2025 Q4 Update

It always feels like the 4^th quarter sneaks up on us. Wham: 9 months have passed. Yet here we are again, looking to close out another wild year. Despite softening economic data, the markets have chugged higher. Helped undoubtedly by loose financial conditions across the globe and fundamentals appearing to have been left “off the roster” of decision-making inputs. Add to this a remarkable shift in many investors’ appetite for risk and we have all the makings of a ______________.  The answer for the blank could be one of many things and we’ll know in time. We certainly have our hunches…

Through the first 9 months, across assets and geographies, investors of most types have chased momentum. This has come just months after markets initially collapsed at the start of Donald Trump’s April tariff announcement. Flash forward and the S&P 500 index had its best September in 15 years, fueled by optimism over artificial intelligence and lower interest rates. Treasuries gained for the third consecutive quarter as the market has further priced in near term interest rate cuts by the Federal Reserve.

·      Global chipmakers saw their market value soar as investors rushed to get exposure to artificial intelligence, the latest sign of a frenetic bull run that is pushing tech stocks to all-time highs. The recent rally has caused a spike in chipmakers’ valuations: Bloomberg’s Asia chip gauge is trading at around 19x forward earnings estimates while the SOX Semiconductor Index is now trading at 27x earnings, approaching record highs from 2024. The trend is so strong in equities that it’s starting to defy the efforts of money managers to keep up: Data from Jefferies Financial Group Inc. shows the proportion of long-only actively managed funds beating benchmarks has fallen to 22% in 2025, poised for the worst showing on record.

·      The Federal Reserve cut its key interest rate in September for the first time this year. Markets are currently pricing in somewhere between one and two additional 0.25% reductions in the Fed’s benchmark rate between now and year end. The good thing about the current labor market is that tepid hiring hasn’t yet translated to more firing. The national unemployment rate was expected to hold at 4.3% last month, an increase from the start of the year but still historically low. Political pressure from the administration and a softening labor market have both justified lower borrowing costs. Yet inflation has remained well above levels historically viewed as acceptable by the U.S. central bank.

·      A bevy of factors weighed on the US Dollar earlier this year, including President Donald Trump’s across-the-board tariff hikes, his relentless pressure on the Federal Reserve to ease interest rates and deficit-raising elements of his signature tax bill, which passed on July 4, just days after the second quarter ended. This has created a tailwind to various global assets in particular equities listed outside the United States.

·      Gold has soared more than 45% this year in a rally that’s seen successive all-time highs, with prices now on track for the biggest annual gain since 1979. The precious metal has been supported by central-bank buying and rising holdings in gold-backed exchange-traded funds, as the Fed resumed interest-rate cuts. Outside of the mostly red-hot metals complex; Oil has failed to gain any upward momentum despite Chinese stockpiling as the organization of petroleum exporting counties and others (OPEC+) have been increasing global supply.

That’s where we’ve been, now, here are some high-level notes that apply to our current market outlook as we enter the final quarter of what has been a volatile year so far.

·      The surge in company valuations worldwide has worried some market observers who argue that, while datacenter spending and construction is accelerating, AI services have yet to go mainstream and earn the revenues needed to justify the near-unprecedented rally. It remains uncertain if there will be eventual demand for all the computing power now under construction. Any setback in earnings from mega-tech firms may spark a selloff given their stretched valuations, as seen during the meltdown in April. Staying grounded from the euphoria, we are vigilant to any signs that the AI capex cycle is coming to an end. We are focused on what we see as relative value opportunities across global markets which includes U.S. smaller cap companies. The small cap Russell 2K just made new all-time highs for the first time since late 2021.

·      The so-called “curve steepener” has been the dominant theme in the U.S. interest rate market as expectations for renewed Fed rate cuts sent policy-sensitive short-term yields plunging, while the long end remained more elevated in part on fiscal and political concerns. The dynamics also helped the bond market turn in its best year-to-date performance in five years through September. We remain cautious on longer duration debt as any of a number of catalysts could quickly once again inject volatility into the long end of the yield curve. We remain focused on short to mid duration, high credit quality fixed income as we believe that corporate yields do not compensate for the risk that could come with a slowdown in the economy.

While we’re always looking for opportunities, we will not take part in the current trend of “buying everything in sight,” no matter how loud the crowd may cheer. Our process remains grounded in data, with a singular goal: delivering attractive, risk-adjusted returns for our clients. Although markets could continue to rise, several indicators are flashing early warning signs. History reminds us that markets don’t move in one direction forever—drawdowns are a natural part of investing, and this time is no different. We continue to encourage clients to stay anchored to their financial plans and mindful of the risks embedded in their portfolios. The market “sun” may be shining brightly now—and it may shine for a while longer—but it won’t shine forever.