Quarterly Economic Update
Third Quarter 2025
Resilience illustrates the ability to withstand
challenges or recover quickly from difficult
conditions. Resilience can also be used to
describe U.S. equity performance over the
past year—including the third quarter, as
markets surged past record highs despite
numerous potential sources of volatility.
Largely fueled by optimistic investor
sentiment around the AI boom, robust
corporate earnings, and expectations of
further interest rate cuts, the U.S. stock
market continued its bull run that began in
early 2023. The artificial intelligence (AI)
boom is continuing to drive growth in the
technology
sector,
dominated
by
the
“Magnificent 7” (Alphabet, Amazon, Apple,
Meta, Microsoft, Nvidia, and Tesla). In
addition to the AI boom, strong corporate
earnings and the Fed lowering interest rates
for the first time this year also helped the
market rally this quarter.
The S&P 500 gained 7.79% in the third
quarter, closing at 6,688. Year-to-date, as of
September 30, the S&P 500 is up almost
14%. The Dow Jones Industrial Average
(DJIA) closed at a record high, gained 5.22%
and ended the quarter at 46,397. Year-to-
date, as of September 30, the DJIA is up over
9%.
Since the recovery from the quick correction
we saw in April, the market has rallied.
While the market continues to rise and
(252) 451-0488
www.StrategicFreedom.com
Anthony (Tony) Engrassia, ChFC, LUTCF, NSSA®
Certified Financial Fiduciary®
investors have a bullish outlook, there is still
a backdrop of caution and uncertainty. The
impact of a slowing labor market, the
consequences of elevated stock valuations, a
possible market bubble in AI and tech stocks,
and potential economic instability, can
potentially dampen investor enthusiasm.
During the third quarter, the U.S. job market
showed signs of cooling but remained strong.
As of August, the unemployment rate was
slightly elevated to 4.3%, the highest in
nearly
four
years
and
a
prolonged
government shutdown could increase this
rate in the near future. (Source: Bureau of Labor
Statistics; 9/5/25)
Overall, the data continues to support a
positive long-term view for equities,
however there is still an undercurrent of
caution. As always, our role as financial
professionals is to actively monitor
developments and confirm that your
portfolio remains aligned with your time
horizon, risk tolerance, and financial
goals. Our commitment is to keep you
informed, proactive, and resilient—just
like the markets themselves.
Inflation & Interest Rates
Key Points:
• Interest rates were lowered by 25 basis
points down to 4.0 – 4.25% in
September, the first rate cut for the
year.
• The Fed is currently forecasting more
rate cuts for 2025.
• The
core
Personal
Consumption
Expenditure (PCE) remained steady at
2.9% in August.
KEY TAKEAWAYS
• Despite periods of volatility, equities
continued to reach record highs in the third
quarter. The rally was fueled by the rapid
growth of artificial intelligence, a resilient
labor market, consistently strong corporate
earnings, and the Federal Reserve’s move
toward easing rates.
• In September, The Fed reduced the federal
funds rate by 25 basis points to a range of
4.0%–4.25%,
with
expectations
of
additional cuts later this year.
• Inflation remained stagnant during the third
quarter. In July and August, the Personal
Consumption Expenditure (PCE) held steady
at 2.9%.
• Traditionally viewed as a safer haven, bonds
experienced some volatility of their own
during the third quarter.
• While we remain optimistic, we continue to
monitor potential headwinds, including the
effects of new tax legislation, tariff impacts
on consumer spending, the path of inflation
and
interest
rates,
and
heightened
geopolitical uncertainty.
• Focusing on your long-term goals and
staying the course of a well-guided plan can
help you stay grounded and confident
during these times of uncertainty.
• We are here for you. Please reach
out with any questions or concerns—
your financial well-being is always
our priority.
In its September 17, 2025, press release, the
Federal Reserve noted: “Recent indicators
suggest that growth of economic activity
moderated in the first half of the year. Job
gains have slowed, and the unemployment
rate has edged up but remains low. Inflation
has moved up and remains somewhat
elevated.” (Source: Federal Reserve Press Release,
9/17/25)
In response to this economic landscape, the
Federal Open Market Committee (FOMC)
voted in September to lower interest rates for
the first time in 2025, establishing a new
target range of 4.0% to 4.25%. Equity
markets reacted positively to this news, with
major indexes reaching record highs. (Source:
finance.yahoo.com, 9/18/25)
Looking ahead, there are two more FOMC
meetings scheduled for the remainder of
2025. While uncertainty surrounding the
economic outlook persists, the Fed has
indicated that additional rate cuts are
possible this year, though not guaranteed.
The Committee reaffirmed its long-term
objectives
of
achieving
maximum
employment and 2% inflation—goals that
have become challenging amidst persistent
inflationary pressures and a resilient labor
market. As Fed Chair Jerome Powell stated,
“There is no risk-free path,”
implying that aggressive cuts could
fuel inflation, while maintaining
high rates for too long could
negatively impact unemployment.
(Source: Associated Press; 9/24/2025)
In August, the core Personal
Consumption Expenditure (PCE)
remained steady at 2.9%. The
annual Consumer Price Index (CPI)
which excludes food and energy
was 3.1%, according to the Bureau
of Labor Statistics. Goods prices
increased 0.1% while services rose 0.3%.
Food showed a gain of 0.5% while energy
goods and services jumped 0.8%. Housing
costs posted a 0.4% rise. Consumers remain
resilient despite some rising prices due to
tariffs. While tariffs have created less of a
threat
than
previously
thought,
their
lingering effects are still a concern. (Source:
cnbc.com; 9/29/25)
Movements in interest and inflation rates
are
critical
for
investors'
financial
planning, and we will continue to closely
monitor these key economic indicators.
The Bond Market and
Treasury Yields
Key Points:
• Bonds, which can be viewed as a safer
haven for volatility, were not exempt
from volatility in the third quarter.
• Like many things, the direction of
bond yields remains unclear. However,
with the Fed anticipating lowering
interest rates this year, we could see
existing bonds rising in value.
Bonds are typically a more stable option for
investors during times of uncertainty. Lately,
however, bonds have been reactive. U.S.
Treasury markets responded more cautiously
than equities to the Federal Reserve’s rate
cut. The yield on the benchmark 10-year
Treasury note briefly fell below 4% before
rebounding. Bond yields ultimately moved
higher, reflecting investor concerns that
inflation could accelerate. Rising inflation
erodes the real value of future interest
payments and diminishes the purchasing
power of invested principal. (Source: Barron’s,
9/19/25)
As the quarter ended, Treasury yields
responded favorably to the solid data of the
U.S. economy. On August 25, the 10-year
Treasury yielded 4.172%, up by 2 basis
points. The short-term 2-year Treasury rose
to 3.661% and the 30-year treasury yielded
less than a basis point lower at 4.749%.
The benchmark 10-year treasury yield settled
at 4.12% to end the quarter, while the 20- and
30-year ended at 4.58% and 4.73%
respectively. (Source: treasury.gov resource center)
When bond prices rise (demand for bonds
goes up), yields fall; when prices fall, yields
rise. Currently, like many things, the
direction of bond yields remains unclear.
We consider using bonds when they are
appropriate for portfolios, and when we do,
there are several things we take into
consideration, including a client’s risk
tolerance,
time
horizon,
and
overall
investment goals. Bonds can be an integral
part of a well-diversified portfolio and offer
stability during times of market decline.
However,
please
remember,
while
diversification in your portfolio can help you
pursue your goals, it does not ensure a profit
or guarantee against loss.
Investor’s Outlook
Key Points:
• Historically, the fourth quarter has
been the strongest performing quarter
for the S&P 500 since 1950.
• Vigilance is critical for the savvy
investor,
as
volatility
remains.
Proceeding with caution and having a
proactive planning approach that
includes an emergency fund and a
well-diversified portfolio that takes
into consideration your risk tolerance
and time horizon is still advised. A
long-term approach to your financial
goals and avoiding diversions is
typically the best path.
While no one has a crystal ball, and past
results do not reflect future ones, it’s
interesting to note that based on historical
data for the S&P 500 index, the fourth
quarter has been the strongest-performing
quarter for equities. Since 1950, it has
delivered the highest average return and the
highest
probability
of
posting
a
gain. Seasonal
factors
like
holiday
spending, corporate earnings releases, year-
end
capital
inflows,
and
portfolio
rebalancing contribute to this strength.
(Source: finance.yahoo.com; 9/25/25)
The chart in this report reflects returns since
1950, which includes several very difficult
fourth quarters, including October of 1987
when the market collapsed and had its worst
single day in history. When studying the
returns, 80% of the time, the fourth quarter
ended the respective year on a high note.
Many continuing uncertainties surround the
economic environment, and our goal is to
continue to focus on key factors that could
affect your personal situation. While investor
sentiment is optimistic, there are some
notable
risks,
including
overvaluation,
stubborn inflation, and geopolitical tensions.
Key items to continue watching as we finish
the year are:
• An economic slowdown. The U.S.
economy, while currently robust, is
predicted
to
slow
down.
Key
indicators such as labor statistics,
consumer spending, and corporate
earnings will help determine our
economic trajectory. Although the
likelihood of a deep recession is low,
if
growth
slows
more
than
anticipated, the risk of a recession
could increase.
• The direction of inflation and
interest rates. Tariffs have not
significantly affected inflation as
initially thought; however, inflation
remains high. The Federal Reserve's
goal of a 2% inflation rate continues
to be elusive, and they are projecting
potential interest rate cuts this year. If
inflation does not moderate, the Fed
may face challenges in continuing
these cuts, with labor data being a
critical indicator to watch.
• Overvalued Stocks. Concerns are
growing that we could possibly see a
modern-day version of the dot-com
bubble burst from 2000. The so-
called "Magnificent 7" stocks make
up more than one-third of the total
market capitalization of the S&P 500
and may be vulnerable to a potential
bubble in AI-related stocks.
• The new tax law. The "One Big
Beautiful Bill Act" was signed into
law on July 4, 2025, aiming to
revitalize the economy, provide tax
savings for Americans, create jobs,
boost domestic investment, and
enhance long-term economic growth.
Many taxpayers have questions about
how these new tax laws may impact
them. If you'd like to discuss this
further, please reach out to us.
• Geopolitical conflict. The global
economy remains in a delicate
position, with ongoing tensions in the
Middle East and the unresolved
Russia-Ukraine conflict adding to the
uncertainty.
As the saying goes, “Everything is fine until
it’s not.” Volatility is still prevalent and may
continue for some time. As we look to the
future, being vigilant is crucial for savvy
investors. Remember, while volatility can
have negative implications, it can also
present opportunities. As the investing
legend Warren Buffet once said, “Be fearful
when others are greedy, and greedy when
others are fearful.” Therefore, we would like
to remind you once again that equities are
long-term investments.
2025 continues to be a year of change for the
U.S. As your financial stewards, we closely
monitor areas that we believe are important
to your financial well-being. We understand
that these changes can bring uncertainty, and
we believe an informed client is the best
kind. We will keep you updated on
developments that could impact your
personal situation.
As always, please inform us of any changes
to your circumstances, including health
issues, the sale of property, or adjustments to
your risk tolerance or time horizon. We
encourage you to share any concerns, ideas,
or potential decisions with us before taking
action. Financial choices often have tax
implications
and
other
considerations,
therefore, the more we understand your
unique situation, the better positioned we are
to offer tailored guidance.
Our commitment is to exceed your
expectations
by
delivering
exceptional
service
and
maintaining
consistent,
meaningful communication throughout the
year. Our team is here to help you with
every step of your journey toward your
financial goals. Please feel free to reach
out to us with any questions or concerns
you may have. We greatly value the trust
and confidence you place in our firm and
look forward to continuing to serve you.
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legal advice.
Sources: cnbc.com; barrons.com; marketwatch.com; treasury.gov; Bureau of Labor Statistics; Federal Reserve; The Associated Press; U.S. Department of Treasury.
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