Q3 2025
Dear Client,
We hope you all are enjoying the shift to fall weather and schedules. In our house it has meant a new school and schedule (which is going pretty well), and the most magnificent leaf-season I can remember after a quarter century in the mountains (I have attached a picture from a recent outing). Having weathered a tumultuous 3 quarters of this year: We hope you will take the opportunity this fall to review your finances and get in touch if you have experienced, or anticipate, any significant changes. We would be happy to arrange a time to Zoom or meet.
From our perspective now in October looking back at 2025 in the markets, it feels like we were in one of those cartoons where you see a car flip over, and the occupant thrown out. Disaster must ensue…but then you see the occupant land gently in a pile of soft hay, and the car end up right back on its wheels, ready to roll. To be sure, there are a lot of unpleasant possibilities for the markets and economy still floating around out there, but for this brief moment we can look back and be amazed we are just fine.
The index returns for the quarter (Q3) and year-to-date (YTD) are as follows (calculated from www.stockcharts.com):
S&P 500 change: 8.1% Q3, 13.3% YTD
S&P 500 Equal Weight Index change: 4.35% Q3, 8.35% YTD
Nasdaq Composite change: 11.68% Q3, 16.78% YTD
Nasdaq Composite Equal Weight Index change: 3.81% Q3, 12.3% YTD
Dow Jones Industrial Average change: 5.3% Q3, 8.76% YTD
Ten Year Treasury Yield change: -1.4% Q3, -8.25% YTD
Crude Oil (WTI Front Month Contract) change: -4.71% Q3, -13.19% YTD
Gold (GLD ETF) change: 15.2% Q3, 45.55% YTD
Overall, the equity markets had another strong quarter. The largest few stocks continued to lead the rest. The Federal Reserve finally made the long-awaited .25% cut to the short-term lending rate. This led to a small decline all along the rate curve, including the Ten-year rate shown above. Oil continued its trend for the year of declining price, which has helped hold down inflation. Finally, gold continued to rally. Within these data points, we believe there is some noise and some signal.
The level of concentration in the top 10 stocks in both the Nasdaq and the S&P 500 have now reached record high levels (38.93% for the S&P and 70.3% for the Nasdaq). Similarly, the level of valuation of the indices (as measured by the forward Price/Earnings ratio of the S&P 500 at 22.8) is historically high. Both of these indicators are well above their historical averages, which mathematically means we should expect a period of correction or at least digestion at some point in the future. The rise in the price of gold is also a concerning data point, as we believe it indicates a level of fear and uncertainty around the world that we haven’t seen in recent memory.
All of that said, corporate earnings have thus far been strong and growing despite the imposition of tariffs. The current analyst estimates are for that to continue. The titanic amount the mega-tech companies are spending on creating and implementing AI has been supportive of the economy. That is based on the money moving around the markets, as well as the anticipation of the eventual efficiencies expected from that spending (in earnings terms, that is increased margins).
Considering the above, we are cautious about the ability of markets to continue to levitate. However, none of the indicators that lead us to that conclusion are timing mechanisms. As such, we are keeping an eye on the horizon and trying not to be preoccupied, trying to predict the end of this cycle, when there is the possibility that it may continue for some time. As students of market history, we have been thinking of Alan Greenspan’s famous “Irrational Exuberance” speech which was eventually correct, but 4 years and almost 300% on the Nasdaq too early.
Our tactic to address the irrationality for now is to maintain balance. We are monitoring cash levels, looking for opportunities, and focusing on our long-term outlook.
We hope you will allow us to bear the burden of perseverating over earnings estimates and quoting dusty old economists. Your focus should be to enjoy the fall weather and the upcoming holiday season!
Take care, Bo and Lesley
