Q3 2025: Resilience, Rallies, and a Reality Check

The third quarter was anything but dull. Markets spent much of the summer digesting a cocktail of Fed rate cuts, political drama, and tariff talk that rattled headlines almost as much as they moved prices. On balance, the global economy proved more resilient than many expected, though cracks in the façade remain. 

In the U.S., growth significantly increased from its earlier hiccup, confounding sceptics. Consumers kept spending - albeit more carefully - as inflation continued to oscillate around the Fed's comfort zone. The FOMC's September cut provided some tailwind, though longer yields proved stubborn, reminding investors that central banks can only nudge markets so far when fiscal policy and politics are tugging in the other direction. 

Overseas, Europe benefited from easier central-bank policy and a softer dollar, while emerging markets were a tale of two stories: China surprised on the upside with policy stimulus and a 20.8% equity rally, while India cooled off sharply. Energy markets added to the noise, whipsawed by OPEC discipline (or lack thereof) and geopolitical flare-ups. 

The bigger picture? Despite political theater in Washington and abroad, global equity markets posted strong gains, bonds finally delivered positive returns, and real assets reminded investors that diversification still matters. But volatility hasn't left the stage, it's simply waiting in the wings. For investors, discipline and a long lens remain the best defense. So pour another cup of coffee (or something stronger if tariffs and tweets are your thing), stay diversified, and remember - the markets don't reward the loudest headlines, they reward the most patient investors. 

Highlights

• Q2 GDP increased to 3.8% from -0.5% in Q1, primarily due to positive net exports of 4.8% 

• Nonfarm payroll gains averaged just 29k (Jun - Aug). Bounced around 150k per month in 2024

• Effective tariff rates up from 15% in Q1 to 19.2% Q2

• Unemployment for August at 4.3%, wage growth at 3.9%

• Headline inflation for August at 2.9%, Core at 3.1% 

• Q3 DM stocks up 4.8%, EM 10.9% and the U.S 8.2% 

• YTD, DM stocks up 25.7%, EM up 28.2%, and the US 14.4% 

• Growth issues continue to lead value and small caps 

• Domestic bonds up 2.0% Q3 and 6.1% YTD 

• Cash up 1.1% Q3 and 3.3% YTD 

• Thanks to the FOMC rate cut, short-term bonds up 1.1% Q3 and long-term up 2.5% 

• All real assets enjoyed solid gains during the past quarter 

• YTD, commodities rose 9.45%, world real estate 11.6%, and infrastructure 14.8%

• Chinese REITS rebounded in Q3 while the U.K. and Germany took a punch 

P/E Ratios and Equity Returns 

Valuations don't lie - they just take their time. Since 1993, one-year returns versus P/E ratios look like a toddler's finger painting: colorful, chaotic, and impossible to frame. But give it five years and the pattern sharpens - low valuations lead to higher returns, high valuations drag them down. Today, with the S&P 500 trading at 22.8, we're in rare air, one of the highest multiples in three decades. Investors are effectively paying up for perfection. History suggests gravity eventually asserts itself, and when it does, rosy narratives rarely work out. 

Source: FactSet, Refinitiv Datastream, Standard & Poor's, J.P. Morgan Asset Management. Returns are 12-month and 60-month annualized total returns, measured monthly, beginning 12/31/1993. R2 represents the percent of variation in total return that can be explained by forward P/E ratios. The forward P/E ratio is the most recent S&P 500 index price divided by consensus analyst estimates for earnings in the next 12 months, provided by IBES since December 1993 and FactSet since January 2022. Past performance is no guarantee of future results. Guide to the Markets - U.S. Data are as of September 30, 2025 

Top 10 Companies by Decade 

Market leadership has always been a revolving door. In 1985, the top 10 firms made up about 21% of the S&P 500's market cap. By 1995, just 17%. A decade later, 23%. In 2015, down to 18%. Today? Nearly 40%-almost double the average of the past four decades. And it's not spread out evenly; extreme concentration sits in just a handful of tech giants. History also shows very few companies remain in the top 10 from one decade to the next. Dominance fades - though rarely without fireworks on the way down. 

Source: Bloomberg, Standard & Poor's, J.P. Morgan Asset Management. Companies are organized from highest weight at the bottom to lowest weight at the top. Past performance is no guarantee of future results. Guide to the Markets - U.S. Data are as of September 30, 2025. 

Labor Supply 

The U.S. job machine is losing steam. Not long ago, the three- month average for nonfarm payroll gains hovered around 150,000. By late last year, we even flirted with 350,000. Today? A meager 29,000. That's not just a slowdown - it's falling off a cliff. Many economists point to the sharp decline in foreign- born workers as a key culprit. Fewer new entrants mean fewer hands on deck, tighter labor supply, and persistent wage pressure. In other words, the jobs market isn't just cooling, it may be structurally short of fuel. 

Source: BLS, FactSet, J.P. Morgan Asset Management. Labor force data are sourced from the Current Population Survey, also known as the household survey, conducted by the BLS. *Latest figure reflects the y/y change as of the latest month. Guide to the Markets - U.S. Data are as of September 30, 2025. 

Fixed Income Investment Universe 

The Bloomberg U.S. Aggregate Index remains the best-known yardstick for bond performance, but it's capturing less and less of the market it's meant to mirror. Case in point: only 55% of outstanding Treasuries are in the index, with the Fed sitting on the other 45%. Similar gaps exist - though smaller - for agencies and investment-grade corporates. The bottom line? The bond market has structural issues. And should the Fed ever unload a meaningful portion of its hoard, "orderly" won't be the word of the day. Think chaos, not calm. 

Source: Bank of America, Bloomberg, SIFMA, J.P. Morgan Asset Management. The investable universe for Treasuries, municipals and other agency securities are sourced from SIFMA and reflect par value outstanding. The investable universe for agency MBS, CMBS, CMOS, CLOS, CDOS, ABS, investment grade corporates and high yield corporates are sourced from Bank of America and reflect market value outstanding. Treasuries include outstanding bills, bonds and notes. Agency MBS includes MBS, CMBS and CMOS. Securitized includes ABS, CLOS, CDOS, non-agency CMBS and non-agency RMBS. Sector classifications for constituents in the Bloomberg U.S. Aggregate are based on classifications provided by Bloomberg. Guide to the Markets - U.S. Data are as of September 30, 2025. 

Global Trade Routes and Chokepoints 

Tariff wars aren't just headlines, they're reshaping shipping lanes. Over the past year, U.S. containership volume with South America is down 3.7% and down a steeper 9.2% with Asia. Yet traffic doesn't stop; it reroutes. Asia-to-North America flows are up 1%, and Asia-to-South America has surged 14.2%. The result: higher costs, longer routes, and more geopolitical fragility built into supply chains. One bright spot for the U.S.? Containership trade volume with Europe climbed 6%. Yes, tariffs may redraw maps, but trade always finds a way. 

Source: Bloomberg, Container Trade Statistics, J.P. Morgan Asset Management. *YTD 2025 data are as of 6/30/25. Twenty-foot equivalent unit (TEU) is a standard unit of measurement for container shipping volumes. A modern standard 40-foot container is equivalent to 2 TEUS. Trade chokepoints are strategic maritime passageways that connect major ports or regions that can be vulnerable to geopolitical conflict or disruption. Guide to Alternatives - U.S. Data are as of August 31, 2025. 

Performance - Equities

Equities delivered a broad rally last quarter, with foreign developed markets up 4.8%, emerging markets surging 10.9%, and the U.S. gaining 8.2%. Year-to-date, the overseas story remains dominant - DM +25.7% and EM +28.2% versus just +14.4% for the U.S. China led the pack last quarter (+20.8%) while India lagged (-6.6%). At home, technology soared (+14.3%), cementing large growth's leadership. Small caps, true to form, offered the most volatility. The takeaway? Global diversification mattered and tech remained king.

Copyright © Consilium, LLC. Commentary and opinions herein consist of subjective judgments and are subject to change without notice, as are statements of economics, investments, and financial markets. Information provided is believed to be reliable but does not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument, security, or financial advisory service. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide for, accounting, legal, investment or tax advice. Investing may involve a greater degree of risk and increased volatility than readers of this publication may be aware of or comfortable with. Past performance does not equate to future results. Consilium, LLC - Registered Investment Advisor. 

Performance - Fixed-Income 

Fixed income finally found some rhythm. Domestic bonds rose 2.0% in Q3 and are up 6.1% YTD, boosted by the Fed's rate cut (and a few Trump nudges). Cash, once king, is barely half as rewarding as longer-duration paper. Still, zoom out five years and bonds remain in the red - averaging a -45 bps annualized drag. Weakness in the U.S. dollar made emerging market local- currency bonds the star performer, +16.5% YTD. But be warned: if the U.S. sneezes, EM debt catches pneumonia. Lastly, high-yield lives up to its name, topping 1-yr returns. 

Performance - Real Assets 

Real assets kept investors guessing. Commodities bounced (up 3.7% for the quarter) but remain the poster child for volatility, swinging on every headline from tariffs to Middle East 

tensions. Real estate continues to feel the pinch from higher financing costs, with public REITs lagging despite steady rent growth. Infrastructure, by contrast, held up relatively well as cash flows stayed resilient. Bottom line: commodities remind us why they're a hedge, not a core, while income-oriented real assets remain the sturdier ballast.