GSAM's Investment Committee Releases Its 3rd Quarter 2025 Market Update

October 17, 2025

The third quarter of 2025 offered a blend of resilience and uncertainty. The key themes emerging from this quarter remained true to the overall trend for 2025: resilient consumer behavior, evolving policy from the Federal Reserve (the “Fed”), global macro tension, and a market keeping investors on their toes. A combination of sticky inflation and a moderating labor market continue to be in the scope of many investors. Yet despite those challenges, both domestic and international equities closed out Q3 near year-to-date highs, highlighting the disconnect that sometimes exists between the markets and the broader economy. The U.S. economy continued its impressive growth from the previous quarter and remained in expansion territory during the third quarter. Revised second-quarter GDP figures showed an annualized growth rate of 3.8%. Projections for third quarter GDP growth are on pace to be above average as well, fueled by a stable cohort of consumers.

Consumers remain one of the economy’s most resilient segments. U.S. household net worth has increased by over $50 trillion since the start of the pandemic, with consumers holding $9 in assets for every $1 in liabilities. Housing wealth along with continued equity gains has provided a strong financial foundation for many households. Consumer spending held up in Q3, particularly in the travel and entertainment sectors, as summer demand remained strong. The composition of consumer spending has shifted over the past few decades, as wealthier households now account for a larger portion of overall spending than ever. The top 10% of wage-earners in the US now account for nearly half of total consumer spending, a noticeable increase since 2019. However, younger consumers appear particularly stretched, especially those managing resumed student loan payments alongside inflation-driven living costs. If the labor market softens further, we could see a more meaningful pullback in consumer activity.

After a strong start to the year, labor market strength began to show signs of moderation in Q3. Unemployment checked in at 4.3% according to the most recent reading — still historically low, but above the 4.0% reading from the start of 2025. Job openings in the U.S. fell below the number of unemployed workers for the first time since April 2021. Since the start of 2025, job openings have fallen from 7.7 million to 7.2 million, while the number of unemployed workers has risen. This can be viewed as the labor market balancing out to a more stabilized ratio of job openings and unemployed workers. However, it may also signal that there is a mismatch between the jobs that are available and the skills of those looking for work. Regardless, the labor market overall remains in a healthy range for now. Layoffs remain modest and unemployment claims have been range bound for the last twelve months, but continued weakening here could have broader implications for both consumer behavior and Fed policy decisions in Q4 and beyond.

Inflation is still a central focus for the Fed and consumers alike. After making meaningful progress earlier in the year, price increases have regained some momentum. The Consumer Price Index (CPI) rose 2.9% year-over-year in August — creeping higher from earlier this year. The largest contributor to overall inflation continues to be housing. Home prices have increased 52% since 2019, partially due to the low supply of homes on the market. Many existing homeowners have mortgage rates below 4%, therefore, they would rather remain in their current home than move and incur a new mortgage rate that could be close to double their current one. Some home buyers have started to reenter the market as mortgage rates have trickled down from their recent high of nearly 8% two years ago. If rates continue their downward trend, activity could noticeably increase from a supply and demand perspective.

The Fed’s dual mandate is to ensure people who are seeking jobs can find employment, and to manage inflation to maintain purchasing power. These goals aim to promote a stable economy. The delicate act of finding an interest rate that contains inflation yet maximizes employment is a challenge. Fed Chair Jerome Powell recently emphasized that “there is no risk-free path” forward, with upside risks to inflation and downside risks to employment. However, at its most recent meeting, the Fed reduced their target interest rate for the first time since December 2024. Powell clarified to investors that any cuts should be viewed as risk-management decisions, not the beginning of an aggressive easing cycle. The market has priced in the potential for up to two rate cuts by year-end, but the Fed will rely on incoming data to inform any continued shift in policy.

Despite persistent headlines around inflation, geopolitical tensions, and tariff risk, the equity market’s upward trajectory continued in Q3. Both the S&P 500 and Nasdaq recorded their best Septembers since 2010 and have compiled more than 20 record closes for the year. The S&P 500 closed out Q3 up nearly 15% year-to-date, while the Nasdaq surged even higher, driven by continued gains in the technology sector. Refer to the data table below for a comparison of performance across various indices: 

The momentum and capital spending in the artificial intelligence space continues to benefit large-cap tech names, as companies have committed billions of dollars to building out AI infrastructure. However, growing concentration in market leadership remains a key risk. Technology retains its position as the dominant sector in the S&P 500, now representing 34% of the index — more than 20 percentage points higher than the next largest sector, financials, at 13.8%. Additionally, the top 10 stocks in the S&P 500 now represent 40% of the entire index — the most concentrated the index has been in over 25 years. Nvidia, the world's most valuable company, now carries an 8% weight in the index, the largest for any stock since IBM in 1969.

Valuations in the broader market remain elevated according to several metrics. The S&P 500 price-to-sales ratio is nearly double its 25-year median and the forward price-to-earnings ratio is 25% higher than the 30-year average. This suggests that optimism is priced in, leaving little room for disappointment in earnings or policy outcomes. If tech earnings continue to surprise to the upside, or if other sectors begin to participate more meaningfully, equity markets could continue to trend higher into year-end.

That said, broader participation across equities has started to emerge. The Russell 2000 closed at a new all-time high for the first time since March 2021. That ended the second-longest period in its history without a new high. After lagging in the first half of the year, small-cap stocks roared back in Q3, turning a -2.1% return through June into a +10% year-to-date gain by the end of September. International equities have also contributed meaningfully by outpacing their U.S. counterparts. Much of this performance has been currency-driven by a decline in the U.S. dollar, which has had its weakest year-to-date start since the early 1970s. A weak U.S. dollar boosts returns for U.S. investors holding foreign assets.

Though they have been overshadowed by the stellar equity returns, bond markets quietly delivered another quarter of positive performance on their way to a respectable total return thus far for 2025. Balanced investors have been rewarded on the fixed-income side of their portfolio. Market interest rates have fallen dramatically since the beginning of the year, and bonds have benefitted from price appreciation during that time. The aggregate bond index is on track for its best year since 2020.

The Grant Street investment committee’s outlook for the remainder of the year is cautiously optimistic. Growth is moderating, and markets are pricing in continued positive outcomes. That makes portfolio discipline critical. We continue to favor diversified exposure across asset classes, sectors, and geographies. While equities have recovered impressively from April lows related to the announcement of tariffs, we believe there is merit in maintaining an eye towards risk management. Buffered equity strategies designed to offer downside protection while participating in further upside remain additive to portfolios. On the fixed income side, we continue to rely on high-quality core bonds with attractive yields, while maintaining less interest rate sensitivity than the broad bond market index. With inflation still above the Fed’s target, we believe fixed income will continue to be an important stabilizer through year-end and into 2026.

The third quarter of 2025 underscored a key truth: markets are forward-looking. While there are areas of rising concern for the economy, corporate earnings and continued AI investment have supported equity prices. Nevertheless, a meaningful deterioration in the labor market or a reacceleration in inflation could challenge current equity valuations and prompt a different response from the Fed. As long as corporate earnings remain positive with continued growth and inflation stays in check, the market has reason to move higher. Our investment committee continues to position portfolios with an emphasis on quality across both equities and fixed income in a diversified manner.

Sincerely,

The Grant Street Investment Committee