Dear Friends,
The U.S. economy and stock market remained strong through the third quarter as the S&P 500 reached record highs in early October. Through September, both U.S. and foreign stocks were up 11% year to date. Notably, interest rates increased during the quarter; the yield on the 10-year Treasury has risen from 4.2% at December 31, 2025, to around 5.25% now. More on that below…
Current market levels suggest that the stock market is pricing in continued strong earnings growth into 2027 and 2028 and the forecasts from the largest AI/technology companies support that premise. It’s also a positive that P/E multiples on large cap tech stocks overall are well below the valuations seen in the 2000 dot-com selloff. On the other hand, several macro-economic factors point to an increasingly risky environment for investors. These factors include tightening monetary policy, higher interest rates and persistent inflation at 3% plus. In addition, market breadth is poor; recent highs are almost exclusively attributable to a small number of mega-cap technology stocks.
Given the crosswinds noted above, we are not inclined to make any bold predictions as to stock market performance over the near term. However, we are guided by our disciplined approach to asset allocation which leads us to advocating for rebalancing portfolios—trimming equity positions which have gone up the most, raising cash when necessary and redeploying cash into the bond market where yields above 5% are the most attractive they’ve been in years.
With midterm elections less than a month away, many wonder about their impact on financial markets. While we acknowledge that issues such as affordability, data centers, etc. may impact different companies in different ways it is difficult, if not impossible, to predict the overall impact of election outcomes on financial markets. We strongly encourage investors not to tailor their portfolios based on predicted outcomes of elections.
Let us know if you have questions or if we can do anything for you. We appreciate your encouragement and support.
Matt and Andrew