In the third quarter of 2025, markets reached new heights, largely ignoring political distractions to focus on economic fundamentals. Bonds showed solid gains, while equities were propelled by two main factors: the anticipated productivity boosts from artificial intelligence and expectations of lower interest rates from the Federal Reserve. Despite challenges such as a government shutdown and ongoing uncertainties regarding trade policies, diversified, multi-asset portfolios enjoyed another robust quarter.
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For investors, the key challenge is to distinguish between meaningful signals and the surrounding noise. While political headlines often dominate financial news, they may not significantly impact long-term economic growth or corporate profitability. The resilience of markets in Q3 highlights the necessity of a disciplined investment strategy that prioritizes economic fundamentals over reactive responses to headline risks. Our approach emphasizes constructing robust portfolios designed to harness economic growth while managing inherent risks in a complex environment. This quarter serves as a strong endorsement of our philosophy of broad, risk-managed diversification.
Markets
Market Performance
Global markets continued their upward trajectory in Q3 2025, with both equities and bonds delivering positive returns despite mixed macroeconomic signals. Equity markets hit new all-time highs, primarily driven by the strength of U.S. large-cap growth stocks, particularly those in the AI sector, alongside renewed momentum in Emerging Markets.
U.S. equities rose approximately 8% during the quarter. Although labor market data showed weakness, the absence of imminent recession risks provided a positive catalyst for asset valuations, bolstered by heightened expectations for further Fed rate cuts. Inflation remained above the Fed’s target but aligned broadly with forecasts. Large growth stocks led the gains, increasing about 10%. Small-cap performance varied, with the Russell 2000 soaring 12.4%, while other small-cap indices like the CRSP US Small Cap Index gained 7.5%, supported by lower borrowing cost expectations and a solid economic backdrop.
International markets also fared well, with Emerging Markets outperforming developed ones, returning 9.8%. This was largely driven by China and Taiwan, where AI enthusiasm and easing trade tensions bolstered local sentiment. Canada followed closely with a 9.4% return, while the Asia-Pacific region gained 6.9%, led by Japan. European equities saw modest gains of 2.9% after a strong first half of the year.
In fixed income, expectations of additional Fed rate cuts led to positive returns across all major fixed income asset classes. The U.S. aggregate bond market returned 2.1% as Treasury yields fell, particularly at the front end, resulting in a modestly steeper yield curve compared to June. Credit spreads remained historically tight, with investment-grade corporates slightly outperforming high yield. Global bonds gained 0.6%, with Emerging Market debt standing out at 4.1%.
Gold also deserves special mention, rising 16.7% in the quarter. Ongoing central bank purchases to diversify reserves and strong demand for a risk hedge amid heightened policy uncertainty kept gold among the top-performing assets of 2025. For many investors, gold has become the preferred store of value amid concerns about inflation, geopolitical risks, currency debasement, and high equity valuations.
Strategy Performance
New Frontier’s ETF portfolios delivered solid absolute and relative results in Q3, with both equity and fixed income allocations contributing positively.
- Global Core portfolios posted positive returns across all risk profiles, benefiting from broad-based gains in global markets. Lower-risk profiles outperformed their benchmarks, supported by diversified bond exposure across maturities and sectors. Duration, credit, and Emerging Market debt allocations enhanced relative performance. Gold remained a significant contributor and the top-performing diversifier. However, allocations to minimum volatility equities and an underweight to U.S. large-cap growth modestly detracted from relative performance.
- Tax-Sensitive portfolios performed in line with Global Core, achieving slightly better relative results across risk profiles. Outperformance stemmed from municipal bonds, which surpassed taxable bond returns, and from higher allocations to U.S. large-cap growth equities due to tax efficiency, capturing more of the equity rally.
- Multi-Asset Income (MAI) portfolios outperformed their benchmarks across all risk levels. The portfolios benefited from our selection of high-dividend ETFs diversified by methodology and region. Newly added high-dividend ETFs continued to outperform their predecessors. Convertible bonds also contributed positively, particularly with exposure to the technology sector. The S&P 500 covered call ETF remained an effective income source, generating high yields driven by option premiums. The portfolios consistently met their objective of delivering attractive and stable income, with yields around 5%.
Model Reallocations
No rebalancing was triggered this quarter. Earlier in the year, portfolios were optimized for a higher-risk regime, resulting in relatively defensive positioning. As market conditions and updated risk estimates normalized in Q3, our Intelligent Rebalancing™ process allowed the portfolios’ risk profile to align with the market’s positive momentum. This naturally tilted the portfolios toward more aggressive ETFs without necessitating a formal rebalance, showcasing the adaptive nature of our process.
New Frontier employs Intelligent RebalancingTM, utilizing the Michaud-Esch portfolio rebalance test to guide portfolio reallocations and rebalancing decisions. This framework enables us to consider changes in portfolio risk characteristics due to price movements and adjustments to optimal portfolio exposures based on new capital market expectations.
Economic & Policy Insights
The economic narrative of the quarter presented a mix of resilience and slowing growth amid a complex policy landscape.
The Fed
The Federal Reserve lowered rates, acknowledging that economic concerns outweighed inflation risks. Rather than stimulating the economy due to low inflation, the Fed acted out of necessity, responding to clear signs of a slowing economy reflected in weaker labor market data. While the Fed’s data-driven approach is reasonable, it exists in tension with market expectations and political pressures that may have broader objectives beyond maximizing employment and stabilizing prices.
The Fed’s policy remains data-dependent, but this quarter revealed a shift in the data it prioritizes. With the labor market softening, the Fed is signaling a greater focus on its employment mandate, choosing to overlook inflationary effects from tariffs largely beyond its control. This approach carries risks, reminiscent of the “transitory” misjudgment in 2021, and raises credibility stakes. The implication is a potential willingness to tolerate inflation modestly above the 2% target to support growth—a trade-off reflected in the long end of the yield curve, even as U.S. policy rates remain elevated compared to global peers.
Government Shutdown
The market’s muted response to the government shutdown was rational. This event was widely anticipated, with prediction markets assigning nearly even odds months in advance, allowing investors to gradually price in the risk. Historically, shutdowns have had minimal lasting economic impact and have been roughly neutral for equity returns. While volatility can increase, past data shows only limited and transitory effects. However, prediction markets suggest this could be the longest shutdown in U.S. history.
Tariffs
The direct economic impact of tariffs remains debated. Although the effective tariff rate continues to rise, significant inflationary spikes have not materialized as feared. This is not due to the absence of costs but rather because their effects are complex and delayed. Initially, many businesses front-loaded inventory to avoid price hikes. Now, costs are being absorbed across various supply chain stages—multi-stage producers, importers, and distributors. A brief tariff scare on gold earlier this year provided a natural experiment: as a transparent global commodity, its price reacted immediately. In contrast, the inflationary forces affecting most consumer and industrial goods are obscured by inventories, sticky list prices, and multi-layer supply chains, resulting in gradual price impacts that will exert persistent upward pressure on inflation.
AI Revolution: Build-Out vs. Implementation
Enthusiasm for Artificial Intelligence has once again driven returns, raising questions about a potential bubble. As highlighted by the 2025 Economics Nobel, technology is a key driver of enduring economic growth. Historically, we are likely in the build-out phase of a technological revolution characterized by massive capital expenditure, intense competition for resources, and returns concentrated among direct enablers of AI infrastructure, such as chipmakers and data centers.
Even if AI fulfills its promise, current valuations of some industry leaders may be unsustainable. Unlike pure speculative bubbles, investments in technology are likely to generate substantial long-term productivity gains. After this massive investment cycle, two outcomes are plausible: technology may become commoditized, leading to many winners but at lower valuations as competition erodes margins, or natural monopolies may form, resulting in a few big winners alongside many losers. Regardless, many investors wary of a bubble continue to invest, hoping to ride the momentum.
The more impactful phase will be when practical technological advances are implemented, diffusing productivity gains from AI throughout the broader economy and benefiting a wide range of industries beyond technology. While the build-out phase is exciting and creates concentrated wealth, the implementation phase holds the potential to broadly enhance economic growth and corporate profitability. Therefore, long-term investors may find greater value in companies that will benefit from AI’s efficiency and innovation rather than speculating on the few current winners.
Private Assets: The New Equilibrium?
Investors are increasingly turning to private equity for high returns, hoping to replicate the success of endowments like Yale in the 1980s. However, expectations should be tempered as the influx of capital into private markets has transformed the asset class. Much like the conservation of energy in physics, there is a finite amount of economic growth and market return profit to distribute among investors. As private assets evolve from a niche strategy into a multi-trillion-dollar market, their returns must converge toward overall market returns over the long term.
This capital influx has several implications: a lower cost of capital for private companies, leading to lower future returns for investors; reduced management fees due to competition; and greater access for more investors. More companies are remaining private longer because the cost of capital has decreased relative to public markets. This trend may also explain historically disappointing returns in the public small-cap universe, which once included many high-growth companies. Consequently, private equity may become a less exciting asset class—less risky but also yielding lower returns than historically observed. This shift is evident in industry trends toward less mainstream illiquid assets, such as infrastructure, in the quest for high returns.
Market Implications & Asset Classes
- Broad-Based Returns and Diversification: The market’s strength in Q3 was notably broad. All New Frontier multi-asset indices reached new highs, as did international stocks, commodities, and aggregate bonds on a total return basis. Substantial market returns were driven by more than just a few mega-cap names, rewarding well-diversified portfolios for taking on broad economic risk.
- The Enduring Case for Treasurys: In a complex world of AI valuations, private market opacity, and geopolitical risk, U.S. Treasurys offer simplicity and security. While not designed to be the highest-returning asset class, their liquidity, transparency, and low correlation to risk assets make them one of the most effective risk management tools available. In the current environment, their role as a core portfolio diversifier is more crucial than ever.
- The Hunt for High Equity Returns: The search for returns continues to lead investors to small-cap and emerging markets. Although these asset classes have not consistently outperformed U.S. large-caps in recent years, the theoretical premise remains: these markets carry higher risk and should, over the long term, offer a return premium. However, this premium is not guaranteed in any given period. In fixed income, the narrative has been clearer, with credit, high-yield, and emerging market bonds delivering higher returns as expected for their additional risk.
- Comparing Bitcoin and Gold: Both assets share conceptual similarities regarding scarcity and independence from financial institutions. While both have seen spectacular returns recently, bitcoin tends to lose value during crises, unlike gold. This fundamental difference gives them distinct roles in a portfolio.
- The Dollar’s Decline: The U.S. dollar experienced a significant decline this quarter. Unlike stocks, currencies cannot grow indefinitely and tend to revert to fair value over time. The dollar’s recent weakness is linked to falling U.S. interest rate expectations relative to the rest of the world. A weaker dollar can be modestly inflationary domestically by raising import costs, providing a policy incentive to prevent further declines.
Originally published October 15, 2025
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