October 2025 edition

Key takeaways

• Despite shifting narratives and a carousel of concerns, the bull market continues to earn the benefit of the doubt as the economy muddles along.
• Market valuations are rich, yet profits remain strong and continue to serve as the north star for stocks.
• The dominant theme of this bull market remains technology and artificial intelligence (AI), where profit trends are robust. We remain overweight U.S. large caps and the growth style.
• The fourth quarter tends to see gains, though the path is rarely linear. We ultimately expect higher market prices by year-end.

Navigating the crosscurrents – Evidence over emotion

As we turn the page into the final quarter of 2025, investors find themselves at a familiar crossroads - headlines swirl with mentions of government shutdowns, Federal Reserve (Fed) policy pivots, inflation, and tariffs.

Despite shifting narratives and a carousel of concerns that continues to spin, global markets have held onto strong gains heading into year-end. Through it all, the north star has been profits—earnings growth and corporate resilience have anchored investor confidence, even as headlines threaten to distract.

Nevertheless, as we review the weight of the evidence, the bull market continues to earn the benefit of the doubt.

Historical lens – volatility, but constructive trends

Government shutdowns, while high profile, have historically been low-impact events for markets. Since 1976, there have been 20 shutdowns, during which the S&P 500 has averaged a flat return and posted gains 50% of the time. These episodes often inject short-term volatility but rarely warrant a change in portfolio positioning

Fed rate cuts near all-time highs have also tended to be constructive. Since 1982, when the Fed has cut rates with the S&P 500 within 3% of its high, as was the case recently, the market has been higher 93% of the time a year later—provided recession is avoided, which remains our base case.

Seasonality is another tailwind as the fourth quarter is historically the strongest of the year. In years with more than 25 all-time highs, Q4 momentum has averaged a 5.2% gain, with stocks finishing higher 89% of the time.

However, the last 5% pullback was back in April, and we’ve gone longer than average without a setback, leaving markets somewhat vulnerable. 

Despite swirling headlines and potential hiccups, profits remain the north star. The bull market endures, tech and AI lead, and Q4 seasonality supports higher year-end prices.

Business cycle – Muddle through economy continues

The economy continues to “muddle through,” marked by a divergence between softening labor trends and a resilient consumer.

We also see evidence of a two-speed economy—the high end of the consumer spectrum benefits from lower debt-to-income ratios, the wealth effect of higher stock prices, and home appreciation, while the lower-income cohort is facing slower wage growth, depleted savings buffers, and persistent cost pressures.

Still, oil prices remain low, the 10-year Treasury yield is well off its highs, and the Fed has begun to cut rates again. AI spending continues in force, and incentives from the tax bill should support capital spending.

A government shutdown delays key data reports like employment and inflation, making investors more reliant on private data and the upcoming earnings season. However, such a shutdown is unlikely to have a significant impact on the broader economy.

Fundamentals – Valuations rich, but earnings rising

Valuations remain elevated, with the S&P 500 forward P/E near 23x, yet the north star of this bull market is still earnings.

As stocks have made new highs, forward earnings estimates have also climbed. Earnings strength is broadening across sectors and market caps, with small caps seeing notable upward revisions.

The upcoming earnings season will be critical in gauging whether corporations can maintain profit margins in the face of tariffs and other headwinds.

While many questions persist about whether technology is in a bubble, the earnings trends in tech remain the strongest in the market.

Further, on a year-over-year basis, the tech sector is up about 27%—well below the “red alert” levels of over 75% seen at previous market tops, and often closer to 100%. This suggests the current rally is built on a more solid foundation of earnings growth, not just exuberance.

Market signals – Primary uptrend intact

The underlying trend remains in place, led by tech and growth. Roughly 90% of global equity markets are in uptrends, and investor sentiment is not at extremes. Still, the longer-than-average stretch without a pullback increases vulnerability to bad news.

Tactical positioning amid crosscurrents

• U.S. large cap bias remains, with improved outlook for small caps. Favor large caps for their strong balance sheets, earnings momentum, and tech/AI exposure. Small caps are benefiting from improved profits and rate cuts.
• International developed equities: Neutral stance, with the recent breakout offering a technically constructive setup, while also providing a partial hedge against U.S. dollar weakness.
• Fixed income: Focus on high quality and neutral duration; investment grade credit spreads remain tight.
• Gold: While gold prices appear stretched in the short term, longer-term trends remain strong. Gold has served as a valuable diversifier - often rising when both stocks and bonds have fallen this year.

Bottom line

Despite headline risks and the potential for short-term volatility, the weight of the evidence continues to support a constructive stance.

As always, we will continue to follow the weight of the evidence