Quarterly Market Review

U.S. stocks soared to record highs in the third quarter on renewed artificial intelligence enthusiasm. The quarter also added new winners as small-company stocks joined the party. Despite the records for U.S. stocks, emerging markets were the top-performing index for the quarter and now the year. Finally, bond yields fell, and prices rose as the Federal Reserve restarted interest rate cuts. For investors, the first nine months of 2025 have perhaps been a surprising year as both stocks and bonds have generated positive returns despite a slew of uncertainties.

Massive investment deals in artificial intelligence and hopes for lower interest rates led the S&P 500 up 8% during the quarter. The continued momentum puts the index up 35% from the lows post-liberation day tariffs announcements. Nvidia, the apex of the AI boom in the U.S., was the first company in the world to reach $4 trillion in size. AI enthusiasm was not relegated to the U.S. alone; emerging markets equities also benefited as investors looked to China for other AI opportunities. Stocks in China rose 20% for the quarter and 42% for the year.

Despite record highs, not all sectors participated in the rally as investors leaned into risk while moving away from defensive sectors. Fast-growing technology companies enjoyed strong returns while defensive stocks across consumer staples fell during the quarter. As for size, interest rate-sensitive smaller companies outperformed their larger counterparts as the Fed restarted its interest rate cuts after being on hold for nine months.

U.S. bonds rose modestly as interest rates fell. International bonds fell as investors worried about the rising debt load in Europe.

Finally, across other asset classes, gold is one of the best-performing investments for the year. Foreign central banks now hold more gold than U.S. Treasuries, for the first time since 1996.