WESCAP Q3 2025 Quarterly Commentary: Broad Gains Amid Lower Rates and Lingering Inflation
As we predicted in our commentary from three months ago, most asset classes in the third quarter benefitted from lower interest rates and positive sentiment, despite slightly higher tariff-induced inflation.
The S&P 500 cap-weighted index returned 8.1% in Q3. The S&P 1500 Value index rose 6.3% for the quarter. U.S. small caps (Russell 2000) gained 12.4%, which finally offset losses from the first six months of the year. Foreign stocks posted solid returns. Developed foreign markets (EAFE) rose 4.8%, and emerging markets (MSCI) gained 10.6% in Q3. Both of these foreign stock indices are up over 25% for the year and outperforming U.S. stock indices.
The 10 largest U.S. stocks now make up about 40% of the S&P 500 index and they are trading near a 30 P/E ratio. This concentration and valuation is a bit troublesome, though it may take a significant negative catalyst to cause any decline in these 10 stocks and the S&P 500. The other 490 stocks in the S&P, smaller U.S. firms and foreign stocks, offer more attractive valuations and lower concentration risk and we believe deserve a higher allocation in portfolios.
Gold was up 16.4% over the quarter and 44.8% for the first three quarters of the year. Central bank purchases, lower interest rates and global uncertainty have created sufficient demand to push gold prices up. However, a recent slowing of central bank purchases and a more stable dollar may limit additional gains in gold.
The Bloomberg U.S. Treasury 20+ Year Index rose 2.5% in Q3 as interest rates declined modestly. Real estate stocks (Nareit REIT index) in Q3 returned 2.7%, partly due to lower interest rates.
The last quarter of 2025 will have its share of challenges. Labor markets are showing some signs of weakness. Inflation remains stubborn due to both tariffs and a weaker dollar. The Fed has lowered interest rates, but events may cause them to put a hold on additional rate cuts. Such a move would likely upset securities markets and business and consumer confidence. Nevertheless, pro-business tax and regulatory policies and earnings upside surprise potential may support stronger U.S. growth through year end. We don’t expect any lasting negative impact from the government shut-down unless it drags for longer than a month. If there are adverse developments, we are prepared to pivot to a more defensive strategy.