Third Quarter 2025 Market Commentary
- Scott Lanigan
- Oct 7
- 19 min read
Major Index Performance

Well, well, well, after being the little brother to their large-cap counterparts, the small-cap index (Russell 2000) finally showed its stuff appreciating 12.39%, giving it the trophy for best performing major index in Q3
US Small-caps directionally moved the same as large-cap indices but were much more volatile in comparison. While there were some macro reasons that contributed to outperformance, such as strong Q2 GDP numbers, falling interest rates, and lower valuations v. large-caps – there was some speculative activity when looking at individual holdings. For instance, Bloom Energy (BE) rallied over 253% on the expectation their power production capabilities will be needed for AI data centers and Oklo (OKLO), a nuclear power/reactor company, nearly doubled on speculation that their company could benefit from the same. And finally, Rigetti Computing (RGTI) and IonQ (IONQ), unproven quantum computer companies, appreciated 151% and 43%, on bets that quantum computing is nearly here (spoiler, it’s not).
All of this to say, is that while legitimate reasons for small-caps strong performance, there are also some exuberant narratives that are leading to some bubble-like activity.
The Nasdaq Composite or the large-cap growth index made up of mostly growthy tech names, appreciated 11.41% in Q3. This was largely due to the familiar names and a familiar theme, AI. A few macro-developments that boosted confidence in the AI narrative, in July the White House released an ‘AI Action Plan’ which outlines priorities to invest in AI infrastructure and reduce regulatory barriers. The government has been clear about the importance reshoring chip manufacturing to the U.S., as opposed to having manufacturing concentrated in Taiwan. This is a major reason they invested approximately $11B in Intel. Then, OpenAI signed a deal with Oracle to purchase $300B in computing power over five years, starting in 2027. This is compute that Oracle doesn’t have the current capacity to deliver mind you and it’s estimated that the company will need to borrow at least $100B to finance this growth initiative. These are just a few of the developments that continue the positive momentum for these mega-AI stocks and why the Nasdaq posted strong performance in Q3.
Next, the MSCI Emerging Markets index rose 10.64%. Broadly speaking, reduced rhetoric coming out of Washington in regard to tariffs and retaliatory trade escalations calmed investors fears, causing them to feel more comfortable placing capital in countries that were previously squarely in Washington’s crosshairs. Notice how we haven't heard much about China recently? It's not a coincidence that Chinese markets have appreciated significantly since April (which we'll discuss shortly). In addition, US-based investors benefitted from many EM currencies appreciating relative to the dollar, causing their positions to receive an additional positive FX gain on top of their local stock performance. Finally, I have to mention that emerging markets are priced much lower than US stocks currently. To illustrate, the MSCI Emerging Markets index has a price-to-earnings multiple of approximately 17x vs. the S&P 500’s of 30x. And given that China has its own AI ambitions and South Korea is a major player in the space as well, investors are likely looking for better company value outside of the United States.
The Dow Jones Composite index, or the old economy index, rose 5.12%. This index is comprised of more cyclical, slow growing value sectors, like financials and industrials, versus the Nasdaq Composite, which is more driven by secular growth in technology and consumer discretionary sectors. So given that investors went risk-on in Q3, it’s not surprising that these slow growers got left behind.
Then I intentionally skipped it, but the S&P 500 posted an 8.12%. The S&P 500's underlying composition is in between the Dow Jones Composite and Nasdaq Composite, so I typically expect it to finish in the middle of these two indices, like they did this quarter and are currently doing it for the year.
Finally, the MSCI EAFE index, the developed international index, finished at the bottom of the pack, returning 4.77%. Germany was the main drag in the index, declining 2.36% in Q3. We’ll go into more detail when we go over international performance shortly.
U.S. Sector Performance

While we’d expect Technology to be the winner in Q3 given the AI momentum, we can see that it was instead Consumer Discretionary stocks that led the way. Hmm, unexpected.
But, as Lee Corso would say, “not so fast my friend!” When we dig into the top contributors for the Consumer Discretionary sector, we can see that Tesla (TSLA) returned 40% for the quarter, overwhelmingly explaining the sector’s strong performance given it's strong weighting in the index (around 20%). So while Tesla is technically categorized as an automotive company, hence its sector classification, investors are undoubtedly valuing it as if it were an AI company. And given its robot-tax rollout and future ambitions into the robotics space, it’s easy to see why.
Apple and Nvidia were the largest contributors to the Tech sector, appreciating 24.25% and 18.10% respectively. Apple, after taking a little bit of a beating in the first half of the year (down around 18% at the end of Q2) saw a resurgence from better-than-expected Q2 revenue and earnings, leading investors to re-evaluate their negative sentiment on the blue-chip tech stock. In addition, during their earnings call they discussed their internal AI investment and future plans centered around it, which further fueled bullish sentiment. But despite the stellar performance Apple is still lagging behind the S&P 500 year-to-date, only up 2.04% versus 14.83% as of the end of Q3.
Nvidia. You already know by now. We talk about it every quarter. But, to summarize, the more bullish companies are on AI, the more GPU chips and hardware they’re going to buy from Nvidia, and the more money Nvidia is going to make. Its performance will mostly be driven by narrative and sentiment in between earnings releases. If they miss on earnings, the stock could decline rapidly. Or it couldn't. As investors could see a decline as a dip buying opportunity (despite a possible legitimate deterioration in fundamentals, if an earnings miss were to occur). As you can tell, I’m left speculating myself, as Nvidia’s stock is largely driven their big business customers guesstimating on when AI will become a profit center and some investors speculating on the direction of its stock price.
On the other end of the spectrum, the Consumer Staples sector was the only sector that declined in value this quarter. As a defensive sector, Consumer Staples will generally decline in value during “risk on” periods, or periods where investors are comfortable taking risk on more growthier and speculative stocks. Digging deeper into individual stocks, Philip Morris International (PM), one of the best performers in Q1 (which we discussed in detail in that quarter's commentary), declined 10.94% in Q3. This decline was mostly from missing Q2 revenue estimates and company leadership attributed the miss to black-market cigarettes in the EU, which is a growing issue. At first I balked, however, given the precarious times we’re in, I came around to believe that consumers are probably looking to save money. Even if that means going to illegal sources to get their nicotine high. Speaking as a consumer of tobaccoless nicotine products, they have to be feeling the pressure of other competitors entering the market which is eroding their Zyn-dominance, which is their primary growth engine and is what a lot of the valuation multiple depends on.
Keurig Dr Pepper, Inc. (KDP) was another notable detractor in the Consumer Staples sector, declining 22.14%. This was pretty much entirely on their decision to acquire JDE Peet’s, or as I know it, Peet’s Coffee, for $18B. The market obviously felt that KDP overpaid, and to add insult to injury, credit markets became concerned about the amount and structure of the debt KDP has to take out to finance the deal. To that point, the credit rating agency Moody’s placed the company under review, which risks KDP falling out of its investment grade rating. Which if it does fall to below investment grade, could have serious consequences for Dr. Pepper’s ability to get financing on decently attractive terms going forward.
S&P 500 Top/Bottom Performers
Third Quarter

Year to Date

Applovin (APP) – “I am Applovinnnn”
Superbad reference, I tried.
Anyways, Applovin, is all things mobile application marketing. The company has two primary business segments. First, it helps mobile application owners acquire users through its AI driven marketing platform. For example, if I made a mobile game, I could pay Applovin a fee to utilize its marketing platform to grow my user base. The cost to me depends on the amount of clicks, impressions, and other marketing metrics that I budget for. The more money I shell out, the more clicks I should get on my mobile game. The value-add to me is that I believe that Applovin’s marketing platform is sophisticated enough to be able to get high quality leads and eventual app installs.
The second business segment is its advertising “brokerage” platform, where Applovin connects willing advertisers and application developers together so the former can buy add space in the latter’s app. Applovin takes a cut of the amount of money the advertiser pays to the application developer. It’s basically the flip side, or the supply-side, of the first business segment we just discussed.
Applovin, appreciated 105% in Q3. Its inclusion into the S&P 500 in September was a large factor to performance as it drove significant dollars into the stock from the passive funds that follow the S&P 500. In fairness, the company also has strong positive revenue growth and ambitious forward guidance, also causing significant upward momentum and investor enthusiasm. But you know where I’m going with this. This upward momentum and enthusiasm has caused the stock to become very, very expensive. For instance, it’s trading at 100x earnings, meaning the entire value of the company is dependent on future growth and hitting those ambitious forward guidance numbers (and then some).
Western Digital (WDC) – AI Storage Needs Send This Company to the Clouds
Most of you are probably familiar with Western Digital through their USB flash drives or external hard drives. Maybe even a few of you have a Western Digital device plugged into your computer as you read this! However, Western Digital also provides cloud data solutions, which many tech companies are using to store the MASSIVE amount of data generated from their AI workloads. In their most recent earnings report, WDC grew revenues by 30% year over year, with approximately 85% of the company’s revenue coming from their cloud business segment.
Despite the stock’s 88% increase this quarter, Western Digital looks like much more reasonably valued AI play, trading at “just” 25x to TTM earnings
Factset Research System (FDS) – Stuck in Investment Data Provider Purgatory
The worst performer in the S&P 500 this quarter, declining 35.76%, Factset has had a rough go of it. I believe the decline is mostly attributable to the hangover experienced from their June 23rd quarterly report where they reported negative earnings growth (from margin compression) and announced that their CEO was stepping down, effective in September.
Factset is an investment data service provider, like Bloomberg, however unlike Bloomberg, they’re stuck in an awkward serviceable addressable market.
Despite its old school interface (it still looks like an application built in the 90s), Bloomberg is the standard for real-time market data and analytics. It’s widely used by hedge fund traders, investment professionals, institutional allocators, investment bankers, and mega-financial service companies. It also has a wide moat for fixed income professionals, in terms of data, modeling, and trading.
A Bloomberg terminal subscription is near the top of the range in price, but it’s the gold standard in the industry. It costs around $28,000 per year.
On the other end of the spectrum, you have up and coming names like YCharts. YCharts also provides investment data and analytics, but it’s nowhere near the depth or breath that Bloomberg does. YCharts openly acknowledges that they aren’t Bloomberg and can’t directly compete with them in the premium market, and because of that, they charge around $5,000/year. It’s a simple, clean, interface that probably captures 90% of what most small-to-medium RIAs and retail investors are looking for and need. That 10% that they can’t provide they either work on building or throw their hands up and call it the $23,000 difference (in reference to Bloomberg).
Then you have Factset, who is right in the middle, charging $12,000/year for its full suite. They can’t move up to capture the high margin segment (because Bloomberg owns it), and they can’t move down to capture volume (because smaller companies are taking share).
Trading at 17x earnings, you may think it’s a good bargain, however, without a strategic refocus, it may just be a value trap.
International Indices
Developed Markets

The Land of the Rising Sun (Japan) was the strongest performing developed international country in Q3, appreciating 7.39%.
Speaking to broad top-down factors, Japan was a major beneficiary of the erratic and troubling behavior coming out of Washington and its relatively cheap valuation multiple (16x v. 30x for the S&P 500). A few investors, not wanting Washington to cause any potential disruptions to highly valued U.S. stocks, likely concluded Japan was a better risk-adjusted place to put capital. In addition, investors who got into Japanese markets early also benefited from a positive foreign exchange gain (around 2%), as the US dollar depreciated relative to the Japanese Yen. However, Japan isn’t immune to the AI-narrative, as Softbank, the leading Japanese stock for the quarter, appreciated 75.90%. Softbank is a multinational conglomerate who has been investing aggressively into a variety of technology driven narratives, both private and public. That being said, even though Softbank was largest individual stock contributor to Japan’s return, its weight in the MSCI Japan is only 2.63%. This small weight is hardly going to move Japan’s stock market one way of the other. But it's worth mentioning given how prevalent the AI narrative is around the world.
Deutschland (Germany) was the only negative returning international developed market, declining 2.36%. In September, Germany reported an unexpected 0.30% drop in Q2 GDP which caught economists and investors off guard, likely leading some modest selling pressure within German’s stock market. Also, keep in mind that, Germany was significantly beating every other country in performance at the end of Q2 (35.16% total return YTD), so it’s also likely that some momentum/sentiment-based traders decided to exit the market on this negative economic news. Despite the decline, Germany is still the best performing country year to date for all developed countries, including the United States.
I have to wonder how much of the strong YTD performance is attributable to Germany’s responsible approach to managing its public finances. Germany currently has a better credit rating than the United States (AAA v. AA+), despite the US being the number one economy in the world and having reserve currency status (for the time being anyways).
Emerging Markets

China was the strongest performing stock market out of all markets discussed in Q3, returning 18.93% and South Korea wasn’t far behind, coming in at third with an 11.79% return.
The story for China and South Korea are similar to the story in the United States. The strong Q3 performance largely came from each country’s large tech companies that have their hand in AI. In China, we have Alibaba and Tencent, the Chinese Amazon and Meta/EA/PayPal hybrid. These two stocks alone collectively make up 30% of the MSCI China index, and returned 54.64% and 36.08%, respectively. Like their US counterparts, they are aggressively pushing into AI, both in terms of research and development and infrastructure investment. For instance, Tencent developed its own large-language model, titled T1, and also supports third-party models like DeepSeek. Alibaba also developed and launched the same titled Qwen3-Max, a massive LLM with over 1 trillion parameters, positioning it to compete with the top LLMs around the world. The company is also investing massively in AI infrastructure and product development, recently announcing a partnership with Nvidia, which sent its stock upward.
In South Korea, their big two tech companies performed strongly as well, with Samsung surging 43.81% and SK hynix, Inc. climbing 23.29% respectively (in local currency, price returns). Together, these stocks make up approximately 35% of the MSCI South Korea Index. So given their performance and stock market weighting, it’s not a surprise where South Korea’s performance came from. Digging deeper, both stocks rose significantly because of positive developments stemming from each company’s high bandwidth memory chips (like the RAM in your computer but turbocharged). SK hynix is at the forefront of high-bandwidth memory (HBM) technology. The company recently completed development and validation of its HBM4 chips, which set new records for data transfer speeds. These chips are critical for AI workloads because they feed massive amounts of input data and prompts from the model into GPUs at much faster rates than previous generations. However, the HBM4 chip is still early in production and isn’t in mass production yet. Now let’s talk about Samsung. Samsung also develops high-bandwidth memory (HBM) chips, but it trails SK hynix in readiness for the newest generation (HBM4). While SK hynix has completed development of HBM4, Samsung is currently mass producing its HBM3E chips, which have recently received Nvidia’s approval for use in AI accelerators. This qualification allows Samsung to begin supplying chips to Nvidia.
A little complicated I know, but it basically means that each company is expected to generate a lot of money. And money is good for stock prices.
I skipped over South Africa which was the second best performing emerging market index. On top of their own AI ambitions, through its tech conglomerate Naspers, South Africa also rose significantly because of broad appreciation in precious metal prices, particularly gold, which the country is a major exporter of. For instance, Gold Fields, South Africa’s largest publicly traded gold miner, rose 74.42% in Q3 due to the shiny yellow rock rising 16.88% over the same time horizon.
U.S. Fixed Income
The Yield Curve

A clean story when it comes to the yield curve. In June, the market was uncertain as to when and by how much the Federal Reserve was going to cut rates. However, as the labor market softened, investors became more certain that the Fed was going to cut rates at their September 17th meeting. And they were correct, as Jerome Powell and the gang decided to cut rates by 0.25%, from 4.50% to 4.25%. Reading the tea leaves, it looks like another rate cut is certain by the end of the year, with some uncertainty as to whether they will cut again. A lot of it will depend on the labor market, which has deteriorated since our last quarterly commentary.
The Credit Curve

Same with the credit curve, where spreads generally declined across credit ratings, with the CCC or Below rated issues falling the most and AAA rated issues falling the least. This is generally expected when stock markets rally. Credit spreads typically move inversely with stock markets, meaning the lower you go in credit quality, the more the bond’s price rises and falls in tandem with stocks. Unfortunately, I can’t explain why the BB spread rose, I’m assuming it’s a security specific story and not a broad macro explanation.
Fixed Income Fund Performance

So given interest rates and credit spreads both fell, it’s not a surprise that long-term corporate bonds would stand to benefit the most due to its long duration and modest credit exposure. The story checks out on the other end too, where money market funds underperformed in an environment where the Federal Reserve is cutting short-term rates. Cash has no duration, so it doesn’t appreciate when rates fall, it just pays out less in interest.
The U.S. Economy

U.S. growth rose 0.95% in the second quarter of the year. When comparing growth to Q1, there was a noticeable uptick in personal consumption (0.11% in Q1 (Revised) v. 0.61% in Q2), a significant decrease in private investment (5.49% v. -3.63%), no material change in government spending, but a MASSIVE reversion in net exports, going from 29.10% in Q1 to -23.37%. This reversion was a huge contributing factor to achieving the 0.95% print this quarter. The story regarding the massive swing in net exports between Q1 to Q2 had everything to do with US consumers and businesses front-loading foreign purchases in anticipation of tariffs and supply chain disruptions. If you remember, we received more and more clarity around who will be tariffed, what specific goods will be tariffed, and when they would be implemented. This increased clarity around tariffs gave US buyers more certainty to continue making normal purchases abroad, despite the higher price tag.
Excluding the COVID-19 crisis, private investment hasn’t decreased by -3.63% since we were near stock market bottoms of the Global Financial Crisis (-5.81% in Q2 2009) and about halfway to the bottom of the Dot Com Bubble (-4.97% in Q4 2001). However, it’s possible that the same front-loading just discussed was going on in this segment as, since in Q1 private investment increased 5.38% (an abnormally high number).
In sum, it’s a noisy Q2 GDP print and we should receive much more clarity around the true state of the US economy in Q3. The only upshot is that households are continuing to spend money, and at a faster rate compared to Q1. But we’ll see how long than can last given…

…unemployment has ticked up across the board. While 4.30% may not seem like a lot compared to 4.20% a year ago, keep in mind that that’s approximately 170,000 people net who lost their job over the past year, controlling for the labor force participation rate. Which, troublingly enough, shrunk. I’d attribute the shrinking labor forced to people who were previously trying to get a job and quit looking (the discouraged workers). Reading numerous articles discussing how difficult it is to get hired right now, especially if you’re young, it makes sense that people are just giving up. This also explains why U-4 and U-6 unemployment are increasing at a faster rate as well.

Over the past three months, employment numbers provided by US government and ADP are basically flat. This is a material slowdown when comparing it to year-over-year since it’s basically saying that labor markets have stalled out.

Personal income numbers are technically slowing when comparing year-over-year, however when annualizing the past three months, they’re slightly above the typical 3-4% range we expect. So no major concerns here. If you have a job, you’re doing fine income growth wise. On average of course, because as we can see the median annual pay growth is lower than the average growth rate.

Inflation ticked up meaningfully in the past three months, and the major inflation index the Federal Reserve looks at – the PCE price index – is exceeding their target growth of 2.50%. We can also see that their goal was exceeded for the Core index as well, which strips out food and energy that tend to be highly volatile period to period. Shelter continues to be an issue, with people’s primary residences (whether through ownership or renting) increasing 0.85% (3.39%) annualized over the past three months.
Which segues nicely into our next topic, the residential real estate market.

What the hell is going on in the residential real estate market? Inventory for new homes has been declining, as have prices, and existing home sales. Meanwhile, new single-family homes sold have exploded. So what’s the deal?
Well first, the past three months number is going to be misleading because the summer is the most popular time of the year to buy or sell your home. It’s when the kiddos are out of school, so that’s when families tend to move. But still, when we look at year over year growth it’s still a pretty big number at 15.44%!
The general thought is that developers are aggressively discounting their new home builds in order to move stale inventory off their books. This is why new homes sold skyrocked, inventory declined, as well as price.
This can be taken in two ways. One, it could indicate that developers got a little overly ambitious in their pricing and they’re cutting prices to better reflect economic realities (supply side issue) or two, that there’s so little demand from new homes due to underlying economic issues that these price cuts were absolutely necessary (demand side issue). In reality, the reason for home developers discounting probably stems from both explanations. However, it’s the demand side story that’s a far bigger concern that has much larger implications for the US economy.
Looking Forward
Q4 Feels Like a Potential Inflection Point for Markets
I expect the last quarter of the year to be particularly volatile, but which direction that volatility will be realized is unknown. It could go up a lot, it could go down a lot. But, I don’t expect a smooth ride in the last three months of the year.
It’s been known for quite some time that the technology sector is richly valued, but sales and earnings growth have been there to support these valuations. That’s why I’ve been hesitant to call it an AI bubble despite many market prognosticators saying that it is. Yes, there are some bubble indicators blinking red, like small-cap quantum computing and nuclear energy stocks popping, but so far, it’s been contained to a few isolated instances. It isn’t that broad yet.
Looking back to the Dot Com Bubble as a comp, valuations are similar but we're not seeing the same systematic overenthusiasm from investors at the moment. The typical investor isn’t speculating to the same degree when new discount brokerages made it easy to do, small-cap companies with AI capabilities (or AI in their name) aren’t doubling when they IPO, and the general discussion around AI has been much more balanced between skeptics and believers.
But, there have been some concerns about the longevity of the current market rally, given so much of it is dependent on continued AI growth. For instance, Michael Cembalest, Chairman of Market and Investment Strategy for J.P. Morgan, reported that AI related stocks have accounted for 75% of S&P 500 returns, 80% of earnings growth and 90% of capital spending growth since ChatGPT launched in November 2022. That’s an eyepopping statistic.
Here’s where it gets a little troubling. From JPM’s Guide to the Market, AI hyperscalers (Alphabet, Amazon, Meta, Microsft, Oracle, etc.) are expected to invest $1T in capital expenditures over the next three years which will constitute well over 70% of their operating cash flow. However, MIT found that 95% over AI pilot programs at companies are failing, and Sam Altman, CEO of OpenAI, believes that investors are currently “overexcited about AI.” This means that there is massive investment into an unproven technology, which Sam states may be overly ambitious, and AI applications aren’t showing promise to their end users. This implies a price/value disconnect.
So, the stock market could be pushed to a bubble if these AI companies start to show a return on their massive capital investment, causing investor FOMO, which could shoot the S&P 500 upward. But it could also come crashing down if bad news from earnings releases and industry reports continues or investors begin to get more skeptical about the economics behind AI.
Given that stock markets are near all-time highs with stretched valuations and companies are receiving massive funding but alarm bells are starting to siren off, it feels like we’re at an inflection point. This commentary is prepared by and is the property of EID Capital, LLC and is circulated for informational and educational purposes only. There is no consideration given to the specific investment needs, objectives, or tolerances of any of the recipients. Additionally, EID Capital's actual investment positions may, and often will, vary from its conclusions discussed herein based on any number of factors, such as client investment restrictions, portfolio rebalancing and transactions costs, among others. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This material is for informational and educational purposes only and is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. This material does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors which are necessary considerations before making any investment decision. Investors should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, where appropriate, seek professional advice, including legal, tax, accounting, investment, or other advice.
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