Mercer's Third Quarter 2025 Market Review
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as of September 30, 2025
Global equity markets posted their second strong quarter in a row, with US and emerging markets equites performing the best. Technology and growth sectors led the charge as appetite for AI names intensified despite ongoing concerns about elevated valuations. Political uncertainty eased somewhat as trade negotiations made progress, and tariffs have not had a major impact on growth and inflation. The One Big Beautiful Bill that was passed early in the quarter buoyed market sentiment further due to its numerous growth-enhancing provisions, most notably tax cuts and deregulations.
The US economy remained remarkably resilient. GDP rose 3.8% in the second quarter, significantly surprising on the upside. The labor market seemed to be the only soft spot this quarter, which was the main motivation for the Federal Reserve (‘Fed’) to implement its ‘risk management’ rate cut in September. It is important to understand declining nonfarm payroll figures in the context of decreasing immigration. Fewer jobs now need to be created to keep the unemployment rate steady, as it did over the quarter. This paints the picture of a strong economy that has defied less optimistic expectations from earlier this year. US headline inflation rose 2.9% year-over-year in August, in line with expectations, but flattening its pace of decline.
Global equities had a strong quarter, returning 7.6%. Performance was positive for all major regions. The S&P 500 returned 8.1% as the economy remained resilient, earnings growth and AI momentum were strong. International developed stocks returned 4.8% in Q3, despite low growth and the dire fiscal situation in the UK and France at the forefront.
Within fixed income (bonds), the Bloomberg US Aggregate Index returned 2.0% during the quarter. Treasuries returned 1.5%, and credit was up 2.6%. The yield curve shifted lower during the quarter as the Fed cut rates.
Global developed REITs returned 4.3% during Q3, underperforming broader equity markets by a wide margin. Core listed infrastructure stocks also had positive returns but also underperformed broad equities. Falling rates this quarter were tailwinds for both sectors in absolute terms, given their higher rate sensitivity. Commodities had a mixed performance for the quarter.
Forward-looking GDP growth estimates were revised upward late in the quarter after gloomy predictions from spring did not materialize. Inflation expectations remained stable amid the tug of war between potential impacts of tariffs and falling immigration levels on one hand and slowing job growth amid expectations of weaker economic growth on the other hand.
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