renewed investor enthusiasm for artificial intelligence.

The technology sector led with robust revenue and earnings growth. Industrials, financials, and materials also advanced, while healthcare and energy lagged, the latter weighed down by declining oil prices. Overall, most sectors posted gains, with technology—particularly semiconductors—and communication services emerging as clear leaders.

Explore the following market and economic insights to help you stay informed and make decisions aligned with your financial goals:

• The Economy
• Market Themes
• Inflation and Employment Trends
• Equity Markets
• Fixed Income
• Potential Risks and Outlook

Key Takeaways on the Economy and Markets

Notable takeaways are as follows:

• Tariffs. Trade negotiations continued through the quarter but had limited market impact, as investors focused instead on monetary policy and corporate earnings.
• Stock Market. Strong earnings and renewed confidence following the Federal Reserve’s rate cut fueled gains across most major asset classes.
• Economic Indicators. US economic growth remained steady, supported by solid consumer spending and business investment, though the labor market showed some signs of softening.
• Federal Reserve. The Fed delivered its first rate cut in nine months, marking a pivot toward supporting employment and growth. Markets are anticipating the possibility of additional easing later this year.
• Fiscal Policy. Continued federal infrastructure investment, selective deregulation, and pro-growth corporate tax provisions under the new tax plan are expected to provide an additional tailwind for US expansion heading into 2026.

The Economy

Economic data underscored the ongoing strength of the US economy, supported by steady GDP growth, resilient consumer spending, and moderating core inflation. A late-September revision confirmed that GDP expanded at an annualized 3.8% in the second quarter, reinforcing confidence heading into year-end. Still, concerns about a potential government shutdown that began on the first day of the fourth quarter added near-term uncertainty.

Market Themes

AI Infrastructure Investment

Artificial intelligence (AI) remained a dominant driver of both headlines and market performance. Leading technology firms are expected to invest roughly $340 billion this year—nearly 1% of US GDP—in semiconductors, data centers, and related infrastructure. This unprecedented level of investment has become a key engine of both economic and market growth. While the long-term commercial impact of AI is still evolving, it has clearly reshaped market leadership: hyperscale firms now represent roughly 40% of the S&P 500’s total market capitalization.

Federal Reserve Policy Shift

In a pivotal policy move, the Federal Reserve cut rates by 25 basis points in September to a target range of 4.00%–4.25%, signaling a shift from combating inflation to supporting a cooling labor market. Additional easing is expected this year helping to boost market confidence and risk appetite.

Inflation and Employment Trends

Inflation stayed above the Fed’s 2% target but rose less than expected amid ongoing tariff effects. Headline consumer prices increased 2.9% year-over-year as of August, up from 2.7% earlier in the summer. While inflation has moderated significantly from its 2022 highs, elevated prices remain a concern for households and businesses.

The labor market showed further signs of slowing, with the unemployment rate ticking up to 4.3% in August—its highest level since late 2021. Although still historically low, broader measures of underemployment have also increased. The Fed’s recent rate cut aimed to temper this slowdown, though questions remain about the potential for a more pronounced softening in the quarters ahead.

Looking ahead to the fourth quarter, the Federal Reserve faces the challenge of balancing the risks of contained—but still elevated—inflation against a weakening job market. Upcoming data, particularly on prices and employment, will be key in shaping monetary policy but could be disrupted by the government shutdown’s impact on key economic releases.

Equity Markets

Equities rallied broadly in the third quarter. The S&P 500 gained 8.1%, bringing year-to-date performance to +14.8%. Growth stocks outperformed value, with the Russell 1000 Growth Index up 10.5% compared with a 5.3% gain for value stocks. Small caps also joined the rally, as the Russell 2000 rose 12.4% during the quarter.

International markets posted positive results, aided by a weaker US dollar, attractive valuations, and improving global growth prospects. European equities rose on easing inflation and stabilizing manufacturing activity, while several emerging markets benefited from lower borrowing costs and steady demand for technology exports.

Fixed Income

Bond investors benefited from the Fed’s rate cut, which pushed yields lower and prices higher. The Bloomberg U.S. Aggregate Bond Index returned 2.0%, while high-yield bonds gained 2.5%, as narrowing credit spreads reflected resilient investor confidence.

Potential Risks and Outlook

Markets enter the fourth quarter with strong momentum but several watchpoints. Elevated valuations, lingering inflation, geopolitical tensions, and political uncertainty could fuel volatility. Two dominant forces continue to shape the investment landscape: the ongoing expansion of AI infrastructure and the potential for additional Fed rate cuts to support economic growth.

Looking ahead, market direction will depend on incoming economic data, corporate earnings, central bank policy, and global developments. Our focus remains on global diversification, selective thematic positioning, and maintaining flexibility—helping portfolios capture opportunity while managing risk in an evolving environment.

We’re Here to Help

For more information about the economic landscape and what it means for investors, contact your Moss Adams Wealth Advisors firm professional.

Additional Resources

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