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 suggests risks are rising.
- Our focus remains on investing in resilient, high-quality portfolios that can 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. On the back of continued strong earnings growth, the technology sectors’ share of the index has reached record levels, reflecting the increasing dependence of the equity markets and the economy 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 coupled with exposure to rising industrial and precious metals.
The combination of US fiscal concerns, questions of Federal Reserve independence, and central bank buying continues to support the price of gold. 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).
Valuations, AI, and Policy Uncertainty
Looking forward, we would highlight 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 in light of the government shutdown and broader policy uncertainty?
Simply stated, 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. In such an environment, even modest disappointments, whether in corporate earnings, economic data, or policy execution, can lead to outsized negative market reactions. History reminds us 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. While we are strong believers in the impact AI will have on the economy broadly, and our industry specifically, we remain mindful of the impact elevated valuations, and unbounded optimism, have historically had on long term returns. While we don’t subscribe to the views suggesting a repeat of the late ‘90’s technology bubble, we do see certain patterns repeating. The circular financing dynamic emerging in the AI sector, where chipmakers are funding customers who, in turn, use those funds to purchase more chips echoes with the vendor financing extremes of that cycle. Our focus remains on companies with diversified revenue streams, strong fundamentals, and reasonable valuations that should be beneficiaries of increasing artificial intelligence adoption.
The ongoing U.S. government shutdown adds another layer of uncertainty to a year of policy volatility. With over 900,000 federal workers furloughed and no resolution in sight, the shutdown is on track to become one of the longest in U.S. history. Historically, shutdowns have been relatively short-lived and have had minimal impact on capital markets. However, an extended shutdown could potentially weigh on consumer confidence and delay federal spending, with potential downstream effects on GDP 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. The combination of strong capital spending coupled with continued strength from the consumer, particularly at the high end, has boosted earnings broadly. 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, this suggests a nuanced but resilient 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
As we enter the final stretch of 2025, we remain focused on what we can control: maintaining discipline, investing in quality and managing risk.
As always, we appreciate and highly value the trust you have placed in us.
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.
