Climbing the Wall of Worry
If you’ve been following headlines lately, you might be wondering how the market continues to push higher despite a steady stream of concerns—rate cuts, inflation, geopolitical tensions, and even AI-induced energy demand. Yet here we are, with the S&P 500 and Nasdaq both hitting record highs in the third quarter. It’s a reminder that markets don’t wait for perfect conditions—they move on expectations, momentum, and sometimes sheer resilience.
Let’s take a look at what’s driving this rally and what it might mean for your portfolio.
Third Quarter Market Review: Strength in Surprising Places
The third quarter of 2025 delivered strong gains across nearly every asset class. The S&P 500 rose about 8%, marking five consecutive monthly increases and pushing year-to-date returns above 14%. That’s a remarkable turnaround considering the index was flirting with bear market territory earlier this year. In fact, the S&P is up roughly 35% from its April lows—making this the fastest recovery from a 15%+ drawdown in modern history.
Growth sectors like Technology and Communications Services led the charge, fueled by AI enthusiasm. But this wasn’t just a Big Tech story. Small-cap and value stocks also participated, broadening the rally. International markets joined in, helped by a weaker dollar and signs of economic improvement in Europe and Asia. Even bonds posted gains, with the 10-year Treasury yield easing to around 4.1%, down from 4.8% in January.
It’s rare to see equities, fixed income, and commodities all moving in the same direction—but that’s exactly what we saw this quarter. For long-term investors, it’s a powerful reminder of the benefits of staying invested through uncertainty.
The Economy: Still Standing Strong
Despite higher interest rates and persistent inflation, the U.S. economy continues to defy expectations. GDP growth accelerated to 3.8% in Q2, and the Atlanta Fed projects similar growth for Q3. Consumer spending remains robust, business investment is rebounding, and household balance sheets are in solid shape.
In September, the Federal Reserve delivered a widely anticipated 25 basis point rate cut—the first in what may be a new easing cycle. Lower borrowing costs could unlock demand in housing and other interest-sensitive sectors. While inflation risks remain (think tariffs, immigration policy, and AI-driven energy demand), the broader economic picture is one of resilience.
AI: Hype or Hope?
Artificial Intelligence continues to dominate headlines—and market returns. Since late 2022, a handful of “AI winners” have driven outsized gains, pouring nearly $800 billion into infrastructure, semiconductors, and software. But AI’s reach is expanding. Companies across finance, healthcare, and manufacturing are adopting AI to improve efficiency and productivity.
We’re optimistic about AI’s long-term potential, but we’re also disciplined. Our investment approach remains focused on balance and quality—owning high-quality companies across sectors, including those benefiting directly and indirectly from AI. We view AI as a reason for optimism, not speculation.
Planning Corner: Tax Reviews & Year-End Prep
As we approach year-end, now is a great time to revisit your tax strategy. Market gains, rate changes, and portfolio shifts can all impact your tax picture. If you haven’t already, please send us your 2024 tax return so we can perform a comprehensive review. This helps us align your investment strategy with your broader financial goals.
You can upload your return securely at https://bol.rwbaird.com, or reach out to Eric or Brianna to coordinate a pickup and scan. If you have taxable accounts with us and want to review your current year taxable gain estimates, give us a call.
Conclusion: Staying the Course
Markets are climbing the proverbial “wall of worry,” and history shows that staying invested through uncertainty is often rewarded. Whether it’s AI innovation or monetary policy shifts, the forces driving this rally are powerful—but not without risk. That’s why we remain focused on fundamentals, diversification, and long-term planning.
If you have questions about your portfolio or want to discuss year-end strategies, we’re here to help.
Team Update
Our previous Client Specialist, Amber Hubbard, has moved to an adjacent team here in our office and we’re excited to announce the addition of Ryan LeBlanc to our team in Elgin! Ryan has his bachelor’s degree in business administration with a concentration in Finance and already holds his SIE. He’s excited about growing his knowledge of investments, the markets, and wealth management. Outside of work Ryan enjoys working out, hiking, pickleball and trying new restaurants. You’ll likely be hearing from Ryan more in the coming months as he reaches out to introduce himself, but if you want to beat him to it, give him a ring!
Past performance is no guarantee of future results. It is not possible to invest directly in an index. All investments carry some level of risk, including loss of principal. Information is derived from sources we believe to be reliable, but its accuracy is not guaranteed. Robert W. Baird & Co. Incorporated does not offer tax or legal advice. Robert W. Baird & Co. Incorporated. 777 East Wisconsin Avenue, Milwaukee, WI 53202. 800-79-BAIRD. rwbaird.com.