Update on the Markets:
| Index | 3rd Quarter 2025 | Full Year 2025 |
|---|---|---|
| S & P 500 (Large US Stocks) | 8.12% | 14.83% |
| Russell 2000 (Small US Stocks) | 12.39% | 10.39% |
| FTSE All-World ex-US (International Stocks) | 7.13% | 26.15% |
| Barclays US Aggregate (Bonds) | 2.03% | 6.13% |
October 2025
Key takeaways
► Stocks at records
► Market broadening out
► But stocks are pricey
► Fed fighting two risks: inflation and unemployment
► Lower rates will support the market
► Reduced expectations next year
Stocks set records
The S&P 500 index rose 8.12% in the third quarter and is up 14.83% this year. Records were set on many days throughout the quarter.
SPDR S&P 500 ETF Trust (SPY)
There’s strong evidence that broadening is underway in the U.S. equity market. The Russell 2000 index of small US stocks rose 12.39% in the third quarter. On Thursday, September 18, the Russell 2000 hit 2467.70—the first record close since Monday, September 8, 2021. In other words, the rally is not due to a handful of mega‑caps (Tech, AI, etc.). An increasing number of sectors and stocks are participating.
Market breadth generally refers to the number of stocks advancing versus declining (or how many are above key moving averages, new highs, etc.). A rally with narrow breadth (just a few names pushing the index higher) is more fragile and prone to reversals. A rally with strong breadth is more durable and suggests greater market health. When breadth broadens, it often signals that investor confidence is expanding beyond just a few “hot” names, which can support further upside. Several strategists look for signs of this as an intermediate-term positive.
Risk of stocks getting expensive
Broadening is a positive sign, but it doesn’t eliminate risk. Here are some counterpoints/caveats to watch:
- Valuations are high: The market at large, and especially many of the mega-cap growth names, are trading at elevated multiples. Nvidia trades at approximately a 53 Price/Earnings (P/E) ratio. Microsoft is at 38. Apple 39. Excess concentration and rich valuations raise susceptibility to P/E compressions or sharp corrections. There’s little room for error.
- Breadth divergence or lag: Breadth measures can diverge from price (i.e., the index keeps climbing but fewer stocks participate). Analysts at BlackRock and Wedbush warn that the broadening is still incomplete.
- Volume / institutional follow-through: Sometimes, many stocks move up on weak volume or retail buying, which is less sustainable. A truly broad rally often needs institutional, high-volume support.
- Macro/policy risks: Fed policy, inflation surprises, geopolitical shocks, and earnings disappointments could all unravel broad participation. A hiccup here can cause more damage when prices are high.
Fed caught between two risks
On September 17, the Fed cut rates by 25 basis points, bringing the target range to 4.00% – 4.25%. Alongside that cut, the Fed’s updated projections (the “dot plot”) showed expectations for two more cuts in 2025. It’s inflation vs. labor. The Fed finds itself between two asymmetrical risks: Do you fight inflation, or do you encourage full employment? “There are no risk-free paths,” said Fed Chairman Jerome Powell.
Some Fed officials (e.g., Boston’s Susan Collins) cautioned against aggressive cuts, citing persistent inflation risks. Dallas Fed President Lorie Logan recently emphasized that the labor market likely needs to be weaker before the Fed can be confident it reaches its inflation goal, signaling a more cautious path.
What could affect the Fed’s dot plot?
- Inflation surprises to the upside
If inflation (especially core or services inflation) resists downward momentum, the Fed may pause further cuts or even consider rate increases. - Labor market remains tight
If jobs and wages stay strong, the Fed may hesitate to cut further for fear of reigniting inflation. - Faster economic slowdown
Suppose growth and employment weaken more sharply than expected. In that case, the Fed might cut more aggressively (e.g., more than 50 bps) to prevent a deeper slump. - Policy mistakes/credibility risks
The Fed likely wants to avoid overcorrecting; too aggressive cuts could hurt its inflation-fighting credibility. - External shocks
Geopolitical events, commodity price volatility, or financial stress could force the Fed into more reactive moves.
So, the base case now is that the Fed will cut further, but it’s data-dependent – wait-and-see. The Fed doesn’t seem to be in a rush, and the board has widely varying opinions. A quarter-point cut in October looks highly likely.
Don’t fight the Fed
Historically, Fed rate cuts have often preceded a strong period for the stock market, with positive returns in the 12 months following cuts, especially when the market is near an all-time high (where we are now) and a recession is avoided (highly likely). However, past performance is not a guarantee, as stock performance varies depending on whether the cuts are seen as supportive or a reaction to a worsening economy and the potential for a recession.
Suppose the Fed cuts rates to support a healthy but slowing economy. In that case, cuts can lead to broader market participation and gains for sectors other than large-cap tech companies. Stock performance is significantly better when rate cuts do not coincide with a recession. During periods of recession, rate cuts can occur alongside significant market losses.
Lower rates can make borrowing cheaper, stimulate economic activity, and broaden market leadership beyond the dominant mega-cap tech stocks to sectors like homebuilders, financials, and smaller firms.
Looking out to the rest of this year:
| Positives | Negatives |
| ● More Fed cuts to come ● Solid US economy ● Stable labor market ● One Big Beautiful Bill ● Lower oil prices | ● Sticky inflation ● Pricey US stocks ● Tariff uncertainty ● Geopolitical issues ● Federal deficit |
What to do
I’ve been overweight in stocks this year, but I am now cutting back (slightly) and moving the money to short/intermediate bonds. Bonds pay a decent income (a powerful compounding effect) and offset some of the risk of stocks. The market will progress through 2026 and 2027, supported by Fed cuts, strong corporate earnings, stable labor, and a growing economy. However, right now, much good news (tax policy, Fed cuts, reduced tariff fears) may have already been fully priced into the market. Some of next year’s upside may have been brought forward.
The passage of the “one big, beautiful bill ” has reduced policy uncertainty. Businesses can make long-term investment decisions and enjoy various tax breaks, like immediate expensing of research and development, creating an investment boom. All of the spending on AI should trickle down to other sectors of the economy, raising productivity.
Lower tax rates from 2017 will remain, especially for high-income consumers. According to Moody Analytics, the top earners (specifically the top 10%) account for almost half of consumer spending and constitute approximately 70% of the U.S. economy.
But the Fed is in a tight spot. Cut rates too far, and inflation may ignite (think the 1970s). On the other hand, waiting too long or not cutting enough may cause the labor market to collapse and a recession to arrive. Due to political pressure, the Fed will probably lean on the side of cutting more quickly. All said, it may be time to cut back a bit and wait and see.
Stick to your investment strategy and remain focused on your long-term financial goals.
Thank you for your trust and confidence. Please let me know if you have any questions or comments.
Sincerely,
Henry
Henry Gorecki, CFP®
HG Wealth Management LLC
401 N Michigan Ave, Suite 1200
Chicago, IL 60611
312-723-5116
