Market Commentary
The third quarter of 2025 extended gains in most asset classes, marked by alternating bouts of optimism and anxiety as investors weighed slowing growth against the potential for policy easing. After a strong rebound in Q2, equity markets began the quarter on uncertain footing amid weaker-than-expected economic data and renewed trade rhetoric. However, by late August, sentiment had improved as inflation continued to moderate and expectations for a Federal Reserve rate in September solidified. The S&P 500 ended the quarter up 8.1%, building on its first-half gains, while global equities (MSCI ACWI) rose 7.6%, supported by renewed strength in developed Asia and parts of Europe. In fixed income, core bonds (Bloomberg U.S. Aggregate Bond Index) advanced 2.0% as yields declined modestly on growing conviction that more cuts to the policy rate are coming. Credit spreads tightened modestly, underscoring continued confidence in corporate balance sheets and a benign default outlook.
The third quarter narrative revolved around the interplay between a cooling economy and the market’s increasing anticipation of monetary support. U.S. economic data pointed to slower but still positive growth, with payroll gains moderating and consumer confidence softening, particularly in lower-income segments. Meanwhile, inflation readings continued to drift lower, with the core PCE index approaching the Fed’s 2% target for the first time in nearly four years. Against this backdrop, the Fed cut interest rates in September by 25 bps and signaled more cuts to come through the end of 2026. Additionally, continued corporate plans for CapEx spending, especially around AI and datacenters, was met with enthusiasm by investors as that new technology continues to emerge as a major theme in economic growth. Markets interpreted these shifts as a green light for risk assets, fueling a late-quarter rally across equities, credit, and even longer-duration Treasuries.
Globally, signs of stabilization emerged in China and Europe after several quarters of sluggish performance. Chinese policymakers unveiled additional stimulus measures targeting domestic demand and small businesses, while the European Central Bank reinforced its commitment to accommodative policy amid persistently weak growth. These developments, combined with a modest pullback in the U.S. dollar, helped support international equities and commodities, particularly industrial metals and energy. Meanwhile, geopolitical tensions—while still simmering in Eastern Europe and the Middle East—remained largely contained, allowing investors to refocus on fundamentals. Sector leadership broadened as cyclical and value-oriented areas participated in the rally, with financials and industrials outperforming after months of lagging technology-driven returns.
Looking ahead to the final quarter of 2025, the market’s trajectory will likely hinge on the Fed’s policy follow-through and the durability of disinflation trends. Corporate earnings revisions have turned slightly positive, suggesting that companies are navigating the slower-growth backdrop with improved efficiency and cost discipline. While risks remain—from policy missteps to renewed geopolitical flare-ups—the combination of easing inflation, stable credit conditions, and the prospect of monetary accommodation provides a constructive foundation heading into year-end. As always, we remain focused on disciplined diversification and active risk management in navigating what continues to be an evolving and opportunity-rich market environment.
Portfolio Commentary
Equity Sleeve: We continue to maintain a mix of active and passive strategies across our equity exposures. International equities have added meaningful value to our portfolio performance thus far in 2025 and we are maintaining that allocation due to the backdrop of lower relative valuations (vs. US Large Cap stocks) and the potential persistence of a weakening dollar. Relative to broad equity benchmarks, we are overweight mid and small cap stocks due to low relative valuations, recent momentum, and potential tailwinds due to the current US Administration. Though small and mid cap stocks have lagged large caps this year, our allocations to active managers have been beneficial. We have also updated our Dividend and Growth stock baskets to better reflect targeted momentum and dividend characteristics.
Fixed Income Sleeve: Fixed Income continues to experience volatility as markets anticipate how many Fed cuts, we can expect in 2025. In the aftermath of significant inflation and a historically fast rate hiking cycle, fixed income has proven to be a helpful defensive ballast in portfolios during the tariff environment over the past quarter. However, potential risks within credit markets as credit spreads remain historically tight. We will continue to rely on our core active manager to help navigate a changing rate and credit environment.
Alternatives Sleeve: To further diversify the fixed income portion of portfolios, we use a blend of diversified, balanced, and active managers designed to help navigate choppy markets. This strategy is meant to complement, not replace traditional fixed income as we aim to produce meaningful real returns while maintaining the primary focus of fixed income which is diversification from stock volatility. Included in this sleeve are strategies that use options to either provide modest equity exposure, reduce portfolio volatility, or generate income. These strategies experienced significant up capture relative to fixed income in the sharp equity market rally in the second quarter.
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The commentary in this report is not a complete analysis of every material fact in respect to any company, industry, or security. The opinions expressed here are not investment recommendations, but rather opinions that reflect the judgment of Horizon as of the date of the report and are subject to change without notice. Forward-looking statements cannot be guaranteed. We do not intend and will not endeavor to provide notice if or when our opinions or actions change. This document does not constitute an offer to sell or a solicitation of an offer to buy any security or product and may not be relied upon in connection with the purchase or sale of any security or device.
Equity markets are represented by the S&P 500 Index. The S&P 500 is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The MSCI All Country World Index (ACWI) is a global equity index that tracks the performance of large- and mid-cap stocks in developed and emerging markets. The Bloomberg U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities and collateralized mortgage-backed securities. References to indices, or other measures of relative market performance over a specified period of time are provided for informational purposes only. Reference to an index does not imply that any account will achieve returns, volatility, or other results similar to that index. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change. Indices are unmanaged and do not have fees or expense charges, both of which would lower returns. It is not possible to invest directly in an unmanaged index.
This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such.
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