Review & Outlook
October 9, 2025
The astonishing run up in stocks since “Liberation Day” in April (the day the Trump Administration announced massive worldwide tariffs) continued unabated in the third quarter, as markets continue to be enamored with the advancements in Artificial Intelligence (AI) and the growth of the ecosystem surrounding it. As the Administration takes a softer approach toward China, worries about devastating tariffs imperiling the U.S. Technology sector have been pushed aside, while the advancements in video and text generation, as well as improving technical capabilities of AI models have swallowed the market’s attention compared to the rest of the universe of stocks.
Due to the enormity of the committed capital investments ($3 Trillion) by Technology companies over the next three years, what comes to everyone’s mind is “are we in a bubble?”. With market valuations approaching the highs of the last Technology cycle in the 1990s, the inclination is neither unwarranted nor unexpected. This rings especially true when equity markets appear to be unfazed by any negative developments in trade, global conflicts or a slowdown in the housing market. The bifurcation in forward progress between stocks and the real economy is as wide as it has ever been.
But as the economist John Maynard Keynes noted, “markets can stay irrational longer than you can stay solvent”, which is to say a bubble can last longer than we think. While we believe AI technology will certainly bear fruit in its ability to reshape the economy, new technological advancements often take decades to be fully adopted with many early investors in nascent sectors often coming up empty handed.
As Quality Growth investors, the way through this three-year cycle is to keep a close watch on our exposures and stay diversified. Admittedly, broad diversification versus high concentration has not produced the results we would have liked or expected. Our firm’s history and experience have shown us that change can happen faster than anyone anticipates. This is why we strongly believe in sticking with our investment discipline in buying quality assets (Stocks and Bonds) that produce consistent growth in profits, have strong balance sheets and will prosper for many future business cycles to come. At historical market highs on many valuation metrics, now is not the time to divert to other asset classes (Gold, Crypto, Real Estate, Private Equity, Commodities and foreign investments) as these alternatives offer little value on a risk/return, transparency and liquidity basis.
As for the rest of the year and moving forward, we expect the following themes to drive our decision making:
- Bottlenecks in AI-related supply (semiconductors, chip-making equipment) can lead to gluts and extended downturns, which we are monitoring closely.
- Productivity enhancements from AI will need to be significant to justify the commitments of multi-trillion-dollar investments.
- Record levels of concentration in stock indices make the viability of AI as a business model critical to future gains.
- Valuations for the S&P 500 market-cap weighted index are in record territory, while the median stock is only mildly above historical levels and smaller capitalized issues are reasonably priced.
- China remains on the cutting edge of new technologies (green energy, electric vehicles) but thoroughly behind the U.S. Technology sector, making a “race to the bottom” in semiconductors unlikely.
- Housing and automobile production continues its sluggish recovery as high interest rates hamper cyclical industries.
- The cancelling of many solar programs/incentives in support for coal and fossil fuels contradicts the economics of solar energy and battery storage as the cheapest and most profitable ways to fuel AI electricity demand.
- Grid investment (brought on by capacity needs for Data Centers) to accompany new electricity demand remains strong, as capacity, transmission and distribution of energy remain key bottlenecks causing utilities to pass prices onto consumers.
- The Federal Reserve is more attuned to risks in labor markets versus inflation at this point, making a more rapid interest rate cut cycle a distinct possibility.
Furthermore, our recent activity can be summarized as follows:
- Selling has outpaced buying so far this year as we have rebalanced portfolios to reduce concentration risk and broaden exposures towards new and undervalued companies.
- Realized Capital gains may be ahead of last year’s numbers, so we encourage you to review your results in this report.
- Target cash reserves have been lowered to 10% from 15%, a reflection of continued strong growth in equities.
- We continue to utilize treasury bills as supplements to cash in your portfolio to take advantage of higher yields.
Despite the mantra that the bubble will soon pop in equities that is currently being echoed across financial media, we take a constructive view that a good portion of stocks that have been left behind during this cycle are reasonably valued and have bright prospects in a country that will always need healthcare, housing, autos, energy and more. While the spotlight may be shining brightly on AI and the companies most impacted by its potential, the winners from its eventual adoption may exceed those of its early investors, as has often been the case with new technologies throughout time.
As always, feel free to call us with any questions, concerns or changes to your circumstances that you may have.
Warm regards,
Daniel A. Kane, CFA
President
Stephen F. Knapp, CFA
Director of Research
Jeanne C. Goedecke, CFA
Portfolio Manager
