The third quarter of 2025 reminded us that markets are capable of weathering considerable noise while continuing to reward companies with strong fundamentals. Despite the threat of a government shutdown (which became a reality to kick off the fourth quarter) and heightened fiscal pressures, equities proved resilient. The S&P 500 reached new all-time highs in September, closing the quarter with a 7.9% gain, while small-cap stocks, as measured by the Russell 2000 Index, also broke through to record levels, ending a 967-trading-day stretch without a new high. Market leadership remained concentrated in high-growth sectors, with technology, artificial intelligence, and cloud computing driving performance. Encouragingly, we also observed a healthy rotation into industrial and automation companies, where themes of reshoring and infrastructure investment continue to provide durable, long-term support.

Fixed income markets were volatile, with yields reflecting ongoing debate about the path of monetary policy. Inflation trends continued to move lower, aided by stabilizing supply chains and a still-healthy consumer backdrop, although risks remain around services’ inflation, commodity prices, and tariff-related headwinds. The Federal Reserve (“Fed”) acknowledged those risks, while also stating the risk of higher and persistent inflation have become “a bit less” than before. As downside pressure built on employment, the balance of risks shifted which led the Fed to cut the Federal Funds rate in September for the first time since December.

As we enter the fourth quarter, equity markets continue to be supported by two primary pillars: the pace of Federal Reserve easing and the ongoing boom in artificial intelligence. Markets are currently pricing in two additional rate cuts before year-end – one in October and another in December. However, stronger-than-expected economic data has begun to nudge yields modestly higher, raising questions about how much flexibility the Fed will ultimately have.

The AI theme has been the dominant driver of equity market performance throughout 2025, pushing valuations to historically elevated levels. While AI has the potential to deliver margin expansion and long-term productivity gains (and thus warrant higher valuations), we remain cautious about the industry’s near-term ability to generate revenue and profitability sufficient to justify the extraordinary investment flowing into compute infrastructure.

Beyond these structural forces, markets are also contending with renewed tariff concerns and fiscal uncertainty. The White House’s rollout of new Section 232 import taxes and related investigations has reintroduced the possibility of trade friction, while the ongoing government shutdown adds another layer of noise. Although the shutdown is unlikely to have a material near-term impact on equity markets, the outcome of negotiations – particularly if an extension of subsidies comes at a high fiscal cost or if tariffs under the International Emergency Economic Powers Act (IEEPA) are rolled back – could place upward pressure on long-term yields.

We remain steadfast in our investment philosophy, emphasizing high-quality companies –both in equity and debt – that demonstrate strong balance sheets and are trading at attractive valuations. As always, we will continue to monitor market developments closely and deploy capital with discipline, maintaining a prudent and long-term approach to portfolio construction.

Thank you for your continued trust. We welcome your questions or conversation at any time.