Third Quarter 2025 Equity Market Observations:
Rotation, Realignment, and Restructuring
Executive Summary
Equity markets in Q3 2025 shifted meaningfully as U.S. leadership expanded beyond mega-cap growth into small-cap and value stocks, broadening market breadth. Artificial intelligence (AI) remained the central growth theme but with greater selectivity, as leadership rotated within the Magnificent Seven and AI adoption spread across sectors. Rising idiosyncratic risk highlighted the importance of company fundamentals, with earnings surprises driving sharp performance differences. Elevated valuations remain a concern, but stronger corporate balance sheets, resilient earnings, and fiscal support suggest that future gains may be earnings-driven rather than multiple-dependent.
For investors, this environment highlights the potential value of diversification and adaptable, systematic approaches.
Rotation, Realignment, and Restructuring
Equity markets in Q3 2025 were defined by shifting leadership, growth realignment, and structural transformations. After a period of narrow market breadth dominated by mega-cap growth stocks, U.S. equities experienced rotation into small stocks, realignment in growth leadership, and geopolitical restructuring. These dynamics broadened opportunities across stocks, sectors, and styles – but posed challenges for systematic investment strategies. This commentary elaborates on these themes and offers insights into the implications for investors.
Equity Markets: What Happened in Q3?
Rotation of Equity Leadership
U.S. equities experienced a notable rotation during Q3 2025, a pattern not observed in non-U.S. developed markets. Stocks that had previously delivered strong trailing performance faltered, while value and small-cap stocks gained ground, signaling a broadening of market leadership (See figure 1). This rotation helped relieve the extreme concentration that had characterized much of the first half of the year.
The implications are twofold. First, a broader set of stocks contributed to performance, giving diversified investors more avenues for capturing returns. Second, the rotation into value and small caps highlighted investor sensitivity to stretched valuations in mega-cap leaders.
For Intech, this environment could be constructive if it persists because broader market participation may create more opportunities for systematic rebalancing and factor diversification by reducing reliance on a narrow group of large stocks. However, abrupt leadership rotations can also present risks, particularly if they favor lower-quality stocks with weaker fundamentals.
Figure 1:
Performance in Q3 2025 vs. First Half 2025
Source: Intech. On value and momentum factors: The universe is defined by the S&P 500 Index at the start of the period. The securities are sorted by the factor and split into five equal-weighted quintiles. We are showing the return of the highest quintile over the period.
Artificial Intelligence Realignment
The transformative impact of artificial intelligence (AI) continued to dominate global equity markets in Q3 2025, with AI-driven growth fueling both opportunity and volatility. The AI ecosystem is expanding beyond traditional tech giants, and investors are diversifying into companies that either build AI infrastructure (e.g., semiconductor manufacturers, cloud computing providers) or leverage AI for operational efficiency (e.g., healthcare, logistics, and retail) – in some cases regardless of fundamentals .
This diversification is driven by the recognition that while AI builders like NVIDIA or Microsoft have led market gains, the next phase of growth may come from AI users capitalizing on cost-effective adoption. For instance, firms in healthcare are using AI to streamline diagnostics, while logistics companies are optimizing supply chains, creating new revenue streams.
At the same time, the Magnificent Seven underwent a sharp internal rotation.1 Tesla, Alphabet, and Apple, which had lagged earlier in the year, delivered strong gains in Q3. In contrast, prior leaders such as Microsoft and Meta underperformed, highlighting investors’ growing selectivity within U.S. mega-cap growth (See figure 2).
The AI boom is not without challenges. Escalating capital expenditure, particularly for data centers and energy infrastructure, raises concerns about return on investment. The power demands of AI computing are driving investments in energy stocks, causing utilities and renewable energy firms to gain attention. Yet, high valuations in mega-cap tech stocks, coupled with regulatory scrutiny over data privacy and market dominance, could pose risks of corrections.
These rotations create both opportunity and risk for Intech. On the one hand, increased dispersion across growth stocks enhances the rebalancing premium. On the other, abrupt shifts, particularly those tied to policy moves or sentiment rather than fundamentals, can drive low-quality rallies that penalize diversified strategies focused on high-quality stock selection.
Figure 2:
Performance of the Magnificent Seven Stocks in Q3 2025 vs. First Half 2025
Source: FactSet. Magnificent Seven stocks: Microsoft, Apple, Amazon.com, NVIDIA, Alphabet (Class A and C), Tesla, Meta. This information has been provided for illustrative purposes only and should not be construed as an offer to sell, or the solicitation of an offer to buy, or a recommendation for any security. There is no assurance that any of the securities identified were or will prove to be profitable. The past performance of these securities is no guarantee of future results. The specific securities identified do not represent all of the securities purchased, sold, or recommended for advisory clients.
Restructuring Shapes Divergence
Geopolitical fragmentation and evolving tariff policy formed part of the backdrop to Q3 2025, but stock performance was driven mainly by earnings revisions, rate expectations, and ongoing AI investment. Companies continued to realign global trade, invest in automation, and respond to policy incentives around energy security and technology independence.
Even if not the primary catalysts, these dynamics influenced how investors allocated risk. Communication Services, Technology, and Consumer Discretionary led the S&P 500 Index and MSCI World Index, reflecting appetite for growth and risk exposure despite elevated valuations. Defensive sectors such as Consumer Staples and Health Care lagged as investors prioritized growth over stability (See figure 3).
Figure 3:
Q3 2025 Performance by Sector of the S&P 500 and MSCI World Indexes
Source: FactSet. Past performance is no guarantee of future results. An index is unmanaged, is not available for direct investment, and does not reflect the deduction of management fees or other expenses.
At the same time, the current environment shows higher stock-specific (idiosyncratic) risk. Leadership has become more selective within and across sectors, with individual company fundamentals and positioning driving outsized performance differences. Companies that miss earnings expectations can experience sharp price declines.
For example, Synopsys shares tumbled over 35% after disappointing guidance. Conversely, firms that exceed expectations and outline compelling growth paths can rally strongly, as seen in cases like Oracle’s AI-driven cloud optimism. This dispersion underscores the importance of understanding company-level exposures rather than relying solely on sector trends.
For Intech, periods of growth-led leadership can narrow diversification, but higher stock-specific risk, structural change, and trade realignment are increasing relative volatility. This creates opportunities for diversified, regularly rebalanced portfolios and systematic factor strategies – provided they adjust to returns increasingly driven by individual company fundamentals.
What’s Next? Intech’s Equity Outlook
Valuations remain front and center as investors look ahead. By most traditional measures, the S&P 500 Index trades at historically elevated levels, with several multiples sitting at or near record highs. That reality has led to concerns about mean reversion and the risk of a correction. Yet the structure of the index has changed meaningfully since prior cycles. Companies today carry lower debt burdens, rely less on floating-rate financing, and generate steadier earnings streams thanks to more asset-light and automated business models. These shifts suggest that investors may be willing to assign a higher premium to large-cap equities than in past decades.
At the same time, one of the past two decades’ most important margin drivers is fading. Companies once boosted profits through global cost arbitrage by moving production, labor, and supply chains to lower-cost regions to reduce expenses. That strategy proved highly effective but finite, and it carried growing geopolitical risk. Today, firms are shifting focus toward reshoring and efficiency-driven growth, relying more on automation, process improvements, and technology to sustain profitability.
While this transition may deliver more modest gains, it also points to durability and resilience. Meanwhile, higher interest rates, rather than weighing entirely on valuations, give the Fed room to ease further should growth falter.
Looking into 2026, the pathway for valuations could hinge more on earnings growth than on multiple contraction. Fiscal support remains expansionary, capex spending is broadening beyond technology, and the first Fed rate cut has already begun to support profit acceleration (aided by deregulation and favorable corporate taxes). If these trends continue, rising earnings and GDP could provide a healthier resolution to stretched valuations than price declines. However, outcomes remain uncertain, and risks of corrections persist.
For investors, our outlook considers both the risks of elevated starting valuations and the potential for an earnings-led cycle, underscoring the importance of disciplined diversification.
About Intech
Intech is a global quantitative asset manager that applies advanced mathematics and systematic portfolio rebalancing to harness a reliable source of excess returns and a key to risk control – stock price volatility. Intech applies its investment approach across five investment platforms which differ by risk-return objective: relative or absolute. Intech also integrates fundamental-based information to identify stocks with favorable underlying characteristics, complementing its volatility-based models that target stocks with attractive trading profit potential due to their volatility characteristics. These strategies only differ by the client’s desired benchmark and risk budget and include enhanced equity, active equity, defensive equity, alternative equity, and absolute return investment solutions within the U.S., global, and non-U.S. regions.
1. Magnificent Seven stocks: Microsoft, Apple, Amazon.com, NVIDIA, Alphabet (Class A and C), Tesla, Meta. This information has been provided for illustrative purposes only and should not be construed as an offer to sell, or the solicitation of an offer to buy, or a recommendation for any security. There is no assurance that any of the securities identified were or will prove to be profitable. The past performance of these securities is no guarantee of future results. The specific securities identified do not represent all of the securities purchased, sold, or recommended for advisory clients.
