Summary, Last Quarter:
The conflict with Iran continued to alternate between periods of fighting and relative calm, influencing energy prices and financial markets. Meanwhile, the Federal Reserve (the Fed) began raising interest rates to combat inflation. Corporate earnings continued to grow in the U.S. and internationally, particularly among companies benefiting from advances in artificial intelligence (AI). Markets such as South Korea and Taiwan have been notable beneficiaries.
Our Commentary:
As we approach the midterm elections, markets appear to be following a familiar pattern, moving largely sideways as investors await the results. We’re often asked which party’s victory would be better for the markets, but we believe that misses the larger point. While election outcomes certainly matter, markets tend to dislike uncertainty more than either political party. Once the results are known, investors have a clearer picture of the political landscape and can adjust accordingly.
We enter the fourth quarter with solid economic growth, renewed inflation pressures driven partly by energy prices, and a Fed that has resumed raising interest rates. Investors generally expect the Fed to pause at its October meeting, followed by another rate increase before year-end and potentially two more in 2027. We agree that a pause is likely, although another increase in October would not surprise us.
Strong corporate earnings have helped support stock prices, although we’d prefer to see those gains spread across more companies rather than concentrated among a handful of market leaders. Strong performance also raises expectations: if earnings disappoint next quarter, stocks could face a correction. Encouragingly, valuations appear reasonable, with little evidence of widespread “multiple expansion,” or investors paying increasingly higher prices relative to company earnings. That reduces the risk of a market “melt-up”—a rapid, potentially unsustainable surge in stock prices. We continue to monitor the possibility of an AI-driven bubble, although we believe that risk remains relatively low for now.
Bond yields also deserve attention. The 10-year U.S. Treasury yield, hovering around 5%, provides investors with a meaningful alternative to stocks. This relationship is often measured through the “equity risk premium,” or the additional return investors expect from stocks in exchange for taking greater risk. Strong corporate earnings continue to support the case for equities, but bonds now offer attractive income as well. Longer-term bonds remain vulnerable to price swings when interest rates change, which is why we favor high-quality, short-term bonds that offer competitive yields with greater stability. Additional Fed rate hikes could further strengthen their relative appeal.
Finally, the broader economy remains resilient, with growth running around 2%–2.5% and unemployment holding near 4.1%–4.2%. Inflation remains elevated, driven partly by energy prices but also by continued consumer spending. Retired Baby Boomers, who collectively hold substantial wealth, are contributing to that demand. Encouragingly, core inflation, which excludes volatile food and energy prices, is rising more slowly than headline inflation. This could limit the need for additional Fed rate hikes. With employment holding steady and economic growth remaining positive, we believe the risk of recession remains relatively low.
Until next quarter,
-Investment Committee
Bond Disclosure:
Fixed income securities carry interest rate risk. Fixed income securities also carry inflation risk and credit and default risks. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Forward-Looking Statements:
Certain statements contained within are forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.
Opinions voiced are not intended to provide specific advice and should not be construed as recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial professional.
Indices are unmanaged measures of market conditions. It is not possible to invest directly into an index. Past performance is not a guarantee of future results.
International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and differences in accounting methods. Past performance cannot guarantee future results.
The information contained in this article is being transmitted to and is intended for the use of only the individual(s) to whom it is addressed. If the reader of this message is not the intended recipient, you are hereby advised that any dissemination, distribution or copying of this message is strictly prohibited. If you have received this message in error, please immediately delete.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.