Commentary from the Investment Committee of Coral Gables Trust
Q3 2025 – Balancing Opportunity and Vigilance
As we conclude the third quarter, the market narrative continues to evolve, weaving together threads of resilience with emerging signals of caution. Building on the first half tariff driven volatility and subsequent rebound, the third quarter has been shaped by a pivotal shift in Federal Reserve policy toward monetary easing, a softening labor market and broader market participation beyond the technology leaders. Despite persistent geopolitical uncertainties, robust corporate earnings and policy tailwinds from the One Big Beautiful Bill Act have fortified investor confidence. Markets ended the third quarter on a strong note, with the NASDAQ leading as the top performer, posting a gain of +11.43%, followed by the S&P 500 at +8.11% and the Dow Jones Industrial Average at +5.67%.
Although mega-cap technology stocks continue to garner investor enthusiasm, small-cap equities are capturing renewed investor attention. Small caps have reached a critical earnings inflection in 2025, emerging from a multi-quarter recession with year-over-year EPS growth turning positive. While their past rallies have often been uneven, a confluence of favorable factors suggests this upswing may have staying power. The chart below underscores the historical tendency of small-cap stocks to outperform large-caps following Federal Reserve rate cuts, based on data since 1990.
As we conclude the third quarter, the market narrative continues to evolve, weaving together threads of resilience with emerging signals of caution. Building on the first half tariff driven volatility and subsequent rebound, the third quarter has been shaped by a pivotal shift in Federal Reserve policy toward monetary easing, a softening labor market and broader market participation beyond the technology leaders. Despite persistent geopolitical uncertainties, robust corporate earnings and policy tailwinds from the One Big Beautiful Bill Act have fortified investor confidence. Markets ended the third quarter on a strong note, with the NASDAQ leading as the top performer, posting a gain of +11.43%, followed by the S&P 500 at +8.11% and the Dow Jones Industrial Average at +5.67%.
Although mega-cap technology stocks continue to garner investor enthusiasm, small-cap equities are capturing renewed investor attention. Small caps have reached a critical earnings inflection in 2025, emerging from a multi-quarter recession with year-over-year EPS growth turning positive. While their past rallies have often been uneven, a confluence of favorable factors suggests this upswing may have staying power. The chart below underscores the historical tendency of small-cap stocks to outperform large-caps following Federal Reserve rate cuts, based on data since 1990.
Source: Bloomberg.
Economic Developments: Softening, but Steady Foundation
For years, the U.S. labor market has been the envy of the world, consistently generating robust job growth. However, the recent employment report revealed a recalibration, with the U.S. adding approximately 911,000 fewer jobs than initially reported for the first half of 2025, reflecting a notable deceleration in hiring. Instead of the strong monthly job gains seen earlier in 2025, hiring has slowed with average payroll growth at 29,000, compared to 130,000 in the first half of the year. Beneath the surface is a deeper story of structural change, driven by technological disruption, demographic shifts, and policy headwinds that are reshaping the American workforce. Reduced labor supply from immigration restrictions, and persistent skills mismatches, traditional metrics may fail to capture the full picture. However, despite slower job growth, the foundation for economic stability remains intact.
The broader economic backdrop highlights this resilience, with U.S. third quarter growth estimated at be an annualized 3.90%, reflective of steady expansion. Furthermore, the U.S. consumer continues to be a cornerstone of this growth, with retail sales rising 5% year-over-year. Consumer spending, which accounts for nearly 70% of GDP, is expected to remain robust, fueled by sustained disposable income and wealth effect from rising equity markets.
Sources: Bureau of Economic Analysis, Payden Calculations.
The chart above illustrates the Real GDP growth breakdown by Real Private Domestic Final Purchases (PDFP), which includes personal consumption expenditures and private fixed investment. Despite the volatility in trade and inventories, PDFP grew at the same pace in the second quarter as it did in the first quarter, highlighting the resilience in consumer and investment spending. As such, this consumption-driven momentum is poised to support economic growth for the foreseeable future.
Federal Reserve: Pivot Toward Easing
The Federal Reserve’s long-awaited pivot toward monetary easing took center stage this quarter. At the September FOMC meeting the committee delivered its first rate cut of the year, lowering the federal funds rate by 25 basis points to a target of 4.00% to 4.25%. While inflation remains stubborn, Core PCE and headline CPI are below 3.00%, allowing policymakers to shift focus toward supporting the labor market. Furthermore, Chair Powell noted the committee is balancing its dual mandate but stressed there is no “risk free path” and emphasized the labor market weakness as the key driver of the rate cut. This policy shift signals a broader redirection from the inflation-centric focus of the past few years to a more nuanced emphasis on labor market dynamics.
The Federal Reserve’s outlook is further clarified by the dot plot, which shows a median projection of 3.75% for year-end 2025, indicating a consensus for two additional 25 basis point cuts from the current range. This projection aligns with market expectations for gradual easing. Projections for 2026 and 2027 cluster around 3.25%-3.50%, suggesting sustained easing, while the longer-run neutral rate stabilizes at 2.50%-3.00%.
Source: Bloomberg, FOMC DOT Plot as of 9/17/2025
Fixed Income Markets: Yield Curve Steepening
In the third quarter, fixed income markets demonstrated resilience, supported by elevated yields and central bank policy divergence. The Bloomberg Aggregate Bond index returned +2.03%, while foreign bonds underperformed with a return of -0.80%. Notably, domestic bonds remain ahead year-to-date by +2.87%, reflecting differences in monetary policy, currency movements, and broader economic conditions.
Within the fixed income landscape, sector performance has been mixed but generally positive. Agency mortgage-backed securities provided steady returns, while municipal bonds rebounded after mid-quarter outflows, suggesting signs of recovery. Investment grade corporate credit exhibited resilience and spread tightness as yields remaining attractive due to elevated interest rates and solid corporate fundamentals. High yield bonds continue to benefit from strong demand, with active issuance reflecting confidence in the broader market. Overall, spreads remain tight, and credit fundamentals remain resilient, supporting expectations for low default rates. Looking ahead, fixed income remains a defensive anchor for portfolios. Reasonable yields and a steepening yield curve provide both income and strategic positioning opportunities, while active management across sectors can help capture relative value as markets navigate through the remainder of 2025.
Beyond Borders: Opportunities in International Markets
The international equity market maintained steady performance despite global growth moderation. The MSCI EAFE index delivered +4.88% for the quarter but remains ahead of the S&P 500 by +10.97% for the year. European developed markets led the charge bolstered by the European Central Bank’s accommodative stance and strong earnings in financials and industrials. Japan’s Nikkei climbed +11.00%, propelled by corporate reforms, wage increases, and a weaker yen. Emerging markets also participated in the global rally with the MSCI EM index up +10.91%. China’s property sector struggles dampened gains, but India and select Latin American markets thrived on tech innovation and commodity strength. The chart below compares the cumulative return performance of the Morningstar Europe Index’s return in terms of U.S. Dollar’s and Euros from January to August 2025. It highlights the value of international stock inclusion for currency diversification and enhanced returns.
Source: Morningstar Direct. Net returns in Euro and USD.
Thoughts on Asset Allocation
Markets have maintained strong momentum in 2025, supported by robust earnings growth and the prospect of a more favorable interest rate environment. While we anticipate continued strength in equities, we encourage investors to review their portfolios to ensure balanced exposure across key opportunities, including international markets, small-cap equities and fundamentally valued companies. As stewards of our clients’ capital, we diversify beyond mega-cap technology to pursue more consistent long-term performance. The Investment Committee is actively discussing portfolio positioning for the upcoming year.
The Trust Investment Committee remains confident in our active managers, who have delivered strong performance across asset classes. Their disciplined approach that emphasizing company fundamentals, valuation rigor, and prudent risk management, has been instrumental in driving results. Below is a selection of our equity and fixed-income managers who have notably outperformed their mandates.
We look forward to speaking with each of you about our investment philosophy and strategies and your portfolio’s performance.
For additional information, please contact Mason Williams, Chief Investment Officer, at 786-497-1214, or Michael Unger, Vice President/Investment Officer, at 786-292-0310.
RESOURCES
Quarterly Report: Q3 2025
Q3 2025 – Balancing Opportunity and Vigilance
As we conclude the third quarter, the market narrative continues to evolve, weaving together threads of resilience with emerging signals of caution. Building on the first half tariff driven volatility and subsequent rebound, the third quarter has been shaped by a pivotal shift in Federal Reserve policy toward monetary easing, a softening labor market and broader market participation beyond the technology leaders. Despite persistent geopolitical uncertainties, robust corporate earnings and policy tailwinds from the One Big Beautiful Bill Act have fortified investor confidence. Markets ended the third quarter on a strong note, with the NASDAQ leading as the top performer, posting a gain of +11.43%, followed by the S&P 500 at +8.11% and the Dow Jones Industrial Average at +5.67%.
Although mega-cap technology stocks continue to garner investor enthusiasm, small-cap equities are capturing renewed investor attention. Small caps have reached a critical earnings inflection in 2025, emerging from a multi-quarter recession with year-over-year EPS growth turning positive. While their past rallies have often been uneven, a confluence of favorable factors suggests this upswing may have staying power. The chart below underscores the historical tendency of small-cap stocks to outperform large-caps following Federal Reserve rate cuts, based on data since 1990.
As we conclude the third quarter, the market narrative continues to evolve, weaving together threads of resilience with emerging signals of caution. Building on the first half tariff driven volatility and subsequent rebound, the third quarter has been shaped by a pivotal shift in Federal Reserve policy toward monetary easing, a softening labor market and broader market participation beyond the technology leaders. Despite persistent geopolitical uncertainties, robust corporate earnings and policy tailwinds from the One Big Beautiful Bill Act have fortified investor confidence. Markets ended the third quarter on a strong note, with the NASDAQ leading as the top performer, posting a gain of +11.43%, followed by the S&P 500 at +8.11% and the Dow Jones Industrial Average at +5.67%.
Although mega-cap technology stocks continue to garner investor enthusiasm, small-cap equities are capturing renewed investor attention. Small caps have reached a critical earnings inflection in 2025, emerging from a multi-quarter recession with year-over-year EPS growth turning positive. While their past rallies have often been uneven, a confluence of favorable factors suggests this upswing may have staying power. The chart below underscores the historical tendency of small-cap stocks to outperform large-caps following Federal Reserve rate cuts, based on data since 1990.
Source: Bloomberg.
Economic Developments: Softening, but Steady Foundation
For years, the U.S. labor market has been the envy of the world, consistently generating robust job growth. However, the recent employment report revealed a recalibration, with the U.S. adding approximately 911,000 fewer jobs than initially reported for the first half of 2025, reflecting a notable deceleration in hiring. Instead of the strong monthly job gains seen earlier in 2025, hiring has slowed with average payroll growth at 29,000, compared to 130,000 in the first half of the year. Beneath the surface is a deeper story of structural change, driven by technological disruption, demographic shifts, and policy headwinds that are reshaping the American workforce. Reduced labor supply from immigration restrictions, and persistent skills mismatches, traditional metrics may fail to capture the full picture. However, despite slower job growth, the foundation for economic stability remains intact.
The broader economic backdrop highlights this resilience, with U.S. third quarter growth estimated at be an annualized 3.90%, reflective of steady expansion. Furthermore, the U.S. consumer continues to be a cornerstone of this growth, with retail sales rising 5% year-over-year. Consumer spending, which accounts for nearly 70% of GDP, is expected to remain robust, fueled by sustained disposable income and wealth effect from rising equity markets.
Sources: Bureau of Economic Analysis, Payden Calculations.
The chart above illustrates the Real GDP growth breakdown by Real Private Domestic Final Purchases (PDFP), which includes personal consumption expenditures and private fixed investment. Despite the volatility in trade and inventories, PDFP grew at the same pace in the second quarter as it did in the first quarter, highlighting the resilience in consumer and investment spending. As such, this consumption-driven momentum is poised to support economic growth for the foreseeable future.
Federal Reserve: Pivot Toward Easing
The Federal Reserve’s long-awaited pivot toward monetary easing took center stage this quarter. At the September FOMC meeting the committee delivered its first rate cut of the year, lowering the federal funds rate by 25 basis points to a target of 4.00% to 4.25%. While inflation remains stubborn, Core PCE and headline CPI are below 3.00%, allowing policymakers to shift focus toward supporting the labor market. Furthermore, Chair Powell noted the committee is balancing its dual mandate but stressed there is no “risk free path” and emphasized the labor market weakness as the key driver of the rate cut. This policy shift signals a broader redirection from the inflation-centric focus of the past few years to a more nuanced emphasis on labor market dynamics.
The Federal Reserve’s outlook is further clarified by the dot plot, which shows a median projection of 3.75% for year-end 2025, indicating a consensus for two additional 25 basis point cuts from the current range. This projection aligns with market expectations for gradual easing. Projections for 2026 and 2027 cluster around 3.25%-3.50%, suggesting sustained easing, while the longer-run neutral rate stabilizes at 2.50%-3.00%.
Source: Bloomberg, FOMC DOT Plot as of 9/17/2025
Fixed Income Markets: Yield Curve Steepening
In the third quarter, fixed income markets demonstrated resilience, supported by elevated yields and central bank policy divergence. The Bloomberg Aggregate Bond index returned +2.03%, while foreign bonds underperformed with a return of -0.80%. Notably, domestic bonds remain ahead year-to-date by +2.87%, reflecting differences in monetary policy, currency movements, and broader economic conditions.
Within the fixed income landscape, sector performance has been mixed but generally positive. Agency mortgage-backed securities provided steady returns, while municipal bonds rebounded after mid-quarter outflows, suggesting signs of recovery. Investment grade corporate credit exhibited resilience and spread tightness as yields remaining attractive due to elevated interest rates and solid corporate fundamentals. High yield bonds continue to benefit from strong demand, with active issuance reflecting confidence in the broader market. Overall, spreads remain tight, and credit fundamentals remain resilient, supporting expectations for low default rates. Looking ahead, fixed income remains a defensive anchor for portfolios. Reasonable yields and a steepening yield curve provide both income and strategic positioning opportunities, while active management across sectors can help capture relative value as markets navigate through the remainder of 2025.
Beyond Borders: Opportunities in International Markets
The international equity market maintained steady performance despite global growth moderation. The MSCI EAFE index delivered +4.88% for the quarter but remains ahead of the S&P 500 by +10.97% for the year. European developed markets led the charge bolstered by the European Central Bank’s accommodative stance and strong earnings in financials and industrials. Japan’s Nikkei climbed +11.00%, propelled by corporate reforms, wage increases, and a weaker yen. Emerging markets also participated in the global rally with the MSCI EM index up +10.91%. China’s property sector struggles dampened gains, but India and select Latin American markets thrived on tech innovation and commodity strength. The chart below compares the cumulative return performance of the Morningstar Europe Index’s return in terms of U.S. Dollar’s and Euros from January to August 2025. It highlights the value of international stock inclusion for currency diversification and enhanced returns.
Source: Morningstar Direct. Net returns in Euro and USD.
Thoughts on Asset Allocation
Markets have maintained strong momentum in 2025, supported by robust earnings growth and the prospect of a more favorable interest rate environment. While we anticipate continued strength in equities, we encourage investors to review their portfolios to ensure balanced exposure across key opportunities, including international markets, small-cap equities and fundamentally valued companies. As stewards of our clients’ capital, we diversify beyond mega-cap technology to pursue more consistent long-term performance. The Investment Committee is actively discussing portfolio positioning for the upcoming year.
The Trust Investment Committee remains confident in our active managers, who have delivered strong performance across asset classes. Their disciplined approach that emphasizing company fundamentals, valuation rigor, and prudent risk management, has been instrumental in driving results. Below is a selection of our equity and fixed-income managers who have notably outperformed their mandates.
We look forward to speaking with each of you about our investment philosophy and strategies and your portfolio’s performance.
For additional information, please contact Mason Williams, Chief Investment Officer, at 786-497-1214, or Michael Unger, Vice President/Investment Officer, at 786-292-0310.
Index of Commentary
Q3 2025
Q2 2025
Q1 2025
Q4 2024
Q3 2024
Q2 2024
Q1 2024
For additional information, please contact:
Mason Williams
Managing Director
Chief Investment Officer
Michael J. Unger, CFP®
Vice President
Investment Officer