
Birch Hill Investment Advisors LLC
One International Place, Suite 770 | Boston, MA 02110
Phone: 617-502-8300 | Fax: 617-502-8310
During the third quarter of 2025, US equity markets maintained their upward momentum despite volatility. The S&P 500 reached new highs, with a year-to-date return of over 14% as of September 30. This resilience is largely due to the easing of geopolitical tensions and economic concerns related to new tariffs. Solid corporate earnings growth has also helped. Another key driver has been the Federal Reserve’s shift to an accommodative monetary policy.
After peaking in late February, the S&P 500 Index fell sharply, declining -18.9% into early April as proposed tariffs on key trading partners fueled uncertainty and raised recession fears. However, a 90-day pause on the most severe tariffs, along with a preliminary agreement with China, sparked a sharp rebound in equities through mid-June. Momentum faded again toward quarter-end as geopolitical tensions flared following US and Israeli attacks on Iranian nuclear facilities. Despite the turbulence, the S&P 500 Index posted returns of +10.9% for the second quarter and +6.2% year-to-date.
In the first quarter of 2025, fluctuating policies on trade and tariffs increased economic uncertainty and market volatility. US equities retreated, with the S&P 500 Index posting a return of -4.3%. Investors shifted their focus toward defensive sectors. Healthcare, consumer staples, and utilities outperformed while cyclical sectors like consumer discretionary and technology lagged. Likewise, small-cap stocks struggled, as reflected in the Russell 2000 Index’s -9.5% drop.
In 2024, US equities delivered very strong gains, with the S&P 500 Index returning +25.0%. Technology stocks were a significant driver of this performance, led by the “Magnificent 7” – Apple, Amazon, Alphabet, Meta Platforms, Microsoft, Nvidia, and Tesla. A JP Morgan analysis notes these companies collectively gained +48%, and contributed 55% of the S&P 500 Index’s price return. Other broad market indices produced lower but still strong results, with the S&P 500 Equal Weighted Index and the Dow Jones Industrial Average returning +13.0% and +15.0%, respectively. Smaller and mid-capitalization equities also had solid returns for the year (as seen in the market indicators box to the right).
US stocks pushed higher in the third quarter. Returns were led by interest-rate-sensitive sectors such as utilities, real estate, financials and consumer staples on expectations of lower interest rates. Technology stocks, which powered most of the market gains earlier this year, lagged. All US large capitalization indices have had strong year-to-date returns through September. The S&P 500 Index returned +22.1% over the period, still outperforming the S&P 500 Equal Weight Index (+15.2%) and the Dow Jones Industrial Average (+13.9%). However, the latter two indices narrowed some of their underperformance in the third quarter.
US stocks, as represented by the Standard & Poor’s 500 Index, declined in April before resuming a gradual upward trend in May. For the first six months of 2024, the S&P 500 returned +15.3% but most S&P stocks didn’t fare as well. A handful of very large technology companies dominate the capitalization-weighted S&P 500, so their returns skew the index’s results. If each of the companies in the index is given equal weight, the index returned +5.1% during the six-month period. This wide gap in returns has persisted for much of the last two years, driven largely by enthusiasm about artificial intelligence. This reminds us of how past innovations have ignited unsustainable surges in narrow groups of stocks.
Upward momentum continued in the US and other markets, such as Japan, during the first quarter of 2024. The market capitalization-weighted S&P 500 Index returned a solid +10.6%, aided partly by continued strong performance by the Magnificent Seven stocks (Apple, Microsoft, Google parent Alphabet, Amazon, Nvidia, Facebook parent Meta Platforms and Tesla), which returned +17.1% on an equal-weighted basis. The equal-weighted S&P 500 Index’s returns were positive (+7.9%), but it still underperformed its capitalization weighted counterpart, reflecting the disproportionate influence of the megacap Magnificent Seven. The Dow Jones Industrial Average returned +6.1%. Smaller capitalization stocks continued to underperform with more modest returns of +5.2%.
US stocks lost ground from mid-2023 through the end of October before staging a powerful move higher. Overall, the year produced strong returns that essentially wiped out the losses of 2022. Until October, the market was driven by a handful of very large technology companies. However, in the last two months of 2023, stock market performance broadened—a healthy sign. The capitalization-weighted S&P 500 Index returned +26.3% in 2023, which was notably higher than most other equity indexes, due to the dominance of several larger stocks. China’s economic, political, and social stresses led to losses in Chinese equities last year.