Executive Summary
- The third quarter of 2025 delivered strong absolute returns across major asset classes supported by resilient economic data, a measured Federal Reserve, and continued enthusiasm around artificial intelligence.
- Despite the market’s momentum, elevated valuations, increasing concentration in equity markets, and policy uncertainty suggest risks are rising.
- Our focus remains on building durable, high-quality portfolios designed to compound value across market cycles.
Market Recap: Broad-Based Strength with Familiar Leadership
The third quarter extended the rally that began in the spring, with U.S. large-cap equities leading the charge. The S&P 500’s 8.2% gain was driven largely by mega-cap technology stocks, where investor enthusiasm around AI continues to push valuations well above historical norms. While we have noted these elevated levels for several quarters, concentration has now reached record highs, reflecting both continued earnings strength and the market’s increasing dependence on the current AI-driven capital spending cycle.
International equities declined slightly during the quarter as the US dollar stabilized but remain up 26% year to date. Emerging markets maintained momentum through the third quarter, driven by strong gains in technology and exposure to rising industrial and precious metals.
For the quarter, gold prices increased from ~$3,300 per ounce to ~$3,900 per ounce (and have moved higher in the early weeks of the fourth quarter). The combination of US fiscal concerns, questions of Federal Reserve independence, and central bank buying continues to support the price of gold.
Valuations, AI, and Policy Uncertainty
We continue to monitor a few core questions that investors must answer:
- Are equity valuations sustainable?
- Is AI a durable growth engine or a speculative bubble?
- How should we think about portfolio positioning considering the government shutdown and broader policy uncertainty?
Valuations across many sectors remain elevated. Current levels suggest a market priced for near-perfection, with expectations for sustained economic growth, continued earnings strength, and a supportive Federal Reserve. Even modest disappointments, whether in corporate earnings, economic data, or policy execution, can lead to outsized negative market reactions. History reminds us, and recent months have confirmed what we have long observed, that when optimism is fully reflected in asset prices, the margin for error narrows considerably.
The strength of earnings, particularly in the technology sector, continues to support an elevated level of optimism with the outlook for artificial intelligence bordering on euphoria. We are strong believers in the impact AI will have on the economy broadly and our industry specifically, but remain mindful of the risks that excessive valuations and unbounded optimism have historically posed to long-term returns. While we do not expect a repeat of the late 1990s technology bubble, certain familiar patterns are emerging. One example is the circular financing dynamic developing in the AI sector, where chipmakers fund customers who, in turn, use those funds to purchase more chips, echoing the vendor-financing extremes of that earlier era. Our focus remains on companies with diversified revenue streams, strong fundamentals, and reasonable valuations that should benefit from broader AI adoption.
The U.S. government shutdown adds another layer of uncertainty to an already volatile policy backdrop. More than 900,000 federal workers are furloughed with no resolution in sight, putting this episode on track to become one of the longest in U.S. history. Shutdowns are typically short-lived and have had limited market impact, but an extended disruption could erode consumer confidence, delay federal spending, and dampen GDP growth and market sentiment.
Looking Ahead: Resilience Through Diversification
Revised data confirmed that the U.S. economy grew at a 3.8% annualized rate in the third quarter, underscoring its resilience despite tighter financial conditions and policy gridlock. Strong capital spending and continued consumer strength, particularly at the high end, have broadly boosted earnings. However, the landscape is not without challenges. Policy changes, including new tariffs and cuts to Medicaid, pose headwinds, particularly for the bottom 60% of earners. Signs of potential weakness in labor markets pose additional risk, countered by strong balance sheets across higher income groups. All in, while nuanced, this results in a net robust picture for the US consumer, barring recession.
In this environment, diversification remains a cornerstone of our investment approach. Our portfolios are constructed to withstand a range of economic scenarios, balancing exposure across sectors, geographies, and asset classes. This discipline has helped preserve capital during periods of volatility and positioned portfolios to participate in recoveries.
Closing Thoughts
We enter the final stretch of 2025 focused on what we can control: maintaining discipline, investing in quality, and managing risk.
Market momentum and policy uncertainty will continue to test investor discipline, yet periods like this often reward those who stay committed to sound fundamentals and long-term thinking. Our team continues to emphasize diversification, balance, and thoughtful positioning across asset classes to protect capital and capture opportunity when it arises.
We appreciate the continued trust you place in us and remain committed to navigating what comes next with diligence and perspective.
Disclosure
Past performance is no guarantee of future results, and the opinions presented cannot be viewed as an indicator of future performance. These materials are provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities.
