The third quarter of 2025 delivered strong equity performance across the board, with international markets continuing their year-long dominance over US equities. Despite ongoing government shutdown concerns and mixed economic signals, markets demonstrated remarkable resilience through the quarter.
In our latest quarterly market review, Instrumental Wealth's CEO David S. Silver, CFP®, CEPA® and Chief Investment Officer Matt Harbert, CFA® examined these developments and their implications for portfolios heading into the final quarter of 2025.
Below, we break down the key insights to help you navigate the current economic and market environment.
Table of Contents:
- International Markets Lead the Charge
- The MAG7 Reclaims Its Crown
- Bond Markets Show Strength
- Economic Crosscurrents: Inflation vs. Employment
- Fed Resumes Rate Cuts
- Government Shutdown: Markets Shrug It Off
- Key Takeaways for Investors
International Markets Lead the Charge
The third quarter reinforced 2025's theme of international outperformance, with emerging markets delivering the quarter's best returns at 10.6%, followed by US small caps at 9.1% and US large caps at 8.1%.
Year-to-Date Performance Standouts:
- Emerging Markets: 27.5% YTD return
- International Developed: 25.1% YTD return
- US Large Caps: 14.8% YTD return
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Source: Instrumental Wealth, YCharts. Data through September 30, 2025
The US dollar's weakness has been a significant tailwind for international returns. After depreciating nearly 10% year-to-date, the dollar provided US investors with an approximate 11% boost to developed market returns and 2.6% to emerging markets. However, the dollar did strengthen slightly in Q3 (up 1%), creating a minor headwind for the quarter.
Source: Instrumental Wealth, YCharts. Dollar Index YTD: -9.87%
As Matt noted, "International equities are well ahead of domestic equities so far this year. US large caps, which have outperformed for years, is now middle of the pack."
The MAG7 Reclaims Its Crown
After a brief respite in Q1, the Magnificent 7 technology giants roared back to reclaim market leadership. Following their Q1 correction when they fell nearly 15%, these tech titans surged almost 38.5% from the end of Q1 through Q3, compared to just 10% for the remaining S&P 500 companies.
Sector Performance Highlights (Q3):
- Technology: 11.5% return
- Consumer Discretionary: 10.5% return
- Communication Services: Just under 10% return
Source: Instrumental Wealth, YCharts. Data through September 30, 2025
This resurgence has pushed S&P 500 concentration to new highs, with the top 10 holdings now representing almost 40% of the index, a historical peak. The MAG7 now outperforms the remaining 493 companies by 6.25% year-to-date (17.7% vs. 11.5%).
Source: Instrumental Wealth, YCharts. The MAG7 surge from Q1 lows through Q3
Source: Morningstar Direct. Top 10 holdings = 38.87% of SPY
Several factors explain this renewed dominance:
- Easing of initial tariff concerns from the Trump administration
- Re-accelerated earnings expectations
- Expectations of more dovish monetary policy
Bond Markets Show Strength
Fixed income continued its solid 2025 performance, with municipal bonds leading Q3 returns at 3%. Year-to-date, the bond market has delivered meaningful returns across all sectors:
YTD Bond Performance:
- International Bonds: 9.4% (boosted by currency effects)
- Corporate High Yield: 7.25%
- Mortgage-Backed Securities: 6.75%
- US Aggregate: 6%
Source: Instrumental Wealth, YCharts. Data through September 30, 2025
Current yields remain attractive from a historical perspective, sitting around the 50th percentile of their 32-year averages. However, spreads have compressed to historically low levels, with US aggregate and high yield spreads in the lowest decile compared to historical norms.
Source: Bloomberg Finance L.P., Fidelity Investments (AART). Data from 1993-2025
Source: Bloomberg, FactSet, JP Morgan. Yield to worst across fixed income sectors, past 15 years
As Harbert explained, "Based on the last 15 years, yields actually look attractive, particularly in the higher quality core sectors...at these levels, bonds do provide more of a buffer over a market correction or an economic downturn."
Economic Crosscurrents: Inflation vs. Employment
The economy presented conflicting signals throughout Q3, with the Fed caught between its dual mandates of price stability and maximum employment.
Inflation Trends:
- CPI: Increased from 2.3% in April to 3% currently
- Core CPI: Rose from 2.7% in May to 3%
- PCE: Up from 2.3% in April to 2.7% (through August)
Source: BLS, BEA. Data through September 2025
Shelter costs remain the primary inflation driver at 3.5% year-over-year, representing 35% of the CPI index. Gasoline prices, while down 0.5% year-over-year, spiked in August and September, contributing to headline inflation.
Source: Bureau of Labor Statistics. September 2025 CPI breakdown by category
Employment Weakness:
The labor market showed concerning deterioration in 2025:
- Average monthly job creation: Just 74,750 (vs. 342,167 average from 2021-2024)
- Unemployment rate: 4.2% (up from 3.5% mid-2023 low)
- Job openings per unemployed person: Now below 1.0 for the first time since early 2021
Source: BLS. Job openings, hires, and quits trends through August 2025
Source: Bureau of Labor Statistics. Data through August 2025
This dramatic slowdown in job creation prompted the Fed to shift focus from inflation concerns to employment support.
Fed Resumes Rate Cuts
After pausing rate cuts earlier in the year due to reinflation fears, the Fed pivoted in September, cutting rates by 25 basis points. They followed with another 25 basis point cut this week, bringing the Fed Funds target range to 3.75%-4%.
Fed Outlook:
- December: 73% probability of another 25bp cut priced in
- Year-end target: 3.5%-3.75% if December cut materializes
- Long-term projection: Fed members expect rates around 3.5%-3.75% through 2025
Source: Federal Reserve. Current range: 3.75%-4.00%
Source: CME Group. Market pricing shows 72.8% probability of 25bp cut
Source: CME Group.
Chairman Powell stressed that December's rate cut is "not a foregone conclusion," maintaining flexibility based on incoming data. The shift from inflation-fighting to employment-supporting reflects the Fed's challenging balancing act between its dual mandates.
Government Shutdown: Markets Shrug It Off
The current government shutdown, now approaching one month in duration, has created data gaps and operational disruptions but minimal market impact. Historical precedent shows why:
Historical Shutdown Performance:
- Average S&P 500 return during shutdowns: Roughly flat but modestly positive
- 2018-2019 shutdown (35 days): S&P gained over 10%
- Bond markets typically see modest yield declines as investors seek safety
Key impacts of the current shutdown:
- Economic data releases delayed (GDP, retail sales)
- Federal workers furloughed or working without pay
- Business contracts and permits halted
- Treasury auctions and Social Security payments continue
Source: Congressional Research Service
Source: S&P Global, Instrumental Wealth
As Harbert emphasized, "Don't overreact to the headlines. Portfolio adjustments based on political noise rarely pay off."
Key Takeaways for Investors
1. International Diversification Paying Off
After years of US dominance, international markets are demonstrating the value of geographic diversification. The combination of strong local returns and currency tailwinds has rewarded patient investors who maintained international allocations.
2. Technology Concentration Intensifies
The MAG7's resurgence has pushed market concentration to new extremes. While these companies continue delivering strong returns, the concentration risk for passive S&P 500 investors has never been higher.
3. Bonds Offer Attractive Risk-Return
With yields at reasonable levels and providing meaningful income again, bonds are fulfilling their traditional portfolio role as both income generators and volatility dampeners.
4. Mixed Economic Signals Require Flexibility
The combination of sticky inflation and weakening employment creates a challenging environment requiring nimble Fed policy and careful portfolio positioning.
5. Political Noise vs. Market Fundamentals
Despite government shutdowns and policy uncertainty, markets continue focusing on fundamentals like earnings growth, monetary policy, and economic data rather than political headlines.
As David Silver concluded, "GDP growth continues to come in at that level, things may work out here for an extended period of time to keep us out of the contraction phase."
Looking ahead to Q4 2025 and beyond, investors should maintain disciplined, diversified portfolios while remaining attentive to evolving economic crosscurrents. The quarter's strong performance across multiple asset classes reinforces the importance of staying invested through uncertainty rather than trying to time political or economic events.
Source: Instrumental Wealth, YCharts. Year-to-date performance across equity, fixed income, and real assets
This market commentary is based on our Q3 2025 Market & Economic Update featuring CEO David Silver and CIO Matt Harbert. For personalized guidance on how these developments may impact your investment strategy, please contact us.
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This article is for informational purposes only and should not be construed as legal or tax advice. Please consult with qualified professionals regarding your specific situation.
Instrumental Wealth is an investment adviser in Tampa, Florida. Instrumental Wealth is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. A copy of Instrumental Wealth's current written disclosure brochure is available through the SEC's website.
Not an offer: This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only and on the understanding that the recipient has knowledge and experience to understand and make an evaluation of the information, the risks associated therewith, and any related legal, tax, or other material considerations. To the extent that the reader has any questions regarding the applicability of this information to their specific situation, they are encouraged to contact David Silver or consult with the professional advisor of their choosing.