Q4 2025 Market Commentary
As we wrap up a resilient Q4 2025, U.S. equities painted a picture of headline strength amid underlying caution—major indices like the S&P 500, up roughly 15.8% year-to-date through late November, have notched all-time highs near 6,800, fueled by double-digit earnings growth (13.4% blended for Q3) and AI-driven momentum in tech and communication services. The Nasdaq Composite has led with ~20% YTD gains, while the Dow (+11%) and Russell 2000 (+13%) showed solid but uneven participation, with small-caps catching up on Fed easing signals. Economic anchors remain supportive: GDP growth held at ~3.0% annualized in Q2, with Q3 estimates around 2.7-3.9%, unemployment steady at 4.4%, and CPI inflation ticking up slightly to 3.0% year-over-year. Yet, this rally defied seasonal norms—September's historical -0.7% average decline flipped to +2.0%, and October's modest +0.8% norm became +2.5%—thanks to a 25bps Fed cut in September and hints of another by year-end, keeping the funds rate around 4.0%. Sectors rotated toward cyclicals like industrials on policy optimism, but defensives lagged as holiday spending bets lifted consumer discretionary.
Breadth tells a more nuanced story: while cap-weighted indices soared on ~35% influence from mega-caps, the equal-weight S&P 500—better reflecting the "average stock"—has trailed, up only ~10% YTD and flat-to-down since September peaks. The recent 5% correction in the S&P 500 and almost 10% correction in the Nasdaq hides the fact that only about 23% of stocks were within 5% of their 52-week highs. This has fueled bearish sentiment from investors that would be historically unusual for a market near highs. This has begun to reverse in the week or so leading up into Thanksgiving and could provide a tail wind into year end.
Looking to 2026, the trend remains intact. Potential for more interest rate cuts from the Federal Reserve, led by a new Chairperson could help fuel a healthier market with broadening participation. Earnings expectations are good with continued capital spend on AI build out leading but the other sectors of the market coming to life. Inflation remains a concern as the rate of change has been rather stagnant. Finally, valuations for stocks by many measures remains elevated. However, this is a condition not a trigger, it is possibility the earnings since of the Price/Earnings ratio grows into the valuations. We will be watching our indicators diligently for potential shifts.
The information presented in this newsletter is the opinion of West Michigan Advisors and does not reflect the view of any other person or entity. The information provided is believed to be from reliable sources but no liability is accepted for any inaccuracies. This is for information purposes and should not be construed as an investment recommendation. Diversification does not guarantee a profit or protect against a loss. Past performance is no guarantee of future performance. West Michigan Advisors is an investment adviser registered with the U.S. Securities and Exchange Commission. Securities offered through Level Four Financial, LLC, member FINRA/SIPC.