Portfolio Manager Commentary

Q3 Market and Portfolio Review

In the third quarter of 2025, equity markets finished higher and are now at all-time highs across most broad indices. Each month saw positive index returns as the market rally continued from April lows. Potential macro headwinds that were feared by investors earlier this year have yet to materialize in the economic data, and earnings reports and outlooks have generally been upbeat. In September the Fed cut rates 25bps and indicated a likelihood of additional cuts in 2025, supporting continued market strength.

There are many exciting areas of emerging and potential growth within the US economy. One such area is artificial intelligence. Longer-term, there is great promise for AI to enhance business models and improve productivity. In the near-term, the infrastructure needed to support the AI buildout is spurring a significant increase in investment and capital expenditures. Both dynamics are driving new growth opportunities for many innovative companies across industries, including technology, industrials, and energy. Aside from technological innovation, the new administration has implemented pro-growth policies, including infrastructure spending, manufacturing re-shoring, critical mineral and pharmaceutical production, defense spending, and more, which are expected to support growth across many sectors of the domestic economy. Given the frenetic pace at which these growth trends are emerging, investors are bidding up the perceived winners and moving out of perceived laggards. While 3Q saw continued positive returns in many of the mega cap companies that have been leading the market for years, there were significant rallies in many speculative parts of the market, and it was especially acute in the micro and small cap indices. Areas with big gainers and material contribution to the micro and small cap indices were quantum computing, nuclear energy, critical minerals, bitcoin miners/HPC power suppliers, defense & space, mobility solutions, and biotech, among others. Many companies in these end markets potentially have an exciting story, but in many cases, the business fundamentals are nowhere close to supporting extremely elevated valuation levels. At the same time, some traditional growth areas, such as software and IT services, have seen significant valuation contraction as companies in these areas are simply not viewed as future winners in this new regime.