October 2025 Market Commentary

Cuts and Crosscurrents

"History never repeats itself, but it does often rhyme." – Mark Twain

The Fed Bends, Not Breaks

The Federal Reserve’s September rate cut – 25 bps down to a 4.00–4.25% target range – was the key refrain of Q3 After the fastest hiking cycle in decades, the Fed has pivoted toward easing, citing balance-of-risks and a softer labor market. Futures markets are already pricing additional cuts into 2025, with a projected year-end target near 3.6%.

Rate-sensitive sectors such as housing and investment-grade credit should benefit, but policymakers remain cautious about sticky inflation. The Fed’s path is likely gradual, not a straight descent.

Returns in Review

Markets have rewarded investors who stayed invested rather than clinging to cash. Performance dispersion across regions has been meaningful, highlighting the value of selective positioning.

• U.S. Equities: The S&P 500 is up nearly 15% YTD, hovering near record highs, driven by large-cap tech and ongoing AI-linked earnings strength. QTD performance has been more muted but remains positive despite September volatility.

• Developed International (MSCI EAFE): International developed markets have trailed the U.S. for the last several years, but 2025 has been their year to shine. Japan, while trailing broader Developed indexes, has attractive forward outlook in our opinion. The MSCI Japan is up over 21% YTD (in dollars), pushing to new highs as shareholder reforms, surging buybacks, and AI-linked themes drive returns. Corporate ROE is near a four-decade high, reflecting real reform momentum. Europe has a slightly more mixed outlook in our opinion: a pro-growth agenda supports sentiment, but structural challenges (energy, fiscal burdens) temper upside from these levels
• Emerging Markets (MSCI EM): Emerging markets have been among the best performers, with the MSCI EM index up over 28% YTD in U.S. dollar terms. Gains have been broad, with contributions from Taiwan, South Korea, and India tied to AI and semiconductor supply chains. China remains neutral in positioning as trade tensions and demographic headwinds offset stimulus measures.
• Fixed Income: Core bonds (Bloomberg U.S. Aggregate) delivered mid-single digit gains YTD as yields retreated modestly after the Fed pivot. High yield has outperformed core bonds thanks to solid corporate fundamentals and carry.
• Cash & Short Bonds: Money markets and short-term Treasuries underperformed nearly every other major asset class as falling rates cut into yields. Allocations to cash that peaked midyear at ~21% of the average advisor’s fixed income sleeve are already eroding relative performance. In our opinion, over allocation to cash as a “fixed income substitute” poses significant risk to forward returns. 

Tariffs and Taxes Rewire the Backdrop

While rates set the tempo, tariffs and tax shifts are rewriting the melody. Expanding tariffs are raising government revenue while lifting costs for import-heavy companies. Domestic producers gain a measure of pricing power, but multinational firms face supply chain strain and margin pressure.

Fixed Income: Beyond Cash, But Watch Duration

The most common investor error this year has been overstaying in cash. With the Fed cutting, portfolios should lean into fixed income—carefully.

• Intermediate over long bonds: In shallow cutting cycles, long Treasuries have underperformed. Intermediate maturities look better aligned to this environment.
• Credit over pure duration: Absolute yields remain attractive; investment grade and select high yield add income without excessive volatility.
• Alternatives matter: Liquid, market-neutral and tactical funds provide ballast with low correlation, a useful hedge against policy risk. 

Positioning for Q4

Three guiding themes shape the playbook for the quarter ahead:

1. Policy ambiguity – modest Fed easing with uncertain inflation trajectory.
2. Tariff-driven dispersion – sectors reshuffled by costs and global trade responses.
3. Selective opportunity – intermediate credit, quality equities, and diversifying liquid alternatives. 

Closing Thought

Q3 was a stanza where the Fed softened, tariffs hardened, and taxes shifted the rhythm. As we enter Q4, the score grows more layered: easing rates support risk assets, but tariffs and fiscal shifts keep dispersion high. Investors who treat tariffs, taxes, and rates as a coordinated ensemble—rather than isolated beats—will be best positioned for the next movement.

Louis Tucci; Partner | Senior Investment Advisor
Paulo Aguilar, CFA, CAIA; Partner | Senior Investment Advisor
Mark H. Tucker, CFA; Chief Investment Officer
Chuck Bettinger; Portfolio Manager

Securities offered through Arkadios Capital. Member FINRA/SIPC. Advisory services through Arkadios Wealth.

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