Q3 Market Recap: A Historic September Surge Sets the Stage for a Pivotal Fourth Quarter

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The third quarter of 2025 closed with a flourish, capping one of the strongest September runs in more than a decade. The S&P 500 advanced 7.8% for the quarter, its best third quarter since 2020, while the Nasdaq surged 11.2%—its strongest Q3 showing since 2010. The Dow gained 5.2%, ending September at a record closing high and marking its best September since 2019. What made the quarter remarkable was not just the headline numbers but also the resilience of equity markets in the face of tariffs, fiscal standoffs, and mixed global economic signals. For the S&P 500, September was the fifth straight monthly gain, while the Nasdaq stretched its winning streak to six months, underscoring a momentum backdrop that remains firmly intact.

Beneath the surface, the quarter was defined by breadth improvements and renewed risk appetite, even as leadership remained heavily tilted toward growth and megacaps. Microcaps delivered the strongest gains of any index, surging 16.3%, while the Russell 2000 added 11.6%, signaling that investors were finally willing to push down the cap spectrum as front-end yields eased. Yet the lagging performance of midcaps (+4.2%) highlighted how conviction remained concentrated at the extremes: the liquidity and safety of large-cap growth on one end, and the high-beta promise of small caps on the other.

Key Themes of Q3

Small and Microcap Outperformance The standout move in microcaps (+16.3%) and small caps (Russell 2000 +11.6%) reflected growing optimism that lower yields and eventual Fed easing could broaden participation beyond megacaps. These gains offered hope that 2025’s rally might extend beyond the AI giants and into the broader economy. Still, whether this rotation holds into Q4 will be a critical watchpoint.

Growth Over Value, Large Over Mid The Nasdaq Composite (+12.7%) and Nasdaq 100 (+10.3%) underscored that large-cap growth remained the market’s cornerstone. Investors stuck with AI and digital advertising leaders, while midcaps languished, suggesting the appetite for cyclicals and balance-sheet risk remains limited. Value factors posted positive but muted returns, and Quality factors underperformed, especially in small and mid-caps, reflecting the “risk-on” character of the quarter.

S&P 500 Strength with Caveats The S&P 500’s 8.4% advance painted a bullish picture, but the Value Line Average (+6.9%) showed the average stock still lagged. This indicates that cap-weighted gains remain heavily reliant on megacap performance. Breadth improved modestly but not enough to suggest full market participation.

Sector and Style Rotations Technology (+13.4%) and Consumer Discretionary (+11.0%) led sector returns, powered by AI infrastructure spending, resilient consumer demand, and easing yields. Communication Services (+9.1%) rounded out the growth leaders. Defensives told a mixed story: Utilities (+8.2%) benefitted from falling yields, while Staples (-3.9%) slumped as bond-proxy sectors fell out of favor. Health Care gained 5.5%, aided by biotech strength and relief around pricing risks, and remains one of the cheaper relative-value plays in the market heading into Q4.

Dow Transports Divergence The transports slipped 1.1%, in contrast with Industrials (+4.4%), raising eyebrows among Dow Theory purists who look for confirmation between the groups as a sign of economic momentum. This divergence stands out as a yellow flag for cyclical participation, even as broader equity momentum remains strong.

Cross-Asset Divergences Precious metals surged, with gold up 16.8% and silver up nearly 30% as falling real yields and geopolitical concerns spurred safe-haven demand. Crypto gained as well, with

What to Watch in Q4

The strong Q3 sets a high bar heading into the fourth quarter, and several key themes will determine whether the rally sustains.

Earnings Breadth and Guidance October earnings season looms as the immediate catalyst. Thus far, AI megacaps have carried the load, but investors will be watching whether margins and forward guidance broaden across sectors. Small and mid-caps will need to build on their Q3 momentum with stronger earnings delivery to validate recent performance. If leadership narrows again, markets risk falling back into the dependency on AI giants that has characterized much of 2025.

Healthcare Value Opportunity Healthcare has emerged as a notable theme into Q4. The sector remains relatively cheap compared to the market and showed resilience in Q3 despite political noise around pricing. With biotech strength and tariff clarity improving sentiment, healthcare may offer investors a defensive yet value-oriented play in a market otherwise trading at stretched multiples.

Transports and Cyclicals The transports’ divergence from industrials is a cautionary signal. Investors will look for confirmation that cyclical participation is broadening, which would provide a stronger foundation for the rally. Energy earnings will also be in focus given the weakness in oil, while industrials’ capex story remains tied to supply chain normalization and infrastructure spending.

Rates and Fed Policy The Treasury market remains central to the equity story. The 2-year yield’s drop toward 3.6% was a tailwind in Q3, but any reversal higher could pressure equities, particularly small and mid-caps. Markets are pricing in roughly 50 basis points of Fed cuts into year-end, but labor market softness and the government shutdown complicate the picture. With official BLS jobs reports delayed, private data like ADP and ISM surveys will take on outsized importance.

Election Cycle and Policy Risks Tariffs, healthcare policy, and fiscal uncertainty tied to the election cycle remain potential volatility triggers. Investors will need to weigh whether policy rhetoric materially shifts corporate margin expectations or consumer demand trends.

Cross-Asset Signals Precious metals and crypto strength suggest investors are hedging policy and geopolitical risks. A sustained bid in gold and silver could indicate skepticism about the durability of the equity rally. Conversely, stabilization in commodities like oil and copper would reinforce the cyclical recovery narrative.

Bottom Line

Q3 delivered a historic September surge and the best third quarter for the S&P since 2020, powered by AI enthusiasm, easing yields, and renewed risk appetite. Yet beneath the surface, leadership remains narrow, and caution flags—like weak transports, soft commodities, and narrow breadth—still flutter.

For Q4, the challenge is clear: can earnings breadth, healthcare value, and cyclical confirmation expand the rally, or will markets remain dependent on a small handful of megacap leaders? Investors should brace for a quarter where policy risk, Fed decisions, and election-year dynamics could add volatility—but also one where opportunities remain for those willing to look beyond the obvious leaders.