Monthly Market Update – September 2025

Key Takeaways

• EVERYONE IS A WINNER… AGAIN For a second straight month, most major global asset classes saw healthy gains in September and were up nicely for the just-completed third quarter. For US stocks, the headline S&P 500 Index saw its fifth straight month of positive returns, with a +3.6% return in September and +8.1% for Q3.
• RISK APPETITE IS GROWING Investors are embracing risk as global markets surge and central banks slash interest rates. Markets are at or near all-time highs, with even small-cap indices like the Russell 2000 hitting record levels. Ditto for bond markets, with credit spreads dropping to their lowest levels since 1998.
• BUT SO ARE MARKET RISKS While Wall Street’s rally has been impressive, market risks are quietly building as well.  Gains in the most volatile stocks have trounced those of the most profitable and higher-quality companies. Likewise, other signs of excessive investor exuberance have also risen to historically high levels.
• STILL, THE ECONOMY REMAINS SOLID The U.S. economy grew faster than expected in Q2, with GDP growth revised up to +3.8%, boosted by strong consumer spending and business investment in artificial intelligence. Forecasts for Q3 are equally upbeat, with the Atlanta Fed estimating another quarter of +3.8% growth.
• EARNINGS CONTINUE TO FUEL THE RALLY Despite fears that new tariffs would hurt trade and corporate profits, U.S. companies are seeing their earnings revised upward at the fastest pace since the pandemic. The better-than-expected earnings growth is helping fuel the stock market rally as tariff concerns subside.
• THE FED JOINS GLOBAL CENTRAL BANKS IN CUTTING RATES The Federal Reserve cut interest rates by 0.25% on September 17, its first move since December 2024. This aligns with a wave of global rate cuts from countries like Canada, Mexico, Norway, and Saudi Arabia, in a synchronized global easing cycle.
• STOCKS TEND TO GO UP WHEN THE GOVERNMENT SHUTS DOWN Financial markets have brushed off the latest U.S. government shutdown, much like they did earlier fears over tariffs. Historically, shutdowns have had little lasting impact on markets, and this time appears no different as the S&P 500 moved higher on each of the first four days of the current shutdown.

Market Summary

Asset Class Total Returns

Source: Bloomberg, as of September 30, 2025. Performance figures are index total returns: US Bonds (Barclays US Aggregate Bond TR), US High Yield (Barclays US HY 2% Issuer-Capped TR), International Bonds (Barclays Global Aggregate ex USD TR), Large Caps (S&P 500 TR), Small Caps (Russell 2000 TR), Developed Markets (MSCI EAFE NR USD), Emerging Markets (MSCI EM NR USD), Real Estate (FTSE NAREIT All Equity REITS TR).

EVERYONE IS A WINNER… AGAIN 

US stocks and bonds were up in September. Non-US stocks and bonds… up. Real assets like real estate and precious metals… up. In fact, for a second straight month, virtually all risk assets across the globe were positive. For the headline S&P 500 Index, it was the fifth straight month of positive returns, the strongest September return since 2010 (total return of +3.6%), and the index closed the month at its 29th all-time high of the year. For the quarter, the S&P returned +8.1% and has now been positive in seven of the past eight quarters and ten of the last twelve. It is not hard to make the case that the market has become extended from a valuation standpoint. After all, according to FactSet data the trailing 12-month Price-to-Earnings ratio for the S&P 500 is 28.3, which is well above the 5-year average of 25.0 and the 10-year average of 22.7. But with economic growth and earnings growth both continuing at a strong pace, support for further gains remains solid. The dynamics of the tailwinds from economic growth and earnings growth are discussed in more detail in the “Still, The Economy Remains Solid” and the “Earnings Continue to Fuel the Rally” sections below.

Importantly, the market rally continues to broaden impressively to include the wider small cap universe. The small cap Russell 2000 Index returned +3.1% in September, also marking five straight winning months. As discussed in the following “Risk Appetite Is Growing” section, that included its first new all-time high since November 2021. For the quarter, the Russell returned +12.4%, its best quarter since Q4 2023, and its fourth positive quarter in the last five.

Stocks rallied outside the US as well. The run in developed market international stocks has moderated from its fervent pace in the first and second quarters, but the MSCI EAFE Index still returned +1.9% in September and +4.8% for the third quarter. The index has been positive in seven of the last nine months and six of the last eight quarters. Year to date, the return for the MSCI EAFE remains +10.3% above the S&P 500. European equities (MSCI Europe ex UK) have been a big part of that outperformance in 2025. In US dollar terms, they only returned +2.3% in September and +2.9% for the quarter, dragged down by lackluster performance of German equities, which were down -0.9% and -1.2% for September and Q3, respectively. But year-to-date European equities are up a whopping +29.0%. Stocks in Japan (MSCI Japan Index) perked up in September, returning +3.1% for the month and +10.6% for the quarter, to push 2025 gains to +13.7%.

For non-US markets though, emerging market stocks have been the hot spot. The MSCI Emerging Markets Index returned +7.2% in September, +10.9% for the third quarter, and is up 28.2% year to date. Chinese technology stocks rallied sharply, with the Hang Seng Tech Index surging +14.2% in September and +23.2% over the quarter to put it up 45.9% year-to-date. Policy support for domestic semiconductor chip producers, alongside an acceleration in Artificial Intelligence spending from some of China’s biggest tech names fueled the rally.

As discussed in the Monthly Market Updates throughout the year, the decline in the US dollar has been a tremendous tailwind for non-US assets. Through September, in 2025 the US Dollar Index is down nearly -10%. In September, it was flat and for the quarter, it was up +0.9%, thanks to July’s +3.1% rally. However, the trend has clearly been down, with the dollar negative every other month of 2025 (except for July). 

In bond markets, US Treasury yields were mostly down in September as the market’s, and the Fed’s, attention shifted from upside inflation risks to downside growth risks. Benign inflation reports and weak employment reports were behind that shift. For the month, the 2-year US Treasury Yield ticked down -1 basis points to close the month at 3.61%. Longer term maturities fell even more. The benchmark 10-year Treasury yield declined -8 basis points to 4.15% and the 30-year Treasury yield dropped -20 basis points to 4.73%. With yields down, the Bloomberg US Aggregate Bond Index enjoyed a +1.1% total return for the month following a +1.2% return in August. It has had positive returns in seven of the last nine months now. And with a +2.0% return for the third quarter, it has delivered positive returns in five of the last six quarters. Through September, US bonds are up +6.1%, which is on pace for their best annual return since returning +7.5% in calendar year 2020.

Non-US bonds trailed their US counterparts in September, but the Bloomberg Global Aggregate Bond ex US Index still returned +0.3% for the month. With the US dollar as a headwind in the third quarter, non-US bonds were down -0.6%, but for the year they are up +9.4%. In addition to a weaker US dollar for most of the year, non-US bonds have also been aided by global central banks reducing their policy rates. There have been more than 90 interest rate cuts in 2025 by central banks across the world, including four by the European Central Bank, three cuts by the Bank of England, and two cuts each by the Bank of Canada and the Swiss National Bank. Of course, the US joined those ranks in September, which is discussed in more detail in “The Fed Joins Other Major Central Banks in Cutting Rates” section below.

One other asset worth discussing, which doesn’t always get a lot of attention, is oil. West Texas Intermediate (WTI) Crude Oil fell -2.6% in September, following a -7.6% drop in August, putting losses at -4.2% for the third quarter and -13.0% for 2025. Bloomberg Intelligence analysis contends that oil prices have likely peaked for the year as OPEC+ reasserts itself by managing production with the global market well supplied. Lower oil prices are an important tailwind for economic growth for energy-importing economies, like Europe, and also help ease inflation pressures. That combination should help keep global central banks in a monetary policy easing mode while offsetting some of the growth pressures from tariffs. According to the U.S. Energy Information Administration (EIA), the outlook for oil demand and prices in 2026 reflects a bearish tone driven by oversupply and modest demand growth. That is corroborated by forecasts by Wall Street firms like Goldman Sachs and J.P. Morgan and if it materializes, would be accommodative to equity markets moving into the new year.

Source: Bloomberg. Data as of September 30, 2025.
Price Returns for Equity, Total Returns for Bonds.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

RISK APPETITE IS GROWING

Wall Street is riding high as the Federal Reserve helps fuel a hot streak not seen since the 2021 stimulus-induced risk-on rally. The Fed’s quarter-point interest rate cut on September 17 has further fueled the market’s rally, as global equities hit record highs and credit spreads tightened to 27-year lows. The rally has been driven by a combination of a resilient consumer, a boom in Artificial Intelligence investment spending, greatly reduced fears of tariff calamity, and a continued expansion of economic activity. Despite concerns about inflation reemerging and the potential for a Fed-fueled bubble, most investors seem to believe the rally has legs. Importantly, the rally has been broad-based, as demonstrated by the small cap Russell 2000 Index finally joining the large cap indices like the S&P 500 and Nasdaq Composite in setting a new all-time high. As shown in the chart below, the Russell’s September 18 record high was its first since November 8, 2021. In the bond world, credit spreads are a proxy of risk levels, and they are similarly showing a big appetite for risk. Credit spreads are the extra yield that investors demand to own investment grade corporate bonds instead of (nearly risk-free) Treasury bonds. Near the end of September, they shrank to just 72 basis points, the lowest level since 1998, according to Bloomberg index data. Other signs of excessive investor exuberance are evident as well. A basket of the most shorted stocks tracked by Goldman Sachs is at the most overbought levels since the early 2021 meme-stock mania. The latest reading of margin debt by US investors (money borrowed to invest in the markets) jumped to a record $1.1 trillion. When so many types of investments are rising together, while many risk measures are at historic levels, it’s a sign that investors are betting big on optimism and are very complacent regarding risk. While not a cause for a market correction, these conditions can act as accelerants to a pullback following a negative catalyst.

Measures of Risk Appetite Growing Abound

Small Caps Join the All-Time High Parade as Credit Spreads Sit at 27-Year Lows

Source: Bloomberg.

BUT MARKET RISKS ARE GROWING TOO

The accompanying chart shows that most profitable (High Profitability) companies have enjoyed healthy, double-digit returns in the six months ending September 30. But their nearly +13% six-month return has been trounced by the most volatile stocks (High Beta), which returned +41% in that six-month period. Moreover, that six-month period started with both cohorts of stocks dropping at -11% and -14%, respectively, in April during the “Liberation Day” tariff storm. The High Beta cohort includes many cyclical and lower quality stocks (like unprofitable technology companies). As tariff uncertainty subsided and rate cut expectations grew, the high beta stocks significantly outperformed the high profitability cohort. Although quality hasn’t been rewarded recently, investors should stand by high quality companies, particularly now with their better value relative to the lower quality, higher volatility peers. Historically, and by definition, high beta stocks suffer sharper and deeper drawdowns when a negative catalyst triggers a market pullback. Nobody can know exactly what such a catalyst will be, or when exactly it could occur, but once it materializes, it typically happens too fast and sharply to react to.

The Highest-Risk Equities Have Powered the Post-Liberation Day Rally

More Profitable Firms Have Underperformed the More Volatile Firms

Source: Bloomberg Factors to Watch, MFS. Daily data as of March 31, 2025 to September 30, 2025. Factors are sector neutralized, long only the top quintile of stocks sensitive to the factor. High Beta = sensitivity of excess stock returns vs excess returns of the cap-weight market portfolio. High Profitability = last-twelve-months return on equity.

STILL, THE ECONOMY REMAINS SOLID

On September 25th, the Commerce Department reported that the US economy expanded more than originally estimated in the second quarter of 2025. The third and final estimate of real Gross Domestic Product (GDP) for Q2 2025 was revised higher to +3.8% from the previous estimate of +3.3% on August 27, which itself was revised higher than the initial estimate of +3.0% released on July 30. Wall Street was expecting it to remain at the prior estimate of +3.1%. Stronger than previously reported consumer spending spurred the upside surprise, as well as business investment from capital expenditures (capex) for Artificial Intelligence (AI). Consumer spending, measured by Personal Consumption Expenditures (PCE), is the main engine of the economy, and it increased +2.5% versus the second estimate of +1.6% and just +0.6% in the first quarter. And the picture looks quite good for the third quarter as well. As of October 6, the Atlanta Fed GDPNow model, which mimics methods used by the Bureau of Economic Analysis to estimate real GDP Growth, also shows the US economy growing at a +3.8% annual rate for Q3. The bottom line is that the US economy showed much stronger growth in the second quarter than the prior two estimates indicated, and real-time forecast models estimate it is on pace to continue that solid growth rate in the third quarter.

Like the Q2 GDP Revision, the Q3 GDP Forecast Shows a Solid US Economy

Evolution of Atlanta Fed GDPNow real GDP estimate for Q3 2025

Source: Atlanta Fed GDPNow, Blue Chip Financial Forecasts. Note: The top (bottom) 10 average forecast is an average of the highest (lowest) 10 forecasts in the Blue Chip survey.

EARNINGS CONTINUE TO FUEL THE RALLY

It was feared that the trade war initiated by the Trump Administration’s tariffs in April would lead to a sharp decline in international trade, economic growth, and corporate earnings. Despite those initial fears, US company earnings are now being revised upward, and at the highest rate since the COVID pandemic, while European earnings continue to disappoint despite optimism around fiscal stimulus. It is too early to fully assess the long-term investment implications of the tariffs, but the positive earnings revisions show Wall Street analysts were overly pessimistic about their impact on company earnings. The earnings resilience is helping to drive equity markets higher and fuel pro-risk allocation positioning. The chart below may be counter-intuitive given the outperformance of non-US equities over their US counterparts, but currency moves, specifically the much weaker US dollar in 2025, has been a big tailwind for non-US earnings and has helped offset the earnings deficit for those international firms. The key takeaway is that broadening corporate earnings growth is essential for a balanced and durable market rally. Sustained earnings growth across various sectors and regions will be crucial moving forward. Global policy developments will play a role, such as US tax reform, which could provide an additional boost for US company earnings, or in Europe, fiscal stimulus and structural reform are expected to enhance domestic growth and support earnings.

Earnings Revisions Comparison Across Regions

(Reading above 0 = more earnings estimates revised up)

Source: Wellington Management, Refinitiv. Note: Monthly data from January 2023 to July 2025. Earnings revisions are defined as a breadth metric (# estimates revised up – # estimates revised down) / total # estimates. Revisions and returns are measured based on MSCI regional indices, as reported in the IBES database.

THE FED JOINS OTHER MAJOR CENTRAL BANKS IN CUTTING RATES

The US Federal Reserve has resumed cutting interest rates, lowering its benchmark rate by 0.25% on September 17. This marks the first reduction since December 2024, after sitting on the sidelines for much of 2025. While challenges like tariffs lend uncertainty to inflation and economic growth, the Fed has recently changed its focus to supporting growth from containing inflation. This decision aligns with several other major central banks that are also easing their policy rates, creating renewed momentum to a global synchronized rate cutting cycle. Typically, stock markets tend to rise following an initial rate cut. So far, this appears to be holding in this rate cutting cycle as most major equity indexes are at or near record highs. However, with the uncertainty introduced by tariffs, growth and inflation outlooks are becoming more unpredictable, and greater differences in policies between central banks could develop. That could lead to varied impacts on financial markets around the world and bears watching, and is another reason remaining diversified is a prudent strategy. In September, Canada and Mexico cut their overnight rates, Norway cut its deposit rate, and Hong Kong cut its base rate. Meanwhile Poland, Indonesia, and Saudi Arabia all cut their Repo Rate in September. Russia, Sweden, and Turkey cut their repo rates during the month too.

Developed Market Central Bank Policy Rates and Projected Path Ahead

Data from January 31, 2000, to September 30, 2027

Source: Wellington, Refinitiv. Forecast from OIS, starting at September 30, 2025 through September 30, 2027.

STOCKS TEND TO GO UP WHEN THE GOVERNMENT SHUTS DOWN

Markets have moved well beyond their April fears over tariffs and trade, so it may not be too surprising that they have also completely shrugged off the most recent US government shutdown. An ongoing dispute between Republicans and Democrats over spending priorities doesn’t show any promise of a near-term resolution as we go to press with this piece. At the close of October 5, according to prediction market Polymarket, this government shutdown is expected to last until at least until October 15. There is no official indication how long the impasse might last, but a long history of past government shutdowns suggests that, regardless of length, it will have little impact on the financial markets and the US economy. The chart below lists nine shutdowns since 1981, averaging nine days in duration, although the last four have averaged 18 days. Even during extended shutdowns of two weeks or longer, stocks and bonds have historically dipped slightly during a shutdown’s immediate aftermath, but these moves are often small and tend to reverse quickly once the government resumes normal operations. The S&P 500 Index has posted a positive return during the last six government shutdowns and has been up every single day of the current shutdown, and sits at an all-time high as of October 6. Although investors haven’t shown it yet, this time a bigger concern may be the interruption of key economic data releases, which can complicate decision-making for the US Federal Reserve and other policymakers if the shutdown drags on. The Federal Reserve is self-funded so isn’t directly impacted by the shutdown, but many of the labor and inflation reports it relies on to make policy decisions will not be published during the shutdown.

US Government Shutdowns Tend to be Brief but Have Grown Longer

Date and Length of US Government Shutdowns (in days), 1981 – 2025

Source: Capital Group, Congressional Research Service: “Federal Funding Gaps: A Brief Overview.” Length of government shutdowns are defined as the number of days during which no budget authority was available, starting from the first day without budget authority and ending the day before new budget authority was enacted. DACA is the Deferred Action for Childhood Arrivals policy. As of September 30, 2025.

Asset Class Performance

The Importance of Diversification. Diversification mitigates the risk of relying on any single investment. It offers many long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different from the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (Vanguard Total International Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “60/40 Allocation” is a weighted average of the ETF proxies shown as represented by: 24% US Bonds, 10% International Bonds, 6% High Yield Bonds, 14% Large Growth, 14% Large Value, 4% Mid Growth, 4% Mid Value, 1% Small Growth, 1% Small Value, 17% International Stock, 4% Emerging Markets, 2% Real Estate.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Chris Bouffard is CIO of The Retirement Planning Group (TRPG), a Registered Investment Adviser. He has oversight of investments for the advisory services offered through TRPG.

Disclaimer: Information provided is for educational purposes only and does not constitute investment, legal or tax advice. All examples are hypothetical and for illustrative purposes only. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. Please contact TRPG for more complete information based on your personal circumstances and to obtain personal individual investment advice.