Yanni Angelakos, Head of Investment Insights, Nasdaq Capital Access Platforms
Key Points:
- A “reasonable” bull market to date & historic moves across asset classes YTD
- Expectations for a solid Q3 earning season underpinning the bottom-up tailwinds for equities despite elevated valuations
- Historically, U.S. government shutdowns have had a minimal short-term impact on equity market performance
Summary
For all of the consternation over the Nasdaq-100® Index (NDX®) and the S&P 500 Index continuing to set new all-time highs and performance being stretched, the reality is that this three year old bull market is not out of the ordinary compared with the 15 others we analyzed since the end of World War II. Are there pockets of froth resurfacing in financial markets? Likely. Is it more challenging for investors with U.S. equities in the 98th percentile of forward price-to-earnings rankings relative to 20-year history? Yes. Do bull markets end solely because of their duration? No.
As we have consistently discussed, we should focus on the macro and micro fundamental drivers for equities—and these largely remain in place heading into Q3 earnings season. Even if a complement to an investment process, in momentum-driven markets such as these, it is also useful to be mindful of the technicals as laid out by our good friends at Nasdaq Dorsey Wright in their latest quarterly Weight of the Evidence report. Given the well-known concentration within U.S. equity markets, it remains paramount for investors to continue to look for diversifying opportunities across asset classes, themes, and regions.
Biweekly Chart in Focus: Putting the Current Bull Market Into Historical Context
Source: FactSet
Details
“Bull Markets Don’t Die of Old Age; They’re Killed by the Fed”
It is worth keeping this classic market adage in mind when looking at the chart above. While it has been a powerful bull market since its start almost exactly three years ago, up by nearly 90%, it is not egregious in terms of price return or duration relative to history. With the Federal Reserve commencing its rate cutting cycle into a broadly resilient economy, a solid earnings backdrop, and the tailwinds from the AI theme, investors have continued to push equities to new highs.
While there are signs of pockets of excess in the markets (e.g., return of SPACs, episodes of meme stock euphoria, relatively elevated U.S. valuations—more on this further below) it is important for investors to remain focused on their respective investment processes to manage portfolio weights and price targets, and to identify new opportunities. The interesting aspect of 2025 for investors managing broad portfolios is the performance outside of U.S. equities. Figure 2 shows a sampling of YTD returns through the first three quarters across select asset classes globally. Although U.S. equities have had very strong returns, they are actually in the middle of the pack as the opportunity set has expanded across asset classes, themes, and regions.
Figure 2: Strong YTD for U.S. Equities, Yet Middle of the Pack Across Asset Class Returns
Source: Bloomberg. Notes: as of October 3, 2025
It is informative for investors to put price returns into historical context—some observations regarding Figure 2:
- The trade-weighted USD index had its weakest YTD return through three quarters since 1986 in the aftermath of the Plaza Accord in 1985 and the coordinated weakening of the USD.
- Benefiting from the USD weakness and serving as a hedge against inflation and geopolitical concerns, gold has risen by 48%—its strongest YTD return through three quarters since the hyper-inflation era of 1979.
- EM equities, another weak USD beneficiary, had their best YTD return through three quarters since 2017.
- Yet another asset benefitting from the USD weakness is Bitcoin which is higher by around 30% YTD. This has propelled the iShares Bitcoin Trust ETF (IBIT) to amass over $96 billion in assets. At this rate, per Bloomberg, it would reach $100 billion in assets about five times faster than any other ETF in history (Vanguard S&P 500 ETF (VOO) was the fastest), despite being less than two years old.
Figure 3 breaks down YTD returns a bit deeper by focusing on specific Nasdaq equity indexes. Here, too, we see an interesting mix across asset classes, regions, and themes.
Figure 3: Nasdaq Equity Indexes Illustrating the YTD Themes
Source: Nasdaq Index Research. Notes: as of September 30, 2025
Unsurprisingly, the AI beneficiaries of large cap tech and communication services have led the S&P 500 sector returns year-to-date (Figure 4). The technology sector also benefits from a weaker USD as it derives over 50% of its revenues from international markets (per FactSet). The key for investors is whether this bull market’s leadership can broaden on a sustainable basis. The AI secular theme will likely continue to determine the directionality of the markets at the index level given the concentration of the mega-cap tech names. However, there is scope for further participation from other segments of the market. Some non-tech sector observations regarding YTD returns in Figure 4:
- Industrials: expected to benefit from the administration’s domestic infrastructure and manufacturing onshoring agenda, defense spending, and AI infrastructure demand.
- Utilities: benefiting from the power required for the AI ecosystem and could further benefit from U.S. domestic energy policies. As we’ve noted previously, the AI hyperscalers of Alphabet (Google), Amazon, Meta, and Microsoft are slated to have combined capex of approximately $400 billion in 2026—to put that into perspective, that is equivalent to around 1.4% of U.S. nominal GDP.
- Financials: although underperforming the S&P 500 YTD, this sector had outperformed for most of this year on the prospects of a rebound in lending activity against the backdrop of a resilient U.S. economy, a steeper yield curve helping banks, deregulation, and the scope for a pick-up in M&A activity.
Figure 4: S&P 500 Sector Returns YTD
Source: Bloomberg. Notes: as of October 3, 2025
Q3 Earnings as the Next Catalyst
Both the markets and the FOMC are penciling in two more rate cuts in 2025. But the debate is about the 2026 trajectory with the markets pricing in two to three rate cuts while the Fed is forecasting just one. In the very near-term, appreciating the Fed meeting on October 29th, the markets will turn to Q3 earnings season which unofficially kicks off on October 14th when the large financials begin reporting.
Nasdaq-100 EPS is forecast to grow by 12.3% year-over-year, which would make it the 10th straight quarter of double digit EPS growth (per Nasdaq Index Research). Although for the first time in a year that S&P 500 EPS is slated not to grow by at least 10%, forecasts are calling for a healthy 8% growth rate per FactSet. Figure 5 shows Q3 S&P 500 sector earnings growth estimates, led by technology but also utilities and materials.
Figure 5: Q3 2025 S&P 500 Sector Earnings Growth Estimates (YoY%)
Source: FactSet
Current 2026 estimates show a healthy broadening of EPS growth (Figure 6) which will be key for more sectors to contribute to overall index returns (Figure 7).
Figure 6: A Broadening of S&P 500 Sector EPS Growth Expected in 2026
Source: FactSet
Figure 7: S&P 500 Sector and Nasdaq-100 Returns During the Current Bull Market
Source: Bloomberg. Notes: as of October 3, 2025. S&P 500 & sector returns from 10/12/22. *Nasdaq-100 returns from 12/28/22.
Given the heavy market cap concentration of the Mag 7 in the S&P 500—currently around 35%—the broadening of EPS growth amongst the other 493 stocks (Figure 8) can provide an opportunity for investors outside of the mega cap tech space where valuations are relatively more favorable (Figure 9). The AI secular theme and the high-quality nature of mega cap tech will remain a strong tailwind for this space and their earnings outlook. However, as the repeatability of such strong EPS growth rates becomes more challenging, investors can also look to other sectors and further down market cap for opportunities—Figure 10 shows the ramp up in forecasted EPS growth for small caps in 2026.
Figure 8: S&P 493 Set to Deliver Double-Digit EPS Growth in 2026
Source: Goldman Sachs
Figure 9: Forward P/Es for Mag 7 and Remaining 493
Source: Goldman Sachs
Figure 10: Small Cap Earnings Growth Slated to Expand Amidst Accommodative Financial Conditions and a Resilient Economy
Source: Nasdaq Economic Research
U.S. Government Shutdowns Have Historically Had a Minimal Near-Term Impact on Equities
We’d be remiss if we didn’t include one chart which speaks to the current U.S. government shutdown. Looking through the cacophony of the headlines, Figure 11 speaks to concerns regarding the shutdown: it tends to be a benign market reaction in the short-term. Additionally, see here for a Nasdaq FAQ regarding the impact of a government shutdown on companies seeking to list on Nasdaq and possibly companies already listed on Nasdaq. Although this situation certainly does not help with the acrimony of the political backdrop in the U.S., it is difficult for investors to have an edge here—that is why we focus on the fundamentals.
Figure 11: Benign Equity Market Reactions During Prior U.S. Government Shutdowns
Source: American Century Funds
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