The story being told in the third quarter is mainly that of the resiliency of the U.S. economy and stock market. While quarter two was fraught with tariff talk, recession concerns, and increasing geopolitical uncertainty, quarter three has been about the stock market’s continued recovery from its April lows and a stronger-than-expected U.S. economy.
Following a contraction in the first quarter, the U.S. economy grew at an annualized rate of 3.3% in the second quarter. Largely the result of increased consumer spending, this stronger-than-expected growth has currently alleviated concerns about the slowing of the economy and risk of recession later this year. While a recession was avoided for now, the outlook for the remainder of 2025 and 2026 remains characterized by slowing growth, a softening labor market, and persistent inflation.
As the Federal Reserve continues to attempt to balance this persistent inflation and softening labor market, it recently lowered interest rates for the first time in 2025 and indicated that additional cuts are likely. This signals that concerns over the health of the job market now outweigh worries about ongoing inflation. Interest rate cuts are generally good for stocks because they reduce borrowing costs for companies and stimulate consumer spending.
Driven by better-than-expected corporate earnings growth, a reduction in tariff uncertainty, and the anticipation of an accommodating Federal Reserve, the S&P 500 Index is up nearly 8% in the quarter and just shy of 14% year-to-date.
Corporate earnings in the second quarter surpassed analyst expectations, with a high percentage of companies beating both earnings and revenue forecasts. Growth stocks, more specifically technology stocks, are bolstering market gains once again, having recovered significantly from their early April lows. However, there is evidence that broader market strength exists and that strength extends beyond just AI-driven technology companies.
As we head into the fourth quarter and beyond, factors driving the U.S economy and stock market will likely be much the same: tariffs and trade policy, the health of the labor market, Fed policy and interest rates, business investment and consumer spending, and corporate earnings. Several different scenarios exist, and forecasts vary from firm to firm and economist to economist. We recommend that investors remain focused on the long-term and hold well-diversified portfolios that should stand up to the many changes that come their way over the various economic and market cycles. The key to successful investment outcomes is a well-designed plan, and part of that plan is sticking to it and remaining true to your risk tolerance, asset allocation, and investment objectives.
As always, we value your relationship and the confidence you have in Adirondack Wealth Management by choosing us as your financial partner. Your relationship team is available to meet with you at your convenience. I encourage you to reach out to them and arrange for a time to talk.