Materials, Momentum, and Monetary Policy: Q3’s Winning Combination
The third quarter of 2025 marked a decisive turn toward optimism as markets built upon the stability achieved in Q2. With the 90-day tariff pause from “Liberation Day” providing breathing room for negotiations, investors found their footing amid a backdrop of constructive policy developments and encouraging economic data. The quarter’s performance provided evidence that the worst of the policy uncertainty may be behind us.
Canadian markets delivered strong performance across the board, with particular strength in areas that had been overshadowed during earlier quarters. The S&P/TSX Composite Index advanced 11.79%, while small-cap companies truly shone with the TSX Small Cap Index surging 20.3%. This outperformance reflected renewed investor appetite for domestically-focused companies as well as a resurgence in resource-based sectors. Mining and energy companies benefited from improved commodity pricing and clearer regulatory frameworks, while smaller Canadian firms captured attention as attractive value plays in a gradually improving economic environment.
The Bank of Canada’s decision to cut its overnight rate by 25 basis points to 2.50% in mid-September provided additional tailwinds for rate-sensitive sectors. Governor Macklem cited moderating inflation pressures and concerns about economic momentum as key factors in the decision. The rate cut, which came earlier than many expected, helped support financial sector margins while providing relief to heavily indebted consumers and businesses. Real estate and utilities sectors responded positively, though the central bank maintained its cautious tone regarding future policy moves.
U.S. markets continued their upward trajectory, with the S&P 500 gaining 7.78% for the quarter. Technology companies once again led the charge, with artificial intelligence and semiconductor names posting outsized gains as enterprise adoption accelerated and regulatory concerns eased. The “Magnificent Seven” technology stocks contributed disproportionately to market returns, although, unlike in previous quarters, we began to see more meaningful participation from other sectors, including healthcare and consumer discretionary. The S&P 600 Small Cap Index advanced a more modest 8.55%, continuing to lag its large-cap counterparts.
The Federal Reserve’s 25-basis-point rate cut in September, bringing the benchmark rate to 4.25%, signalled a measured shift toward accommodation. Chair Powell emphasized that the move was “recalibrated” rather than reactive, designed to support continued economic expansion while inflation showed clear signs of moderating toward the 2% target. The decision was well-received by markets, though Fed officials maintained their data-dependent approach and cautioned against expectations of aggressive easing.
Perhaps most encouraging was the broadening of market leadership beyond the narrow technology focus that had dominated much of the year. Energy infrastructure, healthcare innovation, and even selective industrial names found favour with investors. This rotation suggested growing confidence in the durability of the economic expansion and a willingness to take on more cyclical exposure.
Looking ahead, the convergence of supportive monetary policy, clearer trade relations, and improving corporate fundamentals has created a more constructive backdrop for markets. While geopolitical tensions and the ongoing evolution of AI regulation remain wildcards, the quarter’s performance demonstrated markets’ resilience and adaptability.
As we enter the final quarter of 2025, our focus remains on maintaining disciplined portfolio construction while positioning for continued economic expansion. The broadening of market participation and the normalization of policy settings provide a more stable foundation for investment decisions. While vigilance remains essential in an ever-changing landscape, the third quarter’s developments have reinforced our confidence in a measured, diversified approach to navigating the opportunities ahead. In an environment where patience and strategic positioning continue to be rewarded, we remain committed to helping you capitalize on the evolving market dynamics while managing the risks that inevitably accompany periods of transition.
Written By: Alexander McCallum
