BACK
Third Quarter Review: With the equity market maintaining its strong uptrend since mid-April, the Standard and Poor’s 500 Stock Index gained 8.1% in the third quarter, the Russell 2000 Small Cap Index jumped 12.4% and the MSCI All World ex-US index rose 6.6%. The Bloomberg Aggregate Bond Index returned 2.0%, Gold rose 16.8% and the Bloomberg Commodity Index returned 3.7%. The first nine months of 2025 have offered a very positive backdrop for multi-asset portfolios with most asset categories providing robust returns. The S&P 500 Index has returned 14.8%, the Russell 2000 Small Cap Index 14.1%, the MSCI World ex-US International Index 26.0%, the Bloomberg Bond Index 6.1%, Gold 47.0%, and the Bloomberg Commodity Index 9.4%.
AI Buildout Propels the Equity Market: The commitment to build massive data centers across the country continues unabated as optimism abounds regarding the future demand for artificial intelligence applications. This infrastructure development is being led by deep-pocketed hyper-scalers Microsoft, Amazon Web Services, Google Cloud and Oracle, with each new data center containing billions of dollars of specialized equipment including racks, servers, chipsets and climate controls. Some of these data centers are oriented to training large language models (LLMs) comprising the backbone of AI, while others will be geared towards inference, a more end-user oriented, less energy-intensive endeavor. McKinsey and Co. estimates that over $5 trillion will be invested in AI infrastructure by 2030. This funding will need to come from corporate capex, debt issuance, private capital and government support and all those sources may not be enough. With the S&P 500 trading at an all-time high and the Index posting peak multiples versus both revenue and forward earnings, the market will be highly dependent on a solid return on investment from this buildout. Unsurprisingly, Technology and Communication Services have been the top performing sectors in the third quarter and year-to-date, and the outcome for many of these companies is intertwined due to a spree of co-investments creating a potential negative circularity. OpenAI, the maker of ChatGPT, is the best illustration of these overlapping partnerships. OpenAI, a private company with $13 billion in revenue this year, has committed to pay $300 billion to Oracle over five years beginning in 2027 for data center development and hosting. This announcement sent Oracle shares 36% higher in one day. OpenAI also has an agreement to pay CoreWeave $22 billion for cloud infrastructure and has an arrangement with Broadcom to co-develop custom AI chips associated with inference. In addition, Nvidia is investing $100 billion into OpenAI, which in turn is purchasing $100 billion of Nvidia graphics processing units (GPUs). Finally, in October OpenAI signed an agreement with Advanced Micro Devices for their GPUs with OpenAI receiving warrants for potentially 10% of AMD. Each of these announcements has been met with a positive response by the market, but there remains a lengthy journey of securing financing, ensuring semiconductor supply, improving technologies for power generation, etc., and, most importantly, seeing corresponding demand to get from here to there.
The Federal Reserve: Deregulation, fiscal stimulus, and most significantly of late the Federal Reserve are also providing a tailwind for the markets. The Federal Reserve reduced the Federal Funds target by 0.25% in mid-September to a range of 4.0% to 4.25% and the futures market is pricing in additional cuts in October and December. It is unusual for the Federal Reserve to ease monetary conditions as the equity market achieves new highs almost daily, second quarter GDP was 3.8% and inflation remains stubbornly above the Fed’s 2% target. There are, however, indications of weakness in the labor market and some credit stresses showing in consumer data. President Trump has been publicly pressuring Fed Chairman Jerome Powell to lower the Fed Funds rate more aggressively and any perception by investors that the Fed’s easing program is not economically appropriate would become a major problem for the bond market, as well as the currency and equity markets. With the U.S. national debt standing at $38 trillion, the markets need to believe that the Fed is acting independently and has inflation under control and that the U.S. dollar remains a dependable reserve currency. The accelerating rally in precious metals may be one of the warning signs.
Portfolio Thoughts: There are many unsettling crosscurrents in the current environment, however, the equity market has persistently climbed the proverbial “wall of worry”. While we are not giving up on the AI trade, we are focusing on opportunities with more palatable valuations that are in less frothy areas that are not discounting torrid future growth. We view overseas equity markets as one such area. We are cognizant of the extraordinary run of portfolio growth over an extended period, and for clients who have their core assets with us, we remain on the lookout for speculative fervor. We thank you for your continued trust and support, and we welcome a discussion of your portfolio and the market at your convenience.