U.S. equity markets seemed to have forgotten about the historical context that September has brought for investors.
Historically, September has been the only month in which the S&P 500 index posts a negative average return. This September stood out for both its performance and stability. The S&P 500 index gained 3.7%, its strongest September return since 2009. Daily volatility was remarkably subdued, with no single trading day seeing a move greater than 1% in either direction – an occurrence seen only twice before since 1990 (September 1995 and September 2018). Notably, the 2018 instance preceded both a sharp market downturn and a government shutdown. The most recent U.S. government shutdown began just after midnight on October 1, 2025, following Congress’s failure to pass a funding bill. The previous shutdown lasted from December 22, 2018 to January 25, 2019. Interestingly, during that period, the S&P 500 index advanced 10.3%, but had declined 17.1% in the lead-up from October 1st through December 21st. Despite the uncertainty surrounding the current shutdown, the market posted an 8.1% gain in the third quarter. With the S&P 500 Index up 14.8% year-to-date, following annual returns of 25.0% and 25.3% in the past two years—it remains to be seen whether this rally can persist.
September marked the fifth consecutive monthly gain for the S&P 500. Key contributors included investor optimism following the Federal Reserve’s 25 basis point rate cut and expectations for two additional cuts before year-end. A surge in artificial intelligence-related stocks also boosted mega-cap technology companies, fueling market strength. The prospect of lower interest rates also buoyed small-cap stocks. The Russell 2000 index rose 3.1% in September and 12.4% during Q3. The 4.3% performance spread between the Russell 2000 and S&P 500 indices in Q3 2025 is the largest in favor of small-cap stocks since the first quarter of 2021.
International equities (MSCI ACWI Ex-US) also had a strong month, returning over 3.6% for September, bringing the year-to-date returns to over 26% for 2025. Emerging Markets (MSCI Emerging Markets) had a very impressive month, returning almost 6.5% for the month of September and up over 26% for the year. Chinese equities (MSCI China Index) continue to push EM to new highs for the year returning almost 10% for the month of September, and over 40% for 2025. In asset allocation, every dog has its day. Given the surge in September to all-time highs, at this pace, international equities could get into of the best years ever by year end. Over the last nearly 40 years, this would already be a top 5 annual return with 3 of the other top 4 being early cycle recoveries out of bear markets or corrections.
As stocks continued to advance in September, bonds also participated in strength of performance. The 10-year Treasury yield remained rangebound. After finishing August at 4.23%, the 10-year Treasury yield finished the month of September at 4.16%. Meanwhile, the Bloomberg U.S. Aggregate Bond Index gained 1.1% for the month and is up over 6.0% year-to-date. Municipal bonds also had a relatively strong performance for the asset class, outperforming their taxable counterparts. Despite yields falling for the month, income levels are still attractive for both taxable and tax-exempt fixed income. Given the starting yield of 4.44% on the U.S. Aggregate Bond index, the 10 yr. Treasury yield would need to rise over 5.00% over a 12-month basis to see a negative total return (holding bond spreads constant).
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