October 2025
US stock prices rose steadily during the third quarter, with the S&P 500 posting record highs and a gain of at least 2% during each month. A key driver of the extended rally was stronger than expected corporate earnings, with more than 80% of the companies in the S&P 500 reporting earnings that exceeded analyst forecasts. Although the overall trend was upward, stock prices did come under pressure at times. Most notably on August 1, when the report of weaker than expected job figures triggered a 1.6% decline in the S&P 500. Stocks quickly bounced back on expectations that the US Federal Reserve would soon begin cutting interest rates to bolster the labor market. These expectations were realized on September 17 when the Federal Open Market Committee announced a 25-basis point cut in the Fed Funds rate and Federal Reserve governors signaled that one or two additional cuts might occur before the end of the year. Stocks also came under pressure from September 23 through the 25th. The S&P 500 declined more than 1.3% over this period, as reports of inflation near 3% suggested that the Federal Reserve would be reluctant to cut interest rates much further. As with previous dips the S&P 500 was able to bounce back, recovering more than half of these losses before the end of September. The S&P 500 posted a gain of more than 7% for the quarter overall.
Although we remain optimistic about the stock markets’ long-term prospects, markets are likely to be volatile near term. The rich valuations of many of the technology stocks that have led the market rally are built on expectations for growth in AI revenues that appear impossible to meet. Recent articles have highlighted the heavy debt loads that some companies are taking on to build out AI infrastructure that may go unused. Politics may also weigh on markets, as Republicans and Democrats battle for their budget priorities and President Trump continues to pressure the Federal Reserve to lower interest rates. Finally, job growth has slowed and prompted the Federal Reserve to cut the Federal Funds rate. The Fed’s ability to support the labor market by cutting rates further is limited as the rate of price inflation continues to be above their long-term target of 2%. It should be noted that some segments of the market are likely to hold up better than others. Stock valuations outside of the technology sector continue to be attractive. Market volatility also leads investors to rotate their portfolios toward stable stocks. For further details on each of these points, please see below.
The Economy:
- Although recent revisions to employment figures suggest that job growth has slowed considerably, the US unemployment rate remains near historical lows at 4.3%.
- Consumer spending remains strong.
- Monetary policy overall remains supportive. There is no need for aggressive interest rate cuts.
- Corporate earnings growth for 2026 is expected to exceed 7%.
Investment Valuations & Rotation Toward Stability:
- Investors continue to reassess the valuations of technology shares. Many stocks outside this sector have attractive valuations. This is a great environment for active stock managers, particularly ones that look for stocks with reasonable valuations.
- In volatile markets, investors tend to rotate toward stocks that have provided more stable returns in the past. Stocks that possess economic moats tend to have more stable returns and often benefit in these environments.
This report has been generated from information that Arbor Financial believes to be reliable and accurate. We do not represent or warrant the accuracy or completeness of the information contained in this report. As such, all calculations, estimates, and opinions included in this report constitute our best judgment as of this date and may be subject to change. Past performance does not guarantee future results.
Peter has more than 25 years of experience in the financial industry as a researcher, strategist, and portfolio manager. As a portfolio manager at Arbor, Peter performs quantitative analysis on current and prospective portfolios.
Peter is a CFA charter holder. He earned his PhD in Economics as well as dual Bachelors of Science degrees in Computer Science and Pure Mathematics from the University of California, Santa Barbara.
Before joining Arbor, Peter was a Founding Member of institutional money manager OakBrook Investments and worked there for 22 years serving in a variety of roles including portfolio manager, Director of Research, and co-Chief Investment Officer. Prior to forming OakBrook, Peter worked at ANB Investment Management & Trust Company as a strategist, portfolio manager, and Head of Research.
Peter has lived in Lisle, Illinois since 1997. Outside of work he enjoys sports car racing and is an active member of the Autobahn Country Club in Joliet, Illinois and the Sports Car Club America (SCCA).