Steady Gains Amid Policy and Geopolitical Uncertainty

Within fixed-income, investment-grade core bonds (Bloomberg US Agg Bond Index) rose 0.6% in October as the 10-year Treasury yield edged lower. Lower-quality high-yield bonds (ICE BofA US High-Yield Index) gained 0.2%. High-yield credit spreads remain tight by historical standards, and upside beyond the coupon will be limited.

Foreign markets benefited from dollar weakness. Developed international equities (MSCI EAFE Index) rose 4.3 %, while emerging markets (MSCI EM Index) climbed 1.3%. The dollar softened first in August following a weak jobs report, and again after Fed Chair Powell’s dovish remarks at Jackson Hole, both of which reinforced expectations for rate cuts.

In fixed income, the expected rate cuts pushed yields lower across most of the Treasury curve. The 2-year yield fell 0.35% to 3.57%, while the 10-year declined 0.14% to 4.23%. The 30-year Treasury was essentially unchanged at 4.9%. Core bonds (Bloomberg U.S. Aggregate Bond Index) benefited from lower rates and gained 1.2% in August. High-yield bonds (ICE BofA U.S. High Yield Index) performed similarly, gaining 1.2%, reflecting continued investor confidence in the economic outlook. Year-to-date, high yield has outperformed investment-grade bonds.

In late October, the Federal Reserve cut interest rates by 25 basis points for the second time this year, bringing the target range to 3.75%–4.00%. This cut highlighted a delicate balancing act between supporting a cooling labor market and maintaining vigilance on inflation. The move was widely expected, but the tone surrounding it revealed tension between the Fed’s cautious intent and market optimism. While Chair Powell framed the cut as a precautionary adjustment rather than the start of a broader easing cycle, investors interpreted it as a signal that policy may be much more accommodative and supportive of economic growth. Equity markets rallied on the prospect of easier financial conditions, and Treasury yields drifted lower, pricing in the possibility of further cuts.

However, Powell was quick to temper those expectations, emphasizing that “the path for policy rates is not predetermined” and reinforcing the Fed’s data-dependent stance. That message didn’t fully align with how markets interpreted the move, highlighting the ongoing tension between a cautious Fed and investors eager for clearer signals. Until the economic data, particularly on labor and inflation, point decisively in one direction, this push-and-pull dynamic between the Fed and investors is likely to persist.

In the meantime, the backdrop for markets remains complicated by the lack of timely data. With the ongoing government shutdown delaying key economic data releases, investors are operating in a partial data vacuum, one that could amplify volatility once official labor and inflation readings return. Despite that uncertainty, investors are pricing in another rate cut in December, reflecting conviction that monetary policy will turn more accommodative heading into 2026.

Corporate fundamentals, however, continue to support the market’s optimism. With roughly half of S&P 500 companies reporting, profits have grown 10.7%, well above the 7.3% projected level at the end of June. If sustained, this would mark the fourth straight quarter of double-digit earnings growth, the longest streak since 2021. The strength has been broad-based with firms benefiting from resilient demand, cost discipline, and improving margins. In our view, earnings have done much of the heavy lifting in justifying today’s elevated valuations, offsetting some concerns about stretched multiples.

Labor data, though limited, provides further support. Early November’s ADP report showed stronger-than-expected private payroll gains, suggesting hiring momentum remains intact despite tighter financial conditions earlier in the year. While the official Bureau of Labor Statistics data remains unavailable due to the shutdown, the private figures indicate that businesses are not yet retrenching.

Taken together, the Fed’s cautious rate cut, strong corporate earnings, and labor data paint a picture of an economy that continues to expand. While investors have been quick to price in the potential for further rate cuts, Chair Powell’s emphasis on a data-dependent approach underscores that future policy remains uncertain. Corporate profits and recent labor market momentum have helped support valuations and investor confidence, suggesting that, for now, the economy is navigating a delicate balance between slowing growth risks and the Fed’s measured pivot toward more accommodative policy.

In recent months, investors have increasingly questioned whether we are entering a bubble reminiscent of past speculative episodes such as the dot-com boom or the mid-2000s housing market. While today’s environment shows some of the exuberance often seen in late-stage bull markets, there are also important differences. The enthusiasm driving equities higher is not built on pure speculation, but on a tangible technological transformation. Artificial intelligence is reshaping productivity, efficiency, and business models across industries, creating genuine opportunities for long-term growth.

At the same time, valuations have reached historically elevated levels, with the CAPE ratio above 40, a threshold previously seen only during the late 1990s technology bubble. However, elevated valuations are not broad-based. A small group of mega-cap technology companies, the so-called “Magnificent Seven,” now account for more than one-third of the S&P 500’s market capitalization, the highest level of concentration on record. These firms have benefited disproportionately from AI enthusiasm and from massive capital investments in data centers, cloud infrastructure, and semiconductor capacity. The top five AI hyperscalers (Microsoft, Amazon, Alphabet, Meta, and Nvidia) are expected to generate over $550 billion in operating cash flow this year, according to Bloomberg, funding these investments internally rather than through leverage. This financial strength differentiates today’s cycle from prior debt-fueled booms. Furthermore, even after substantial capital expenditures, these companies continue to return record amounts of cash to shareholders through buybacks.

Still, risks of overextension remain. A potential “circular investment loop” is emerging in which the largest AI companies are simultaneously the biggest investors and the biggest customers within the ecosystem. For example, Microsoft and Google purchase GPUs from Nvidia to power their AI models, while Nvidia relies on those same firms for revenue growth. Nvidia and OpenAI are taking stakes in firms within the system and relying on each other for mutual spending. This feedback loop supports rapid expansion but could lead to overcapacity if end-user adoption lags behind infrastructure spending. Signs of imbalance would include slowing revenue growth despite rising capital expenditures or compression in AI-related profit margins.

While there are isolated examples of speculative excess, such as companies with little or no revenue reaching multi-billion-dollar valuations, and filings for leveraged AI-focused products, the broader AI theme remains grounded in real, productive innovation. Unlike the late 1990s, the current investment cycle is being led by profitable, cash-generating enterprises that are already integrating AI into core operations. AI’s impact extends well beyond the technology sector, reaching healthcare, financial services, manufacturing, and retail, where it is driving efficiency gains, lowering costs, and opening new sources of revenue. These productivity improvements form a fundamental underpinning for long-term earnings growth and help justify some of the elevated valuations seen today.

From an investment perspective, we continue to view AI as a durable, secular growth driver rather than a short-term mania. However, markets appear to be “priced for perfection,” and even modest disappointments in earnings, adoption rates, or competitive positioning could lead to sharp corrections in the most crowded trades. As always, investors should avoid the temptation to time the next downturn and instead focus on building resilient portfolios. Diversification across asset classes and geographies remains the most reliable defense against concentrated risk.

The AI-driven rally may continue to define markets in the near term, but disciplined portfolio construction and a long-term perspective remain the best ways to navigate the intersection of innovation and speculation.

Despite ongoing policy uncertainty, geopolitical risks, and pockets of speculative behavior, the U.S. economy continues to demonstrate resilience. Growth is slowing from last year’s pace, but it’s not collapsing. Corporate earnings remain strong, labor markets are holding up (albeit weakening), and the Federal Reserve has begun to cautiously ease policy. These dynamics suggest that, while risks have risen, the economy is still grinding ahead rather than tipping into recession.

Equity markets reflect this balance of optimism and caution. The recent rally has been driven largely by a narrow segment of AI-focused technology leaders, leaving valuations elevated and the margin of safety compressed. In our view, this backdrop does not call for a decisive overweight or underweight position in equities. We are sticking to our strategic, long-term equity allocations, and maintaining diversification across market-caps and geographies to mitigate some of the concentration risk.

Within fixed income, yields remain attractive by historical standards, even as credit spreads have tightened. We continue to favor high-quality, short-term fixed-income instruments that can provide attractive income and stability, while avoiding unnecessary exposure to duration. We are also maintaining exposure to select opportunities in the more conservative parts of high-yield bonds, e.g., shorter maturities and higher in quality, and in non-traditional or niche credit sectors. Overall, we are emphasizing capital preservation and flexibility at this stage of the cycle.

Overall, we view the current environment as one of cautious optimism. The combination of steady, but slower economic growth, strong corporate fundamentals, and a measured policy shift supports a constructive outlook. However, with markets priced for perfection, maintaining balance and diversification are important in helping to navigate both the opportunities of technological transformation and the inevitable bouts of volatility that accompany it.

In late October, President Trump and Chinese President Xi Jinping held their first face-to-face meeting in six years, resulting in a one-year trade truce that marks a modest but meaningful step toward stabilizing relations between the world’s two largest economies. The agreement includes a reduction in U.S. tariffs on Chinese imports from 57% to 47%, commitments from China to curb the export of fentanyl precursors, an increase in U.S. agricultural purchases (notably soybeans), and a suspension of rare-earth export controls.

While this represents a de-escalation in tone and a temporary easing of trade tensions, it is not a structural reset of the relationship. The fundamental issues dividing the two nations include technology leadership, national security concerns, and supply chain independence, and remain unresolved. Both governments continue to pursue policies aimed at long-term decoupling, particularly in areas such as semiconductors, advanced computing, and green energy technologies.

Short-term relief from the trade war likely improves sentiment around the relationship of the two largest economies. Though there are some near-term concessions, the deeper rift between the two countries remains. The key issues driving the two countries remain unresolved, and both continue to pursue ways to further decouple. The trade truce does not solve the technological/industrial competition, geopolitical/security issues, or supply chain dependencies. Further structural decoupling between the two countries should still be viewed as the base case.