Markets carried their strong momentum from the second quarter into the third quarter, with the S&P 500, Nasdaq, and Russell 2000 each hitting new highs. Investor sentiment remained optimistic despite soft labor market data and mixed economic signals, and stocks traded higher due to strong corporate earnings, the Federal Reserve’s resumption of rate cuts, and easing trade tensions.
The technology sector remained an important contributor, as artificial intelligence (AI) companies reported strong earnings growth.
At the same time, improving market breadth added fuel to the rally, and small-cap stocks finally broke above their 2021 highs. In this commentary, we recap the third quarter’s defining themes, review stock and bond market performance, and look ahead to the final quarter of 2025.
A Quarter of Transition in the Economy
The third quarter opened on a strong note. Economic activity recovered from the tariff-driven volatility earlier in the year, and incoming data pointed to steady consumer and business demand. Job growth was solid, consumers continued to spend, and business surveys showed sentiment was improving. The stock market traded higher in July, driven by confidence that the economy could withstand high interest rates and trade uncertainty without slipping into a recession.
By late summer, cracks began to emerge in the labor market, as job growth slowed sharply. The Bureau of Labor Statistics reported two consecutive months of weak job growth in July and August and negative revisions to prior months. The unemployment rate rose to 4.3%, the highest since 2021.
While the labor data raised concerns about an economic slowdown, separate data showed consumer spending remained solid. Economic growth was still positive, but the economy appeared to be softening.
The shift in economic data was significant because it changed the conversation around Federal Reserve policy. As labor market data softened, the market adjusted its forecast to price in a more accommodative Fed and multiple interest rate cuts before year-end. In the market’s view, slowing job growth wasn’t a recession signal but rather a catalyst for the Fed to resume its rate-cutting cycle. The question was when, not if, the Fed would deliver its next cut.
Download our entire market commentary below…
Q3 2025 Quarterly Market Commentary
Markets carried their strong momentum from the second quarter into the third quarter, with the S&P 500, Nasdaq, and Russell 2000 each hitting new highs. Investor sentiment remained optimistic despite soft labor market data and mixed economic signals, and stocks traded higher due to strong corporate earnings, the Federal Reserve’s resumption of rate cuts, and easing trade tensions.
The technology sector remained an important contributor, as artificial intelligence (AI) companies reported strong earnings growth.
At the same time, improving market breadth added fuel to the rally, and small-cap stocks finally broke above their 2021 highs. In this commentary, we recap the third quarter’s defining themes, review stock and bond market performance, and look ahead to the final quarter of 2025.
A Quarter of Transition in the Economy
The third quarter opened on a strong note. Economic activity recovered from the tariff-driven volatility earlier in the year, and incoming data pointed to steady consumer and business demand. Job growth was solid, consumers continued to spend, and business surveys showed sentiment was improving. The stock market traded higher in July, driven by confidence that the economy could withstand high interest rates and trade uncertainty without slipping into a recession.
By late summer, cracks began to emerge in the labor market, as job growth slowed sharply. The Bureau of Labor Statistics reported two consecutive months of weak job growth in July and August and negative revisions to prior months. The unemployment rate rose to 4.3%, the highest since 2021.
While the labor data raised concerns about an economic slowdown, separate data showed consumer spending remained solid. Economic growth was still positive, but the economy appeared to be softening.
The shift in economic data was significant because it changed the conversation around Federal Reserve policy. As labor market data softened, the market adjusted its forecast to price in a more accommodative Fed and multiple interest rate cuts before year-end. In the market’s view, slowing job growth wasn’t a recession signal but rather a catalyst for the Fed to resume its rate-cutting cycle. The question was when, not if, the Fed would deliver its next cut.
Download our entire market commentary below…
The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value-weighted index with each stock’s weight in the Index proportionate to its market value.
The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.
The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
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