- U.S. economic growth continues to moderate into year-end but has yet to stall, supported by resilient consumer spending buoyed by the wealth effect.
- The labor market, once a pillar of strength, has started to show clear signs of cooling with non-farm payrolls increasing by only 22,000 in August and consensus estimates for September sitting at just 50,000, while unemployment ticked up to 4.3%.
- The government shutdown is the latest in a long series of disruptive events and while the impact tends to be transient (back pay is typically made up upon reopening), it can be more consequential if sustained for an extended period or if it translates into more impactful action like layoffs.
- The Fed cut interest rates by 0.25% in September, bringing the benchmark rate to 4.00%–4.25%. One or two more small cuts are expected by year-end, but treasury rates may already be near equilibrium when factoring in current inflation and growth trends.
- Inflation has stabilized but is unlikely to rescind back to prior cycle levels barring some extreme economic shock. Ongoing dislocations from tariffs and the labor market present risks both to the upside and downside, depending on downstream reactions.
- AI infrastructure spend continues to surge with expectations for potentially trillions in capex before the end of the decade. Limited tangible, current revenue paired with an accelerated depreciation cycle for data center components (ex. GPUs, etc.) pose a meaningful risk if the expansive level of capex fails to translate into future revenue, growth, and profitability.
- Following April’s rapid drawdown, 2025 turned into a supportive year for global equity markets with compelling gains in the third quarter and international stocks rising nearly 30% year-to-date. Higher prices have led to elevated valuations, especially in the U.S., potentially making markets more sensitive to future economic shocks or earnings disappointments.
- Equity market concentration levels (S&P 500 top-10 names amount to ~40% of the index) pose a continued risk advocating for extensive diversification across different segments of the public markets, as well as within private markets.
- Declining base rates and tightening spreads offered a supportive backdrop for fixed income assets in Q3. Higher starting yields at the beginning of the year offered cover for yield volatility and paved the way for a generally supportive year so far for credit.
- Rapid asset growth paired with selective defaults (ex. First Brands) have some questioning the health of the broader private credit and syndicated loan market. To date, signs of widespread stress (ex. non-accruals, PIK utilization) are at normalized levels and lower base rates could offer some relief to floating rate borrowers, although it is something we are monitoring closely.
- Tariff, policy, and geopolitical uncertainty are likely to keep markets volatile, even as recovering asset values support ongoing economic growth.
- In this type of environment, it is important to maintain broad diversification and likely appropriate for most investors to focus on protecting their portfolios from downside risks, rather than pursuing aggressive growth.
