11 minute read
High-altitude climbers know the paradox of success: the closer you get to the summit, the more careful each step must be. The air thins, movements slow, and discipline replaces adrenaline. Equity markets in 2025 feel much the same – ascendant, resilient, yet increasingly demanding of stamina and prudence. Record highs invite celebration, but also respect for the terrain. The Fed’s renewed easing offers fresh oxygen, even as valuations remind us that balance matters most above the clouds. The view is spectacular, but this is the stage of the climb when experience matters most.
It has been a banner year so far for global equity markets in 2025. Equity markets sit near record levels supported by corporate earnings and consumer spending, while key economic indicators suggest the economy is slowing. The Federal Reserve’s September decision to restart rate cuts adds a supportive backdrop for equity markets, while elevated valuations serve as a reminder that risks remain, particularly if economic and corporate earnings growth slows more than expected. Tariffs seem largely behind us but with midterm elections around the corner, debates over fiscal and monetary policies will likely intensify, testing investors’ discipline and conviction. Our current view is that the economic backdrop is positive for global equities.
In the third quarter, the S&P 500 gained 8.12%, lifting its year-to-date return over 14.83%. Corporate earnings resilience continues to drive the index higher. The tech-heavy Nasdaq posted a 11.41% return for the quarter, lifted by continued optimism around AI-driven productivity and capital investment in cloud infrastructure. Large-cap growth stocks (Russell 1000 Growth) were up 10.51%, nearly doubling the 5.33% gain of “value stocks” (Russell 1000 Value). Small-cap stocks (Russell 2000) had a strong quarter (up 12.39%), outperforming large-cap stocks amid hopes that lower interest rates would benefit the asset class. Internationally developed market stocks (MSCI EAFE) gained 4.77% in the quarter, lagging the S&P 500. Emerging markets rose 10.64% (MSCI EM) in the quarter, largely because global financial conditions are easing, valuations are relatively attractive, and there is AI optimism in key markets, especially China. Year to date, developed international and emerging markets stocks are still outperforming domestic stocks, thanks to a roughly 10% decline in the US dollar.
In the U.S. fixed income markets, after holding rates steady for the first eight months of the year, the Federal Reserve resumed rate cuts in September. The Fed stated the cut was “risk management,” taking a more cautious stance in response to slowing growth and softening labor conditions. Yet the path forward remains far from certain. While the Fed emphasizes data dependency and balancing the risks of inflation versus economic growth, markets are pricing in a more aggressive easing trajectory. Against this backdrop, yields moved unevenly across the curve. Credit markets remain strong, with spreads near multi-decade tights, and fiscal pressures continue to influence long-term rates. Investment-grade core bonds ended the quarter up 2.03% (Bloomberg US Aggregate Bond), while high-yield bonds were up 2.41% (ICE BofA US High Yield).
Investment Outlook and Portfolio Positioning
Markets are always reacting to news, but today it feels even more pronounced. Every data release, policy comment, or geopolitical headline seems to carry an outsized influence on investor sentiment. This heightened sensitivity seems justified, as investors try to determine the path forward. Will the economy continue to slow under the weight of tighter financial conditions, or can momentum continue?
Against this backdrop, there are reasons for optimism. One important tailwind comes from monetary policy. The Federal Reserve’s recent rate cut provides a constructive backdrop for both equities and bonds. Lower rates reduce borrowing costs for consumers and corporations, potentially fueling further investment and spending. History also offers perspective. When the Fed cuts rates with the S&P 500 within 1% of an all-time high, the index has averaged a 15% gain over the following 12 months, though there is no guarantee this will occur again or be profitable.
The consumer remains a source of strength. The U.S. economy is primarily driven by consumption, often described as the backbone of growth. Spending has held up well across much of the economy, even after adjusting for inflation. While income and spending levels are not distributed equally, overall consumption has been supported by real wage growth that has outpaced inflation in many segments. This appears to have enabled households to absorb higher costs without meaningfully pulling back. Balance sheets remain healthy, the result of higher brokerage accounts and stable housing values. Despite higher mortgage rates, housing continues to serve as a source of household wealth and an important piece of consumer confidence.
Corporate fundamentals add another layer of support. Earnings growth rose 11.7% in the second quarter, making it the third consecutive quarter of double-digit growth. Many companies reported expanding margins, improved efficiency, and positive forward guidance. These results provide a foundation for higher equity valuations.
Importantly, market leadership has begun to broaden. While much attention has been focused on a handful of large-cap technology companies, gains have recently extended across a wider set of sectors. This improved breadth suggests a healthier rally, less reliant on a narrow group of stocks.
Risks remain, and we are closely monitoring the labor market. Key indicators such as quit rates, layoff rates, and initial unemployment claims have all flatlined. We seem to be at stall speed, and conditions could shift either way, so we are monitoring developments closely, especially regarding the unemployment rate.
Since April, job gains have averaged around 53,000 per month, which aligns closely with estimates of breakeven job levels needed to keep unemployment steady. We are not yet seeing broad-based layoffs of the kind of deterioration that typically signals a downturn. In the table below we show some current key labor market stats compared to prior periods.
Most recently, employment growth has slowed further, yet the number of job seekers remains roughly in line with available jobs. The key point is that payroll growth can look strong when conditions are deteriorating and appear weak when the market is relatively balanced. Today, the combination of modest job growth and a stable unemployment rate suggests the labor market is slowing but not collapsing. We continue to look at the data closely for signs of further weakening.
U.S. Equities
As we turn to equity markets, it’s worth pausing on our position along the ridge. Valuations and optimism both sit at altitude. In our opinion, the key now is pacing, maintaining exposure to growth opportunities while keeping firm footing in fundamentals. Diversification serves as our rope line, keeping portfolios balanced even if the slope steepens.
At the beginning of the year, consensus return expectations for U.S. equities were in line with the historical average of about 8%. Year to date, U.S. stocks have exceeded those assumptions, reaching an all-time high, driven by corporate earnings growth, persistent enthusiasm around AI and technology, and an improving macroeconomic backdrop.
Today, the S&P 500 trades at roughly 26x trailing 12-month earnings compared to a long-term average of 17.8x, which raises the question of valuation. These elevated levels are not lost on us and they remain a critical factor we monitor closely. Yet context matters. As the chart below illustrates, the market has traded above its long-term average for most of the past 25 years.
So what is the right multiple? We believe the historical average of 17x is too low for today’s market. A higher fair-value multiple is warranted given structural changes in the economy/index composition such as the shift away from capital-intensive industries toward asset-light business models, with stronger balance sheets, durable competitive moats, and higher, more resilient profit margins. The chart below shows that since the mid-1990’s margins for the S&P 500 have nearly doubled.
Today’s economy looks very different than in past decades. Back then, capital-intensive industries with lower margins and higher reinvestment needs dominated the market. Now, technology and service-oriented companies – which scale efficiently, require less capital, and earn higher margins – represent a much larger share of the S&P 500. In 1980, capital intensive businesses made up two-thirds of the index, while asset light firms were less than 15%. Today, roughly half of the index is represented by innovation-driven companies, while manufacturing has shrunk below 20%. Naturally, we believe investors should apply different multiples to cyclical, capital intensive firms versus high-margin, scalable businesses.
We are mindful that exuberance can push valuations beyond reason. However, we believe there are structural reasons why equilibrium multiples today are higher than in previous decades. In our view, a fair base case multiple is likely in the low 20x range, with peaks in the mid to upper 20’s and troughs closer to the historical average of 17x. Multiples can and may fall well below this level in certain stress scenarios such as severe recessions.
Valuations today are at about 22x forward earnings, which is high relative to history. When we look at past periods, subsequent 12-month returns following similar valuation periods are extremely wide from losses to strong gains. Valuations tend to be a poor tool for short-term market timing. Other factors such as earnings growth, monetary policy, and investor sentiment tend to play a much larger role in driving market performance over a one-year time period.
Given the current backdrop for inflation, a slowing but resilient economy, and expectations for rate cuts, we remain positive on U.S. Equities and international developed equities while remaining slightly underweight on emerging markets. We believe U.S. and global equities have room to grind higher through the remainder of the year.
Fixed Income
The U.S. Fixed income market saw the Federal Reserve re-initiate rate cuts in late September, lowering the federal funds target range by 0.25% to 4–4.25%. This was the first cut this year, but not the first of this cycle. The Fed previously eased three times from September to December 2024, totaling 100 basis points of cuts, but paused over concerns that inflation remained stubbornly elevated above their 2% target and that policy might be loosening too quickly.
The Fed’s recent decision to cut was positioned by Fed Chair Powell as a “risk-management” step given concerns over softening labor market data and slowing economic growth. Looking ahead, the Fed is leaving the door open for additional cuts, but Powell has been careful to emphasize that further easing will be data dependent with the goal of balancing the risk of higher inflation with supporting growth.
Credit markets remain resilient, with investment-grade and high yield spreads tightening further toward cycle lows, underscoring strong fundamentals and persistent demand for yield. Over the past several years, many corporations have delivered, extended maturities, and improved balance sheet quality, leaving them in a stronger position to withstand higher rates and slower growth. While spreads may have limited room to tighten further, current levels reflect both healthy corporate fundamentals and demand for yield.
Our current base case is for the economy to continue grinding ahead, avoiding recession with slower but positive growth, while inflation remains rangebound and trending downward. In this outcome, the curve may steepen modestly as short rates drift slightly lower as the Fed eases, while long-term yields remain anchored by moderate growth expectations. This would be supportive for risk assets, with credit spreads remaining tight and equity valuations hold up.
Alternative Investments
Alternatives can provide long-term portfolio benefits and non-correlated returns to traditional stock and bond holdings, and improve risk-adjusted returns of balanced portfolios. Given the current volatility in public equity markets, alternative investments have delivered good relative returns with low volatility just as we would have expected. Alternatives have unique features and risks so please discuss them with your advisor before investing.
We favor private real estate investment allocations to multi-family, industrial, and self-storage, and selected grocery-anchored centers. We expect equity-like long-term returns from these investments with built-in inflation protection and tax efficient income generation. Our real estate investments will likely benefit significantly as the Fed cuts interest rates. We also favor private equity and credit opportunities. We will continue to add alternatives to our diversified balanced portfolios.
Conclusion
We enter the final quarter of the year with both opportunity and uncertainty. At the moment, equities are supported by resilient earnings, healthy consumer demand, and a more accommodative Fed, yet valuations remain elevated, and policy debates loom large. In fixed income, tight spreads reflect strong corporate fundamentals, even as fiscal pressures and policy divergence create risks at the long end of the curve. Labor markets are softening but not collapsing, reinforcing the view that growth is slowing rather than outright stalling.
This is a moment to stay disciplined. Near-term volatility and policy noise will likely continue, but fundamentals are providing a constructive backdrop. We continue to maintain diversified portfolios – balancing risk and opportunities – and positioning to benefit from long-term secular trends while staying alert to evolving macro and policy risks.
We sincerely thank you for your confidence and trust in us. Please do not hesitate to reach out to us if you have any questions or wish to discuss how all this relates to your specific financial situation in more depth.
