Despite the sharp decline in April, the stock market has brought positive returns in 2025, reaching 28 record highs so far.
U.S. Markets Continue to Rally
Despite the sharp decline in April, the stock market has brought positive returns in 2025, reaching 28 record highs so far. The drivers of these positive returns include double-digit corporate earnings growth, Fed rate cuts, enthusiasm for artificial intelligence, and broad investor optimism. With the markets reaching new highs, market valuations have also risen to elevated levels. While some investors may worry about a pullback at these levels, markets often continue to climb for long periods even after reaching new records.
Bonds are Performing Well
Bonds have performed well, with the aggregate bond index up 6.1% YTD. This compares well to last year’s return of 1.3%. Bond returns have improved as the bond market is experiencing lower volatility compared to recent years, better yields, and the Federal Reserve lowering rates (which tend to increase bond prices).
Federal Reserve Lowers Rate by 0.25%
Investors have also been paying close attention to the Federal Reserve, which, after much anticipation, delivered its first rate cut of 0.25% at its September meeting. Additional cuts remain possible, though Fed officials will continue to monitor key data points on inflation and employment.
Payroll Data Softening
When it comes to economic concerns, the softening labor market is perhaps the most significant. While unemployment remains historically low at 4.3%, the pace of job creation has slowed. The latest report shows that the economy added only 22,000 payrolls in August, well below the average of 123,000 earlier in the year. Perhaps most surprising is that the preliminary payroll revisions calculated by the Bureau of Labor Statistics (BLS) each year suggest that there were 911,000 fewer jobs than initially believed over the 12 months preceding March.
Big Beautiful Bill Passes
The “One Big Beautiful Bill Act” (OBBBA) was passed during the 3rd quarter, which brought greater clarity to the tax landscape for 2025 and beyond. While the law will keep tax rates low, it is also projected to increase the Federal debt levels. The national debt-to-GDP ratio exceeds 100%, which is often concerning for economists.
Government Shutdown
A government shutdown began on October 1st, adding to a year in which government policy on trade, taxes, immigration, and other issues has created economic and market uncertainty. History shows that shutdowns have occurred regularly since 1980 under both parties, with minimal long-term impact on financial markets.