The LTWM Insider – Market and Economic Commentary Q3 2025 Executive Summary

During the third quarter of 2025, we witnessed a continuation of the robust recovery for global equity markets, following the sharp volatility earlier in the year triggered by tariff uncertainties. The administration’s 90-day tariff pause, announced on April 9th, and subsequent trade agreements with Japan and the European Union, announced in Q3, alleviated fears of a global trade standstill. The S&P 500, which plummeted over 12% in four trading days from "Liberation Day" on April 2 and rebounded with a 9% rally on April 9^th, which was the largest single-day gain since October 2008, posted an additional 8% gain in Q3, contributing to a solid year-to-date return of 14.8%. The VIX index, which spiked above 50 on April 8th amid tariff fears, has settled at approximately 16, reflecting historically low volatility. 

International equities outperformed further, with International Developed Stocks rising 5.3% in Q3 (16% over the past year) and Emerging Markets surging 10.6% in Q3 (17.3% over the past year), driven by currency tailwinds, more attractive valuations, and regional economic recoveries. Key drivers of international strength included stronger-than-expected earnings growth in Europe, a notable recovery in China’s tech sector bolstered by AI advancements and government support; and improved geopolitical stability in the Middle East and Ukraine. 

The U.S. stock market, comprising 63% of the global equity market (down from 65% at the year’s start), remains richly valued, with an S&P 500 Price to Sales ratio of 3.41, at the time of this writing, well above its previous all-time high of 3.23 last reached in December 2021. Interest rates increased at the start of 2022 and we witnessed negative returns during the 2022 market, for both stocks and bonds. Looking forward to Q4, we maintain a cautious stance on U.S. large-cap stocks due to this elevated valuation but remain optimistic due to the strong momentum and are more favorable on U.S. small-cap stocks and international stocks.

The U.S. economy continues to decelerate, with GDP growth projected at 1.9% for 2025, down from 2.8% in 2024, but support from new U.S. capital investments, an accommodative Federal Reserve and a lower U.S. dollar, may mitigate immediate recession risks. The passage of the One Big Beautiful Bill Act (OBBBA) maintains a low tax environment for individuals and small businesses and alongside new foreign capital investments, supports economic resilience. We are encouraged by ongoing trade negotiations, Fed support of lowering rates due to a slowing job market, and the potential of increased investment in AI development.

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For those who would like a deeper dive into the details, please continue reading…

World Asset Class 3rd Quarter 2025 Index Returns

The third quarter of 2025 was super positive for U.S. stocks and all major global equity markets, while real estate and bonds were closer to an average quarter. For the total U.S. Stock Market, the second quarter return of 8.18% was well above the average quarterly return of 2.5%. International Developed Stocks gained 5.33%, well above the long-term average quarterly return of 1.8%. Emerging Market Stocks gained 10.64%, well above the average quarterly return of 2.7%. Global Real Estate Stocks were up 4.22%, slightly above the asset class’s average quarterly return of 2.2%. The U.S. Bond Market up 2.03%, above its average quarterly return of 1.0%, while the Global Bond Market (ex U.S.) was up 0.49%, just below its average quarterly return of 0.9%.

Here is a look at broad index returns over the past year and longer time periods (annualized):

For the past one-year period, Emerging Market stocks (up 17.32%) and U.S. stocks (up 17.41%) are leading historical returns. Global Real Estate stocks were down -1.24% in a challenging environment for the asset class. The U.S. Bond Market gained 2.88% and Global Bonds were up 3.02%. Over the past five years, U.S. stocks were up 15.74% annually, a very strong five-year period, while International Developed stocks were up 11.6% annually, Emerging Market stocks were up 7.02% annually, and Global Real Estate stocks were up 6.58% annually. The U.S. Bond Market was slightly negative, down -0.45% annually for the past five years, while Global Bonds were up 0.87% annually. Over the past 10 years, the U.S. stock market (up 14.71% annually) is well ahead of International Developed (up 8.41% annually), Emerging Market stocks (up 7.99% annually) and Global Real Estate stocks (up 4.37% annually). U.S. Bonds were up 1.84% and Global Bonds were up 2.58%, annually, over the last 10 years. The last decade was difficult for bonds since it included a sharp rise in interest rates from the 0% yield environment resulting from the great financial crisis.

Taking a closer look within U.S. stocks during the third quarter, Small Value took the top spot, up 12.6%, just ahead of small growth (up 12.19%) and well above market wide returns of 8.18%. Large Cap Value stocks (up 5.33%) underperformed and were well below Large Growth stocks (up 10.51%). It is a bit odd to see small value at the top and large value at the bottom of this list, but anything can happen in the short-term (one quarter).

If we extend our analysis of U.S. stocks over longer time periods, Large Growth stocks still led over the past year, up 17.22% while Large Value, was up 13.70%. Large Growth has been the top returning U.S. asset class over the past 1, 3, 5, 10, 15 and 20 years, outpacing the broad Large Cap category in each of the periods. U.S. small cap stocks are behind large cap stocks for the past 20 years, which has only happened two other times in history for rolling 20-year periods. The valuation gap between large cap and small cap stocks is also at an extreme, mostly due to the sharp rise in valuation of large cap stocks.

The U.S. stock market represents 63% of the global stock market, down from 65% at the start of year, due to the strong performance of international stocks. The U.S. business cycle continues to slow as measured by leading economic indicators. GDP growth is expected to be lower for calendar year 2025 than 2024 (1.9% vs.2.8%) as strong consumer spending and AI investment is offset by tariffs, lower net immigration and a softening labor market. In September, the Bureau of Labor Statistics revised the previous year’s payrolls down by 911,000, indicating much weaker job growth than previously thought. The four-week moving average of initial claims for unemployment insurance is near highs for the last year, around 240,000, pointing to a weaker U.S. job market.

Moving on to International Developed stocks, which were strong in local currency and very positive in dollars for the quarter, due to the weakening of the U.S. dollar against most major currencies. International stock returns were helped by currencies movements in the second quarter, but there are many other reasons for the stronger performance in the past year. Europe and emerging market stocks trade at more attractive valuations than the S&P 500, which is near its highest valuation in the past 25 years. The countries in the Euro zone had stronger than expected earnings growth, with analysts revising future earnings higher. China’s tech sector recovery, including advancements in AI, along with supportive government policies and a large gains in Hong Kong’s stock market, contributed to strong emerging market performance. U.S. trade policy uncertainty affected U.S. stocks more during the correction in April. And better geopolitical stability in the Middle East and Ukraine and the corresponding reconstruction opportunities boosted international stocks. Historically, the relationship between U.S. and International stocks is cyclical with an average eight-year period of dominance between the two; and it appears the 20-year dominance of U.S. stock outperformance is transitioning to international stock outperformance. If history is a guide, the current favorable international trend could continue for years.

International Value stocks led during the third quarter, gaining 7.88%, after currency adjustment, up 8.73% in local currency. International Small Cap Stocks were second, up 7.24% in U.S. dollars, up 8.18% in local currency. The Euro went from $1.04 at the end of the first quarter to $1.18 at end the second quarter and ended the third quarter at a value of $1.17; so still elevated against the dollar but slightly less than last quarter. The currency effect served as a slight headwind, hurting international stock returns during the third quarter:

LTWM follows a strategy of capturing the value premium around the globe. In the chart below, over longer time periods internationally, the value premium (value-growth) is positive for the past quarter, and all the way out to the past 10-year period. The value premium has been sizeable internationally. The international size factor premium (small cap-large cap) is positive in the past quarter, year to date, 1-year period but negative in the 3-year, 5-year periods, and 10 years, and positive for the past 15 years (7.43% vs. 6.72%) and 20 years (6.24% vs.5.63%):

The International Developed Market represents 26% of the global stock market, up from 24% at the start of the year and Emerging Markets represent 11% of the global stock market, up from 10% at the start of the year. Emerging Markets returned 10.64% in Q3, with a 17.32% annual gain, driven by China’s tech sector (e.g., AI chip sales adjustments) and Hong Kong’s market rally. Valuations remain attractive compared to the S&P 500, supporting our slightly overweight allocation in EM.

Moving the commentary to fixed income, bond market returns around the world were positive during the quarter, as yields decreased for short, intermediate and long bond maturities. The yield on the one-year Treasury Bill decreased 28 basis points to 3.68%. The yield on the 5-year Treasury Note decreased by 5 basis points, ending the quarter at a yield of 3.74%. The yield on the 10-year Treasury Note decreased by 8 basis points, ending the quarter at a yield of 4.16%, down from 4.24%. And the 30-year Treasury bond yield decreased by 5 bps to 4.73%, up from 4.78%. As yields decrease, bond prices increase, and lower borrowing costs make it easier for consumers and corporations to use debt, including auto loans and mortgages. When the U.S. economy is struggling, the Federal Reserve lowers interest rates to help economic activity. Here is the U.S. yield curve, and you can see how yields decreased for short maturities more than they decreased for long maturities (current yield curve in grey, one quarter ago in blue, and one year ago in green):

Looking at fixed income asset classes, the highest third quarter bond return was for the Municipal bond index (up 3.0%), while the least return was for the World Government Bond Index 1-5 Years (up 0.63%). The U.S. High Yield Corporate Bond Index was also strong for the quarter (up 2.54%), so bond traders had no problem purchasing riskier lower quality bonds. The U.S Aggregate Bond Index was up 2.03%. It is worth noting that the long bond index was still down -7.73% annually over the past five years and is still negative over the last 10 years (-0.09% annually). Long duration bonds have much higher volatility and can have large negative returns during periods of rising interest rates. Here are the fixed income periodic returns:

The stock market considers hundreds of factors to determine asset prices, some more important than others. Currently, trade deals, inflation and the level of interest rates are three of the most influential factors for determining asset price movements. The Federal Reserve cut interest rates 25 basis points during its September meeting and could end up lowering rates two more times by year end to support a softening job market. While stocks are at record highs, so is gold and many digital assets. The decline in the U.S. dollar, which is down about 10% so far in 2025 is helping international returns and one reason why we hold globally diversified portfolios.

One cannot time markets and typically the short term is just noise. Here is a sample of how the world stock markets responded to headline news, during the last quarter and the last year (notice the insert of the second graph that compares the last 12 months to the long term). We encourage you to tune out the financial news, since major news sources have a bias toward negative headlines; and often the headlines of the day have very little to do with the direction of stocks.

CONCLUSION

The third quarter reinforced the value of holding a globally diversified portfolio due to the trend of International Developed and Emerging Market stocks performing well. Going forward we expect the trend to continue with valuations more reasonable than the U.S. stock market. The valuation of the S&P 500 is breaking through to new highs, however, many strategists are stating the AI bubble may be larger than the internet bubble. Currently, the price to sales ratio of the S&P 500 is 3.41, breaking the previous record of 3.23, set in December of 2021. The S&P 500 is richly valued but the strong upward momentum is likely to continue.

Our recommendation is to stay disciplined with investing, tune out the news and focus on what you can control with your financial plan at year end and into the new year. We are here to help you succeed and look forward to interacting with you soon.

^{Standardized Performance Data and Disclosures}

^{Russell data © Russell Investment Group 1995-2024, all rights reserved. Dow Jones data provided by Dow Jones Indexes. MSCI data copyright MSCI 2024, all rights reserved. S&P data provided by Standard & Poor’s Index Services Group. The BofA Merrill Lynch Indices are used with permission; © 2024 Merrill Lynch, Pierce, Fenner & Smith Inc.; all rights reserved. Citigroup bond indices copyright 2024 by Citigroup. Barclays data provided by Barclays Bank PLC. Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio.}

^{Past performance is no guarantee of future results. This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell securities.  Diversification does not guarantee investment returns and does not eliminate the risk of loss.}  

^{Investing risks include loss of principal and fluctuating value. Small cap securities are subject to greater volatility than those in other asset categories. International investing involves special risks such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks. Sector-specific investments can also increase these risks.}

^{Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, liquidity, prepayments, and other factors. REIT risks include changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, supply and demand, and the management skill and creditworthiness of the issuer.}

^{Principal Risks:}

^{The principal risks of investing may include one or more of the following: market risk, small companies risk, risk of concentrating in the real estate industry, foreign securities risk and currencies risk, emerging markets risk, banking concentration risk, foreign government debt risk, interest rate risk, risk of investing for inflation protection, credit risk, risk of municipal securities, derivatives risk, securities lending risk, call risk, liquidity risk, income risk. Value investment risk. Investing strategy risk. To more fully understand the risks related to investment in the funds, investors should read each fund’s prospectus.}

^{Investments in foreign issuers are subject to certain considerations that are not associated with investment in US public companies. Investment in the International Equity, Emerging Markets Equity and the Global Fixed Income Portfolios and Indices will be denominated in foreign currencies. Changes in the relative value of these foreign currencies and the US dollar, therefore, will affect the value of investments in the Portfolios. However, the Global Fixed Income Portfolios and Indices may utilize forward currency contracts to attempt to protect against uncertainty in the level of future currency rates (if applicable), to hedge against fluctuations in currency exchange rates or to transfer balances from one currency to another. Foreign Securities prices may decline or fluctuate because of (a) economic or political actions of foreign governments, and/or (b) less regulated or liquid securities markets.}

^{The Real Estate Indices are each concentrated in the real estate industry. The exclusive focus by Real Estate Securities Portfolios on the real estate industry will cause the Real Estate Securities Portfolios to be exposed to the general risks of direct real estate ownership. The value of securities in the real estate industry can be affected by changes in real estate values and rental income, property taxes, and tax and regulatory requirements. Also, the value of securities in the real estate industry may decline with changes in interest rate. Investing in REITS and REIT-like entities involves certain unique risks in addition to those risks associated with investing in the real estate industry in general. REITS and REIT-like entities are dependent upon management skill, may not be diversified, and are subject to heavy cash flow dependency and self-liquidations. REITS and REIT-like entities also are subject to the possibility of failing to qualify for tax free pass through of income. Also, many foreign REIT-like entities are deemed for tax purposes as passive foreign investment companies (PFICs), which could result in the receipt of taxable dividends to shareholders at an unfavorable tax rate. Also, because REITS and REIT-like entities typically are invested in a limited number of projects or in a particular market segment, these entities are more susceptible to adverse developments affecting a single project or market segment than more broadly diversified investments. The performance of Real Estate Securities Portfolios may be materially different from the broad equity market.}

^{Fixed Income Portfolios:}

^{The net asset value of a fund that invests in fixed income securities will fluctuate when interest rates rise. An investor can lose principal value investing in a fixed income fund during a rising interest rate environment. The Portfolio may also be affected by: call risk, which is the risk that during periods of falling interest rates, a bond issuer will call or repay a higher-yielding bond before its maturity date; credit risk, which is the risk that a bond issuer will fail to pay interest and principal in a timely manner.}

^{Risk of Banking Concentration:}

^{Focus on the banking industry would link the performance of the short-term fixed income indices to changes in performance of the banking industry generally. For example, a change in the market’s perception of the riskiness of banks compared to non-banks would cause the Portfolio’s values to fluctuate.}

^{The material is solely for informational purposes and shall not constitute an offer to sell or the solicitation to buy securities.  The opinions expressed herein represent the current, good faith views of Lake Tahoe Wealth Management, Inc. (LTWM) as of the date indicated and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such.  The information presented in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, LTWM does not guarantee the accuracy, adequacy or completeness of such information.} 

^{Predictions, opinions, and other information contained in this presentation are subject to change continually and without notice of any kind and may no longer be true after the date indicated. Any forward-looking statements speak only as of the date they are made, and LTWM assumes no duty to and does not undertake to update forward-looking statements.  Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time.  Actual results could differ materially from those anticipated in forward looking statements. No investment strategy can guarantee performance results. All investments are subject to investment risk, including loss of principal invested.}

^{Lake Tahoe Wealth Management, Inc.is a Registered Investment Advisory Firm with the Securities Exchange Commission.}