Third Quarter 2025 Review and Outlook

Written by Tim Rigby

According to The Wall Street Journal, the popular stock indexes posted returns for the quarter and year to date as follows:

 			                                                                             Quarter		    Year

The Dow Jones Average 5.22% 9.10%

The S&P 500 7.80% 13.70%

The NASDAQ Composite 11.24% 17.30%

After the big drop earlier in the year when President Trump unveiled his tariff policy, the stock market surprised almost everyone with a pretty persistent rally despite headlines that normally might lead to setbacks. Inflation is hotter than the Federal Reserve likes, as it is still increasing around 3%, tariffs are being imposed on all foreign goods, war is still raging in Europe and the Middle East, and last but not least, the Federal Government has gone into a shutdown because Congress can never agree on a spending plan.  Any of these issues in the past have caused stocks to drop sharply into correction territory or worse. 

In spite of all these negatives, the latest readings on the economy show increasing strength across the board. Corporate earnings are also strong and getting even better.  So even though inflation is still hot and the economy is showing strength, the Fed has begun to lower rates, where in the past they might have seen fit to raise them to cool things down. An old Wall Street saying is “Don’t fight the Fed.”  When the Federal Reserve lowers rates, it is very positive for the economy, and the markets usually respond favorably.   

Congress did pass a spending bill earlier this year that has many pro-growth initiatives, which markets appear to believe will lead to even faster economic growth. Combined with the tariffs, both could potentially generate billions of dollars in tax revenues, which could reduce the deficit or even balance the budget!  That doesn’t happen very often, but if both the tariffs and the legislation work as desired, it could prove to be a powerful boost for our country.

Given this momentum, our outlook is positive but couched in caution as the stock market is at the very high end of historic valuations.  The biggest risk is in tech stocks and some in companies that lack not only earnings, but they don’t have much revenue either and yet trade at exceedingly high valuations.  Looking out 10 years to see revenue begin at some companies is a high-risk way to invest.  Our strategy prefers to buy companies when valuations are reasonable, but revenues and earnings appear to be ready to start growing at a quicker pace.  Many of our stock holdings are lower risk because of this, and if you are patient, they still do very well over time.  If you buy stocks that are extremely priced to start, you are incurring high risk and could end up with major losses if forecasts prove to be too optimistic.

Our outlook is positive because of the strength we are seeing in the economy, but caution is warranted because the valuations are extremely high in certain sectors.  At these valuation levels, there could be a lot of volatility at some point, so we would prefer to put new money to work at lower levels.  Any unusual news could create those opportunities.

Have a great fall season and please call with any questions or comments.    

Tim Rigby