Market volatility is an inherent aspect of investing, and 2025 has certainly demonstrated this reality. Sharp downturns, like those triggered by tariff concerns, can be unsettling for investors, yet they often present chances to purchase assets at more favorable prices. Conversely, when markets rebound and achieve new peaks, some investors may experience anxiety despite solid fundamental support. In either situation, maintaining portfolios designed to endure various market conditions while keeping long-term objectives in focus becomes increasingly critical.

As we enter the final quarter of the year, investors confront contradictory indicators. During Q3, equity markets achieved fresh record highs, buoyed by robust corporate profits and excitement surrounding artificial intelligence developments. Simultaneously, however, employment conditions have deteriorated notably since early summer, sparking worries about economic stability and consumer financial wellness. Nevertheless, GDP expansion has remained solid and inflation has generally been contained.

During such market conditions, the advantages of sustained investment strategies and comprehensive financial planning become apparent. Instead of responding to news cycles and economic data releases, maintaining properly structured portfolios capable of navigating market transitions proves more valuable. This necessitates comprehending the fundamental trends that will influence markets in coming quarters.

Primary Market and Economic Factors in Q3

• Throughout Q3, the S&P 500, Nasdaq, and Dow Jones Industrial Average advanced 7.8%, 11.2%, and 5.2%, respectively, with each index setting new records in September. For the year through September, these gains totaled 13.7%, 17.3%, and 9.1%.
• The Bloomberg U.S. Aggregate Bond Index delivered a 2.0% return in Q3 and has climbed 6.1% year-to-date. The 10-year Treasury yield concluded the quarter at 4.15%.
• International developed market equities (MSCI EAFE) advanced 4.2% while emerging market equities (MSCI EM) gained 10.1% during the quarter. These indexes year-to-date are up 25.7% and 28.2% respectively.
• Gold surged to an unprecedented $3,841 per ounce, marking a 16% quarterly increase.
• Bitcoin finished at $114,641, posting quarterly gains despite remaining below its August high.
• The U.S. Dollar Index dropped to 96.63 in September before settling at 97.78 for the quarter. Year-to-date, the dollar has weakened 9.9%.
• August’s Consumer Price Index rose 2.9% while core CPI increased 3.1%.
• The Bureau of Labor Statistics’ latest report showed just 22,000 net new jobs in August. Monthly job growth has averaged 26,800 since May.
• During its September meeting, the Federal Reserve reduced rates by 0.25% to a 4% to 4.25% range.

Market valuations approach historically elevated territory

For investors with extended time horizons, overall market valuation levels represent a crucial consideration. Beyond merely examining market prices, valuations reveal what investors receive in exchange—including earnings, cash flow, revenue, dividends, and other fundamental metrics. Elevated valuations indicate investor optimism but may also signal excessive expectations in certain market segments.

The accompanying chart illustrates this through the S&P 500’s Shiller price-to-earnings ratio. At 38x, the current reading substantially exceeds the 35-year average of 27x and nears levels witnessed during the dot-com era. This metric offers extended perspective compared to traditional P/E ratios by incorporating ten years of inflation-adjusted earnings history.

These valuation levels are unsurprising given the powerful rally over recent quarters. Since April 8, the S&P 500 has surged 34%, producing double-digit annual returns. Technology equities across multiple sectors have spearheaded both the advance and previous decline. The Magnificent 7 stocks, for example, have jumped 61% from their lows. Despite growing questions about whether artificial intelligence investments will yield positive returns, this theme has been instrumental in driving broader market performance and capital expenditures.

Importantly, valuations do not forecast near-term market direction and should not be employed as timing mechanisms. Rather, they function as fundamental inputs for asset allocation decisions. While aggregate market valuations are elevated, this characterization does not apply uniformly. Small-caps, value stocks, and international equities currently present more compelling valuations than large-caps, growth stocks, and domestic equities. This disparity can generate opportunities for investors maintaining broader perspectives and extended investment horizons.

Rate reductions proceed as employment conditions soften

In September 2025, the Federal Reserve decreased interest rates by 0.25%, continuing its easing program after maintaining steady rates throughout much of the year. This action reflects the Fed’s effort to address persistent inflation above the 2% objective while confronting deteriorating labor market conditions. Markets had broadly anticipated this reduction, which has provided support in recent months.

Several elements distinguish this easing cycle. Traditionally, the Fed has reduced rates in reaction to economic emergencies or contractions. While certain weakness indicators exist currently, aggregate growth remains robust. Consequently, recent reductions represent something distinct: an effort to restore normal policy following the aggressive tightening campaign initiated in 2022. This explains why the Fed is easing even as the economy continues expanding and markets trade at record levels.

Labor market deterioration has perhaps been the most significant factor influencing the Fed’s actions. Though the 4.3% unemployment rate remains historically modest, job creation has decelerated sharply. August recorded merely 22,000 new payroll additions, well beneath the 123,000 average from earlier months.

More remarkable are payroll revisions indicating that 911,000 fewer positions were generated during the twelve months ending  in March than initially reported, as depicted in the chart above. The Bureau of Labor Statistics annually revises payroll figures using more precise data than available during initial monthly releases. Though these numbers remain preliminary, a revision of this scale would constitute the largest on record, demonstrating that employment conditions have been weaker than previously understood.

Therefore, the Fed is reducing rates because, per the latest FOMC statement, it “judges that downside risks to employment have risen.” For investors, rate reductions typically benefit both equities and fixed income when economic conditions remain healthy.

Market turbulence and policy ambiguity have temporarily subsided

Following substantial volatility from tariffs and tax policy earlier this year, economic policy uncertainty measures have moderated. The VIX index measuring stock market volatility stands near 16.3, beneath its long-term average of 18, while the MOVE index tracking bond market volatility has fallen to 78, below its 87 average.

As seasoned investors recognize, tranquil market periods can shift rapidly. Recent years have witnessed numerous volatility episodes stemming from inflation, trade conflicts, Washington policy developments, Federal Reserve actions, recession concerns, geopolitical tensions, and additional factors. The current government shutdown represents yet another event that could disturb markets near-term, even if long-term impacts prove limited. Similarly, tariff policy outcomes and inflationary consequences remain unclear.

For investors, this ambiguity may feel uncomfortable, yet it also determines long-term portfolio results. Recent years also demonstrate the divergence between investor fears and actual market performance. Rather than treating uncertainty as something to eliminate, successful long-term investors acknowledge it as an inherent market characteristic that creates opportunities for strategic portfolio positioning in future years.

The bottom line? As we enter the year’s final quarter, markets stand near record highs amid contradictory economic data. This landscape emphasizes the importance of preserving suitable asset allocation and remaining committed to financial objectives.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based upon third party data which may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article.