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The third quarter of 2025 was another good period for the equity markets with the S&P 500 gaining 11.2%. Breadth also expanded with smaller companies, represented by the Russell 2000 Index, finally participating. The standouts were the semiconductor companies, as most of the hyper-scalers announced major investment plans for AI data centers. Even healthcare, and particularly bio-techs, appear to have turned a corner.
As we go to print, it would appear that the U.S. Congress will not be able to pass a continuing resolution bill to keep the government open. Normally, government shutdowns create all sorts of gyrations in both the stock and bond markets, primarily due to the government reaching its debt limit and being unable to fund its obligations. Fortunately, the passage of the “One Big Beautiful Bill” in July of this year increased the debt ceiling by some $5 trillion, which will allow the government to pay all its mandatory obligations and continue issuing debt.
At their September meeting the Federal Reserve Board lowered its federal funds rate by 25 basis points, continuing a pattern of lower rates, which had been suspended for twelve months. The primary reason noted was a deterioration in the labor markets. We expect at least one further cut this year and further cuts in 2026.
While there are still many unknowns, one of the hallmarks of 2025 has been the steady increase in corporate profits. Current estimates are for S&P 500 earnings to increase about 8% in 2025 and 9% in 2026, and even these estimates may be low. We like the fact that corporate earnings are going up while interest rates are going down, and credit conditions are mostly benign. Provisions in the 2025 tax bill should help spending broaden in 2026 with tax refunds starting in February and full depreciation of corporate investments a major plus for corporate cash flow. Deregulation will also help. Some have referred to the recent advance in the equity markets as a bubble, but bubbles of the past are usually “popped” by a Fed tightening cycle and investor preference for staples. This is not the case today.
October 2025
PLEASE NOTE: Unless otherwise stated, the firm and any affiliated person or entity 1) either does not own any, or owns less than 1%, of the outstanding shares of any public company mentioned, 2) does not receive, and has not within the past 12 months received, investment banking compensation or other compensation from any public company mentioned, and 3) does not expect within the next three months to receive investment banking compensation or other compensation from any public company mentioned. The firm does not currently make markets in any public securities.
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