Equities rose in third quarter on strong earnings and monetary stimulus despite labor market and tariff concerns.
Fixed income rallied as the Federal Reserve cut interest rates and signaled for potential future rate cuts.
U.S. equity markets show signs of broadening with small-sized companies outperforming. Asset class performance beyond U.S. large cap equities demonstrates portfolio diversification benefits.
Market Update
U.S. equities continued their assent, fueled by strong second quarter earnings growth and Chair of the Federal Reserve, Jerome Powell’s, remarks at the annual Jackson Hole symposium suggesting that the Federal Reserve will enter a monetary easing cycle. Equity momentum outweighed investor fears of labor market weakness with the three-month average non-farm payroll growth stalling to 29,000 per month, compared to an average of 166,000 per month in 2024.
Equity markets showed signs of broader participation beyond large cap equites throughout the quarter. For instance, profitable small cap equities outperformed large cap equities despite record investor outflows from small cap equities. We outlined our constructive outlook on broader market participation in last quarter’s update and have taken advantage of opportunities across client portfolios.
Fixed income markets also rallied towards the end of the quarter as the September interest rate cut and expectations for additional interest rate cuts drove investors into safe haven Treasuries.
As demonstrated in the chart on the following page, corporate credit spreads have continued to shrink since their most recent peak in September 2022 and are now approaching their tightest levels since 1998. Credit spreads signify the difference between the yields of corporate bonds and U.S. Treasury bonds of the same maturity. While corporate bonds entail credit risk versus credit risk free U.S. Treasury bonds, corporate bond investors are currently receiving less than 1% of incremental yield relative to that of a U.S. Treasury bond. In our view, fixed income investors are not being compensated for credit risk. Thus, we continue to favor state-tax exempt U.S. Treasuries in fixed income markets.
Economic Update
Economic activity continues to expand with the Federal Reserve projecting third quarter real gross domestic product (GDP) growth of almost 4%, surpassing economist projections. The primary drivers of economic activity include personal consumption and corporate capital expenditure, which have been partially offset by declines in residential investment.
Global fiscal policy makers have been embracing expansionary policy while most central banks are cutting interest rates. We believe this reflationary backdrop is supportive for global economic growth and that a near-term recession is unlikely. As it stands today, our main concern is reacceleration of inflation as policy makers have signaled their intent to support the labor market.
To some, non-farm payroll growth declining from 166,000 in 2024 to the current 29,000 per month (three-month average basis) signals an imminent recession. However, we view the lower net migration levels resulting from recent immigration policy to be a driver of a much smaller number of jobs needed to be created to maintain full employment.
Estimates vary on the number of jobs needed to be created each month to maintain full employment. The St. Louis Federal Reserve estimates that 32,000 to 82,000 jobs are needed per month while a joint study between the American Enterprise and the Brookings Institutes estimates 10,000 to 40,000 jobs per month [1] [2].
While immigration is not the sole factor impacting the labor market, alternative measures of the labor market do not suggest weakness, including tax withholdings and initial weekly applications for unemployment benefits.
Three Performers Outside the S&P 500
The recent performance of AI and technology stocks has many investors believing the S&P 500 has been the only investment opportunity, leaving many investor portfolios concerningly undiversified. We highlight three asset classes that have recently performed, supporting our long-standing rationale for a more diversified portfolio.
International Value Equities
Global value investing has worked extraordinarily well as foreign government fiscal stimulus has ignited cyclical industries, such as global industrials and financials. While valuations have increased from their recent historically low levels, the current relative valuation between overseas and U.S. equities favors overseas equities, especially amidst a weakening U.S. Dollar.
Gold
Gold has re-gained its luster as a top performer. There are many reasons that have contributed to gold’s success including:
Weaker U.S. Dollar
Fiscal deficit concerns
Inflation expectations
Central bank purchasing and policy
Geopolitical risks
Market sentiment
While gold does not offer a dividend or interest yield, it has proven a track record as a store of value and purchasing power measured over millenniums.
Emerging Market Fixed Income
Fixed income issued by emerging market countries such as China, Brazil, Mexico, and Indonesia have performed well for a non-equity asset class and despite currency, credit, and jurisdictional risks. Fixed income issued by these countries tends to perform especially well during structurally weak periods for the U.S. dollar and Federal Reserve rate cuts, as it allows for their local central bank to cut interest rates.
Parting Thoughts
As we move into the final quarter of the year, we remain focused on striking the optimal balance of risk and opportunity aligned with your unique objectives and goals. While headlines can be noisy and often emphasize short-term uncertainty, the bigger picture continues to show a resilient economy, broadening market participation, and the benefits of portfolio diversification across asset classes.
Our role is to help you navigate markets and your financial future with clarity and confidence, and we are grateful to serve as your partner along the journey.
Footnotes
[1] Alexander Bick, “Lower Immigration Projections Mean Lower Breakeven Employment Growth Estimates,” St. Louis Fed On the Economy, Aug. 28, 2025.
[2] Wendy Edelberg, Stan Veuger, and Tara Watson, “Immigration Policy and Its Macroeconomic Effects in the Second Trump Administration,” AEI Economic Perspectives, July 2025.
Disclosure
RISE Investment Management, LLC ("RISE" or "RISE Investments") is an investment adviser registered under the Investment Advisers Act of 1940. Registration of an investment adviser does not imply any level of skill or training. This publication is solely for informational purposes and past performance is not indicative of future results. Any description of products, services, and performance results of RISE contained in this publication are not an offering or a solicitation of any kind. No advice may be rendered by RISE Investments unless a client service agreement is in place. Advisory services are only offered to clients or prospective clients where RISE Investments and its representatives are properly licensed or exempt from licensure. All of the information in this publication is believed to be accurate and correct as the date set forth. RISE does not have or accept responsibility or an obligation to update such information. This article is for education purposes and should not be treated as tax or legal advice. This article is not a substitute for legal or tax advice from your professional legal or tax advisor.