Third Quarter 2025 Review

Personalized Portfolios account: Total Return Investment Approach

By Strategic Advisers, LLC

Market Landscape

Despite uncertainty on tariffs and low consumer confidence, stocks and bonds have had a strong year so far

July 2025: U.S Congress passes sweeping new tax law, improving sentiment about future economic conditions.¹

August 2025: Jobs report reveals some signs of weakening in the U.S labor market.² The White House hosts a group of top European leaders to discuss steps toward peace between Ukraine and Russia. 

September 2025: U.S. Federal reserve (Fed) reduces interest rates by 0.25%. Government shutdown looms before taking effect in October.

The Big Picture

Global financial markets have delivered strong returns so far this year, fueled by a mix of economic growth, rising corporate profits, and attractive bond yields. This positive momentum carried through the third quarter. U.S. stocks were a standout performer, lifted by another round of strong corporate earnings reports. International markets also saw positive returns albeit at a more moderated pace than U.S. stocks. Meanwhile, the broad U.S. investment-grade bond market saw a significant rally as well. The U.S. stock and bond markets were further supported by the Fed’s September rate cut. This cut signaled a resumption of accommodative monetary policy last seen in 2024 and reinforced positive investor sentiment. Bond performance was further supported by continued investor confidence in corporate credit.

Looking ahead:

A positive global earnings outlook may present potential opportunities for investors. However, the path for U.S. monetary policy remains less clear. Uncertainty around economic growth, tariffs, federal employment, and inflation makes it difficult to form solid expectations for additional Fed rate cuts through the end of the year.

DID YOU KNOW?

With 83% of prime-age (25–54) workers active in the labor force in July 2025, the U.S. job market experienced a level of employment not seen since the early 2000s.³

Positioning Landscape: Total Return Investment Approach

We have adjusted holdings to help manage risk and protect against inflation.

U.S. Stocks:

• We added to the U.S. stock allocation as companies posted strong earnings results and earnings outlooks improved for rest of year.
• In doing so, we have leaned moderately toward value stocks and small- to mid-sized companies. These are areas of the market with lower valuations (i.e. inexpensive) that may help manage potential volatility in parts of the market with higher valuations.
• Our focus has remained on core, research-driven managers that follow a disciplined process based on fundamental analysis of individual companies.
• Opportunistic allocations included real estate stocks with exposure to data centers and cell phone towers that may benefit from economic growth and provide some inflation protection.

International Stocks:

• We made a small reduction to developed international markets while increasing exposure to emerging markets.
• At the same time, we reduced exposure to very large stocks due to less attractive valuations.
• Adjustments were made within the model to reduced exposure to companies which may be more vulnerable to tariff risks.
• More broadly, we are focused on managers who invest in quality companies.

Bonds:

• We decreased exposure to investment-grade bonds in favor of stocks.
• We maintained an overall duration and corresponding interest rate sensitivity essentially in line with the U.S. investment-grade bond market benchmark.
• The strategy held below-benchmark exposure to U.S. Treasuries and corporate bonds, while holding an above-benchmark allocation to mortgage-backed securities (MBS).
• Opportunistic allocations included maintaining exposures to Treasury Inflation-Protected Securities (TIPS) and commodity-related securities to help guard against potential inflationary pressures.
• The strategy had modest exposure to lower-rated, high-yield corporate bonds to provide additional income, with the view that default risk has remained low during the economic expansion.
• Finally, we have holdings of alternative investments with low correlation to traditional asset classes with the potential to provide stability during periods of stock and/or bond market volatility.

The following investment types discussed here are for general informational purposes. All asset class categories referenced may not be represented within your specific strategy.

Asset Classes – A Closer Look

Both stocks and bonds had a strong quarter of returns.

U.S. Stocks 8.2%⁴

Rising earnings and Fed rate cut supported stock market rally

U.S. stocks posted strong gains in the third quarter, driven by continued economic growth, strong second quarter corporate earnings, and growing conviction that the Fed's September rate cut signaled the resumption of easing monetary policy.

Growth stocks outperformed value stocks.⁵ This outperformance was driven by strong earnings reports and the Fed's rate cut. Lower interest rates typically increase the appeal of companies with strong future earnings potential (i.e. growth stocks). As a result, dividend-paying stocks faced challenges during the quarter because these investments mostly come from the "value" part of the market.

All sectors but one had positive returns for the quarter, led by information technology, consumer discretionary and utilities.⁶ An optimistic outlook for spending and energy demand related to artificial intelligence (AI) fueled positive performance for information technology and utility stocks. Consumer discretionary stocks saw gains in response to robust spending by higher-income households. Consumer staples was the only sector to post a loss, as investors favored more growth-oriented stocks.

Smaller companies led performance with 12.4% returns, coming out ahead of large and mid-sized companies.⁷ The outlook for lower borrowing costs from Fed interest rate cuts helped boost small company stock returns. In addition, smaller companies tend to be oriented toward the domestic market. As a result, they are generally less vulnerable to tariffs. Performance for large company stocks was strong as well, led by companies viewed as beneficiaries of AI initiatives.⁸ Meanwhile mid-sized stocks, which typically are less technology-oriented, lagged the broader market.⁹

Commodity stocks had positive returns for the quarter but underperformed the broader stock market.¹⁰ Precious metals led commodities with strong returns of 19.2%, outperforming U.S. stocks by a wide margin.¹¹ Gold has likely benefited from heightened economic uncertainty and strong central bank buying across the globe.

Real estate investments also had positive returns but underperformed the broader stock market.¹² Investors have likely been drawn to the higher growth outlook of other parts of the market.

International Stocks 6.9%¹³

Performance bolstered by earnings growth and improving economic outlook for many countries

International developed market stocks delivered a positive return of 4.8% over the quarter, though they continued to trail their U.S. counterparts.¹⁴ Among major markets, Japan stood out as a top performer, driven by strong corporate earnings, particularly in the technology sector, which benefited from global demand.

In contrast, Germany experienced a modest decline due to continued economic weakness. This is a reversal from a strong first half of 2025, in which German stocks had been buoyed by the approval of a national budget aimed at boosting defense and infrastructure spending.

Meanwhile, emerging market stocks outpaced international developed markets, with a 10.6% return.¹⁵ Much of the momentum came from China. Growing optimism around AI and increased government support for domestic semiconductor companies lifted investor sentiment for Chinese stocks.

Bonds 2.0%¹⁶

Healthy yields and Fed interest rate cut supported a strong quarter

Bond markets responded positively to the Fed’s rate cut. Lower treasury yields and narrow credit spreads¹⁷ helped drive strong returns across corporate bonds. Meanwhile, mortgage-backed securities (MBS) benefited from relatively stable mortgage rates and continued low prepayments on underlying loans.¹⁸ Intermediate and limited-duration¹⁹ investment-grade bonds underperformed the broad taxable bond market, returning 1.8% and 1.5%, respectively.²⁰ This underperformance was mostly driven by the fact that declining interest rates tend to benefit longer-term bonds the most because these investments lock in higher yields over time.

High-yield bonds outperformed investment-grade bonds,²¹ supported by solid corporate earnings and low default risk. Some investors have remained cautious about the potential for inflation to rise further due to tariffs and continued economic growth. As a result, Treasury inflation-protected securities (TIPS) also posted gains, returning 2.1%.²²

Municipal bonds had a particularly strong quarter, returning 3.0%.²³ Municipal bonds rebounded from a weak start to the year and outperformed other investment-grade bonds.²⁴ Investor concerns about tax reform eased and demand for tax-exempt income remained strong. September 2025 marked the best September performance for broad-market municipal bonds in 16 years, with long-term bonds leading the way.²⁵ Similar to taxable bonds, intermediate and limited-duration municipal bonds underperformed the broad municipal bond market, returning 2.4% and 1.5%, respectively.²⁶

Municipal bond new issuance picked up in during the quarter, reaching levels 15% higher than the same period in 2024 and well above the five-year average.²⁷ While credit fundamentals have remained solid, uncertainty around federal policy changes could impact certain sectors.

Looking ahead, further potential Fed interest rate cuts may support continued strength in longer-term bonds. However, with yields starting from lower levels, most returns in the coming quarter may come from income rather than price appreciation.

For Additional Information, please view our Quarterly Market Perspective

The foregoing commentary was prepared by Strategic Advisers LLC, a registered investment adviser and a Fidelity Investments company. (opens in new tab or window)

The foregoing commentary was prepared by Strategic Advisers LLC, a registered investment adviser and a Fidelity Investments company.

¹ The Conference Board Consumer Confidence Index® 9/29/2025.

² Bureau of Labor Statistics U.S. Department of Labor News release 9/5/2025.

³ Brookings Institution, Seven economic facts about prime-age labor force participation, 7/1/2025.

⁴ Dow Jones U.S. Total Stock Market Index, as of 9/30/2025.

⁵ Russell 1000 Growth Index and Russell 1000 Value Index, as of 9/30/2025.

⁶ Based on an ICB industry breakdown of the DJ U.S. Total Market Index, as of 9/30/2025.

⁷ Russell 2000 Index, S&P 500 Index, and Russell MidCap Index, respectively, as of 9/30/2025.

⁸ S&P 500 Index, as of 9/30/2025.

⁹ Russell MidCap Index and Dow Jones U.S. Total Stock Market Index, as of 9/30/2025.

¹⁰ Bloomberg Commodity Index and the Dow Jones U.S. Total Stock Market Index, as of 9/30/2025.

¹¹ Bloomberg Precious Metals Index and the Dow Jones U.S. Total Stock Market Index, as of 9/30/2025.

¹² FTSE NAREIT All Equity REITS Index and the Dow Jones U.S. Total Stock Market Index, as of 9/30/2025.

¹³ MSCI All Country World ex US Index (Net MA Tax), as of 9/30/2025.

¹⁴ MSCI EAFE Index (Net MA Tax) and Dow Jones U.S. Total Stock Market Index, as of 9/30/2025.

¹⁵ MSCI Emerging Markets Index (Net MA Tax), as of 9/30/2025.

¹⁶ Bloomberg U.S. Aggregate Bond Index, as of 9/30/2025.

¹⁷ Credit spreads reflect the difference in yield between Treasuries and other bonds of the same maturity. Investors often view credit spreads as a barometer of overall economic health. Large (or wide) spreads can be seen as a potential warning sign, while small (or narrow) spreads can be seen as a positive sign.

¹⁸ Based on a sector-level breakdown of the Bloomberg U.S. Aggregate Bond Index, as of 9/30/2025.

¹⁹ Intermediate bonds are those with an average duration range of approximately three and half to seven years. Limited-duration bonds are those with an average range of approximately two to three and a half years. Duration is a measure of a security’s price sensitivity to changes in interest rates. Duration differs from maturity in that it considers a security’s interest payments in addition to the amount of time until the security reaches maturity and also considers certain maturity-shortening features (e.g., demand features, interest rate resets, and call options) when applicable. Securities with longer durations generally tend to be more sensitive to interest rate changes than securities with shorter durations. A fund with a longer average duration can generally be expected to be more sensitive to interest rate changes than a fund with a shorter average duration.

²⁰ Bloomberg U.S. Intermediate Aggregate Bond Index and Bloomberg U.S. 1-5 Year Credit/Government Bond Blend Index, as of 9/30/2025. Broad market taxable bonds are represented by the Bloomberg U.S. Aggregate Bond Index.

²¹ ICE BofA U.S. High Yield Constrained Index and Bloomberg U.S. Aggregate Bond Index, as of 9/30/2025.

²² Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) Index, as of 9/30/2025.

²³ Bloomberg Municipal Bond Index, as of 9/30/2025.

²⁴ Bloomberg Municipal Bond Index and Bloomberg U.S. Aggregate Bond Index, as of 9/30/2025.

²⁵ Bloomberg Municipal Bond Index, 9/30/2009 - 9/30/2025.

²⁶ Bloomberg Managed Money Municipal Short Intermediate 1-10 Year Index and Bloomberg Municipal Managed Money Short Index, as of 9/30/2025. Broad market municipal bonds are represented by the Bloomberg Municipal Bond Index.

²⁷ J.P. Morgan as of 9/30/2025.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.

Past performance is no guarantee of future results.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

Unless otherwise noted, this commentary does not necessarily represent the views of Fidelity Investments. This commentary is for informational purposes only and is not intended to constitute a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The information and opinions presented are current only as of the date of writing without regard to the date on which you may access this information. All opinions and estimates are subject to change at any time without notice.

Data is unaudited. Information may not be representative of current or future holdings.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal. Foreign investments involve greater risks than U.S. investments, including political and economic risks and the risk of currency fluctuations, all of which may be magnified in emerging markets.

Investments in smaller companies may involve greater risk than those in larger, more well-known companies.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Any fixed income security sold or redeemed prior to maturity may be subject to loss. High yield/non-investment grade bonds involve greater price volatility and risk of default than investment grade bonds.

The municipal market can be affected by adverse tax, legislative or political changes and the financial condition of the issuers of municipal funds. Although municipal funds seek to provide interest dividends exempt from federal income taxes and some of these funds may seek to generate income that is also exempt from the federal alternative minimum tax, outcomes cannot be guaranteed, and the funds may generate some income subject to these taxes. Income from these funds is usually subject to state and local income taxes. Generally, municipal securities are not appropriate for tax-advantaged accounts such as IRAs and 401(k)s.

BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P.

Index information:

Please note that indexes are unmanaged, and performance of the indexes includes reinvestment of dividends and interest income, unless otherwise noted. Indexes are not illustrative of any particular investment, and it is not possible to invest directly in an index. Securities indexes are not subject to fees and expenses typically associated with managed accounts or investment funds.

The Conference Board is the name of the non-profit organization and publishes the Consumer Confidence Index. Consumer Confidence Index® (CCI) is a monthly economic indicator that measures consumer sentiment about the economy and their personal financial situation. It gauges consumer optimism or pessimism regarding current and future economic conditions, which in turn influences spending and saving habits.

Dow Jones US Total Stock Market Index is a float-adjusted market capitalization–weighted index of all equity securities of US headquartered companies with readily available price data.

Russell 1000 Growth: Russell 1000 Growth Index is a market capitalization-weighted index designed to measure the performance of the large-cap growth segment of the U.S. equity market. It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates.

Russell 1000 Value: Russell 1000 Value Index is a market capitalization-weighted index designed to measure the performance of the large-cap value segment of the U.S. equity market. It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates.

Russell 2000: Russell 2000 Index is a market capitalization-weighted index designed to measure the performance of the small-cap segment of the U.S. equity market. It includes approximately 2,000 of the smallest securities in the Russell 3000 Index.

S&P 500 Index is a market capitalization–weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance.

Bloomberg Commodity Index Total Return measures the performance of the commodities market. It consists of exchange-traded futures contracts on physical commodities that are weighted to account for the economic significance and market liquidity of each commodity.

Bloomberg Precious Metals Index - The index measures the performance of two future contracts on precious metals: gold and silver. It is a multiple-commodity sub-index consisting of the contracts included in the Dow Jones-UBS Commodity Index related to precious metals.

Russell MidCap: Russell Midcap Index is a market capitalization-weighted index designed to measure the performance of the mid-cap segment of the U.S. equity market. It contains approximately 800 of the smallest securities in the Russell 1000 Index.

FTSE NAREIT All REITs Index is a market capitalization–weighted index that is designed to measure the performance of all tax–qualified Real Estate Investment Trusts (REITs) that are listed on the New York Stock Exchange, the NYSE MKT LLC, or the NASDAQ National Market List.

MSCI ACWI (All Country World Index) ex USA Index (Net MA Tax) is a market capitalization-weighted index designed to measure investable equity market performance for global investors of large and mid-cap stocks in developed and emerging markets, excluding the United States. Index returns are adjusted for tax withholding rates applicable to U.S. based mutual funds organized as Massachusetts business trusts (NR).

MSCI EAFE Index (Net MA Tax) is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets, excluding the U.S. & Canada. Index returns are adjusted for tax withholding rates applicable to U.S. based mutual funds organized as Massachusetts business trusts (NR).

MSCI Emerging Markets Index (Net MA Tax) is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors in emerging markets. Index returns are adjusted for tax withholding rates applicable to U.S. based mutual funds organized as Massachusetts business trusts (NR).

The Bloomberg US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, mortgage-back securities (agency fixed-rate pass-throughs), asset-backed securities and collateralized mortgage-backed securities (agency and non-agency).

The Bloomberg U.S. Intermediate Aggregate Bond Index is a broad-based benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency). Must have a maturity from 1 up to (but not including) 10 years for all sectors except for Securitized (MBS, ABS, CMBS), which does not have a maximum weighted average maturity (MBS) or remaining average life (ABS, CMBS) constraint.

Bloomberg US 1-5 Year Credit/Government Bond Blend Index is a customized blend of the following unmanaged indices: Bloomberg US 1-5 Year Credit Bond Index - 80%, Bloomberg US 1-5 Year Government Bond Index - 20%. Indexes are unmanaged. The Bloomberg 1-5 Yr. Government/Credit Index is a broad-based benchmark that measures the non-securitized component of the US Aggregate Index. It includes investment grade, US dollar-denominated, fixed-rate Treasuries, government-related and corporate securities with 1 to 5 years to maturity.

ICE BAML US High Yield Constrained Index is a modified market capitalization–weighted index of US dollar denominated below investment grade corporate debt publicly issued in the US domestic market. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch). The country of risk of qualifying issuers must be an FX-G10 member, a Western European nation, or a territory of the US or a Western European nation. The FX-G10 includes all Euro members, the US, Japan, the UK, Canada, Australia, New Zealand, Switzerland, Norway and Sweden. In addition, qualifying securities must have at least one year remaining to final maturity, a fixed coupon schedule and at least $100 million in outstanding face value. Defaulted securities are excluded. The index contains all securities of The ICE BofA US High Yield Index but caps issuer exposure at 2%.

Bloomberg US TIPS: Bloomberg U.S. 1-10 Year Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the U.S. Treasury that have a remaining average life between 1 and 10 years.

Bloomberg Municipal Bond Index is a market value–weighted index of investment–grade municipal bonds with maturities of one year or more.

The Bloomberg Managed Money Muni Short/Intermediate (1-10) Index is a flagship measure of the USD-denominated tax-exempt bond market over 1 year to maturity. The index includes four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds.

The Bloomberg Municipal Managed Money Short Index measures the performance of the tax-exempt bond market and the investment grade fixed rate bond market, with index components for education, government public service, and transportation & utility with remaining time to maturity of 1-5 years. It is a rules-based, market-value-weighted index. This index is the MM Short (1-5) component of the Managed Money index.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

Clients are responsible for all tax liabilities arising from transactions in their accounts, for the adequacy and accuracy of any positions taken on tax returns, for the actual filing of tax returns, and for the remittance of tax payments to taxing authorities.

Fidelity® Wealth Services provides non-discretionary financial planning and discretionary investment management through one or more Personalized Portfolios accounts for a fee. Advisory services offered by Strategic Advisers LLC (Strategic Advisers), a registered investment adviser. Brokerage services provided by Fidelity Brokerage Services LLC (FBS), and custodial and related services provided by National Financial Services LLC (NFS), each a member NYSE and SIPC. Strategic Advisers, FBS, and NFS are Fidelity Investments companies.

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