Q3 Recap — 10 Key Takeaways

10 Takeaways from Q3:

1. Dow, S&P, and Nasdaq Hit Record Highs: The Dow Jones Industrial Average (Dow), the S&P 500, and the Nasdaq Composite each hit all-time highs in Q3, with the tech-heavy Nasdaq rising 11.2%, besting the S&P 500’s 8.1% increase and Dow’s 5.2% gain. The Nasdaq’s impressive performance was largely fueled by the continued strength of the Magnificent Seven and those involved in artificial intelligence (AI). The robust performance of these indexes underscores the resilience and strength of the broader market in 2025, powered by strong corporate earnings.
2. Growth Stocks Continue to Shine: Growth stocks, particularly those with ties to AI, continued to outperform their value stock peers, as the Russell 1000 Growth Index gained 10.5%, while the Russell 1000 Value Index rose roughly 5.3%. This trend was driven by strong performances from stocks in the technology, communication services, and consumer discretionary sectors. The preference for growth over value continues, with investors piling into stocks investing heavily in AI infrastructure and its capabilities.
3. Small Caps Narrowly Outpace Large Caps: Small caps beat out their large cap peers, rising 12.4%. Small caps, as measured by the Russell 2000 Index, reached an all-time high in late September, eclipsing the prior high reached over four years ago. Additionally, small caps ended the trailing year-to-date (YTD) period up double digits — at the end of Q2, small caps were down nearly 2% on the year. While small caps have bested large caps over the quarter, they remain behind over the calendar year period.
4. Stellar Corporate Earnings: S&P 500 constituents reported second quarter (Q2) earnings that came in higher than expected, with earnings growth of 11.7%, marking the third consecutive quarter of double-digit earnings growth. Of the 500 S&P constituents, more than 400, or 81%, reported actual earnings per share (EPS) that beat consensus EPS — the highest number since Q3 2023.
5. Foreign Equities Outpaced U.S. Equities: Both developed and emerging international markets rose in tandem with U.S. equities over the quarter; however, they remain well ahead of their domestic counterparts on a YTD basis, up 25.1% and 27.5%, respectively. Tariff concerns continue to plague the U.S., leading many investors to explore options outside the U.S to overseas. Additionally, the fall in the U.S. dollar has helped propel foreign equities ahead of domestic equities.
6. Fed Cuts Rates: The Federal Reserve (Fed) cut the fed funds target rate by 25 basis points (bps) in late September, as cracks in the labor market and a potential slowdown in economic growth outweighed inflation risks. While the quarter-point cut was largely expected and priced into markets, investors were encouraged by the voting results, with 11 out of the 12 Federal Open Market Committee (FOMC) members in favor of a cut of that magnitude. The lone member who voted for a rate cut of greater magnitude was Stephen Miran, the most recent member of the Federal Reserve Board, and an appointee of President Trump’s first administration.
7. Healthcare Remains Under Pressure: Despite a modest 3.8% gain over the past quarter, healthcare remains the only S&P 500 sector in negative territory YTD. Ongoing challenges — including drug pricing reforms, tariff-related uncertainty, and rising operational costs — have weighed on earnings expectations. Additionally, investor capital has shifted toward high-growth, thematic areas of the market, such as AI, leading to sustained outflows from the historically defensive sector.
8. Bonds Rose as Yields Declined: Core bonds, represented by the Bloomberg U.S. Aggregate Bond Index, rose 2.0% in Q3 as yields broadly declined across the Treasury curve amid easing inflation concerns. Although inflation remains above target, recent data shows it is trending closer to the Fed’s 2% goal. This quarter’s rate cut and dovish commentary from Fed officials helped calm investor fears of a renewed inflation spike, particularly those tied to tariff impacts. Additionally, significant flows into bond funds have led to a rise in bond prices and compressed yields.
9. Gold Continues Its Impressive Run: The precious metal had another quarter of double-digit gains, closing out the quarter 16.8% higher. Continued geopolitical tensions, a weaker U.S. dollar, and retail and central bank inflows helped propel gold to a record high, crossing the $3,800/ounce threshold by quarter-end. Gold remains one of the top asset classes YTD, rising over 46%, marking its best year since 1979.
10. Investor Sentiment Remains High: Equities continued their rebound from the April lows, with the S&P 500 climbing over 30% following President Trump’s global tariff proposals. Investor optimism has been fueled by several supportive factors: tariffs proving less disruptive than initially feared, expectations of further Fed rate cuts, enthusiasm around AI-driven growth, and solid corporate earnings. These tailwinds have so far outweighed concerns over a potential economic slowdown, inflationary pressures from trade policy, and ongoing geopolitical tensions.

While markets continue to grind higher, LPL Research’s Strategic and Tactical Asset Allocation Committee (STAAC) remains neutral equities, favoring large cap stocks over small caps, coupled with a tilt towards growth stocks over value. Regionally, we remain neutral across domestic, developed, and emerging markets, as the upside potential from AI in domestic equities balances the foreign upside potential from further U.S. dollar weakness. The STAAC remains neutral core bonds with a slight preference for mortgage-backed securities over investment-grade corporate bonds. Outside of traditional asset classes, the STAAC remains positive on alternative investments, as we believe they can help strengthen portfolio stability during periods of volatility.

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Important Disclosures

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

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Asset Class Disclosures –

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor's holdings.

This research material has been prepared by LPL Financial LLC.

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