No jobs, no problem? It was an atypical macro backdrop, as economic activity defied expectations for a slowdown despite clear signs of labor market deceleration.
Following several upward revisions, U.S. second-quarter real GDP growth—initially reported in July—was finalized at 3.8% annualized, well above the original consensus estimate of 2.6% annualized. Third-quarter growth projections were revised higher, with some forecasts now anticipating another period of above-trend expansion.
This underlying strength was fueled by robust capital investment and resilient consumer spending. However, U.S. job growth slowed to levels rarely observed outside of recessionary periods. A constrained labor supply helped prevent a sharp rise in the unemployment rate, but the moderation in employment was sufficient to prompt the Federal Reserve’s first rate cut of 2025—marking the beginning of what markets expect to be an easing cycle through most of 2026.
On the inflation front, tariff-related passthrough effects have remained manageable so far. This has allowed the Fed to shift its focus more squarely toward supporting growth, even as goods inflation continues to exert upward pressure on core inflation.
Economic activity outside the U.S. also showed resilience. Key European business surveys improved, and Germany advanced plans for fiscal support. Most non-U.S. central banks continued easing policy, contributing to a more accommodative global stance. While risks remain, global recession fears stemming from weak trade dynamics eased as the initial tariff shock faded and major trade deals were announced.
Equities gain ground in the third quarter. Major asset class returns were largely positive, with outperformance in equities relative to fixed income. Fixed income returns were around 2% across both investment grade and high yield—helped by some tailwinds from both rates and credit. Treasury yields declined modestly while credit spreads tightened and remain near 2025 lows.
Global equities posted an 8% gain with solid returns across each major region. U.S. equities added 8% with help from megacap tech strength and a supportive macroeconomic backdrop.
Investor sentiment around the artificial intelligence (AI) narrative gained steam, with strong returns across the tech space and outsized (20%-plus) gains for some of the largest tech-related companies including Alphabet and Oracle.
Outside of the tech space, U.S. equity returns were largely positive with gains across all sectors except consumer staples. U.S. small caps gained 12%. Other tenets of support for U.S. equities included a strong 2Q corporate earnings season, better than expected tariff resilience, and Fed policy easing.
Emerging market equities gained 10% with help from tech exposure—particularly across China and broader Asia— plus some support from the materials sector. Non-U.S. developed markets added just under 6% in U.S. dollar terms.
The U.S. dollar was mostly unchanged in 3Q but remains down close to 10% since the start of 2025.
In the real assets space, natural resources outperformed global equities, helped by metals & mining as gold was up about 16%. Global listed infrastructure and global real estate each gained roughly 4% but lagged global equities overall.
