Fiscal policy uncertainty, which drove the decline in stocks this spring (S&P Global), receded during Q3 and helped lift stock valuation multiples. Job growth slowed materially, but outright job losses remained subdued, and consumer spending was stronger than expected. Inflation picked up somewhat, but the Federal Reserve placed greater emphasis on the weakening labor market data than the increase in inflation, which it believes is being driven by transitory upward pressure from tariffs. As a result, monetary policy easing resumed in September, and bond yields declined materially across the curve as investors priced in additional rate cuts ahead. Meanwhile, investment in artificial intelligence continued to exceed expectations, fueling excitement about a prolonged period of rapid growth. Against this backdrop, stocks continued their steep ascent from the April low, and while AI-related stocks continued to do well, the best performers were highly volatile, low quality, small capitalization, and cyclical stocks.
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