Key Takeaways
Economic growth remains resilient. Consumer spending continues to be the primary engine of US economic growth, while technology-related capital expenditures are providing an important additional boost. Investments in software, data centers, and AI infrastructure have become a meaningful contributor to GDP growth, helping offset slower activity elsewhere in the economy. [1]
AI continues to drive equity markets. Equity returns remain heavily influenced by the AI theme. A relatively small group of AI-related companies has generated a disproportionate share of market gains, while many other stocks have lagged despite what we believe are solid fundamentals. This concentration has created a notable gap between headline index performance and the experience of the average stock.[2]
Today’s AI cycle looks different. While comparisons to the dot-com era are common, current market leadership is being supported by robust earnings growth rather than speculation alone. AI-exposed companies have significantly outperformed the broader market, and accelerating profit growth has helped justify elevated investor enthusiasm.[3]
Market breadth remains a watch point. Despite strong index returns, market participation remains unusually narrow. A large percentage of S&P 500 companies remain well below their previous highs, highlighting the degree to which performance has been concentrated in a limited number of AI beneficiaries. Broader participation would create a healthier foundation for continued gains.[4]
Earnings growth is supporting valuations. The S&P 500 reached new highs during the third quarter, but corporate earnings have grown faster than stock prices this year. As a result, valuations have actually become less stretched than they were a year ago. Continued earnings delivery will be key to sustaining current market levels.[5]
Rising rates pressure fixed income. The bond market experienced a difficult third quarter as stronger growth, persistent inflation concerns, and expectations for additional Federal Reserve tightening pushed yields higher. Longer-duration bonds and municipal bonds were among the hardest hit.[6]
Municipal bonds present opportunity. Municipal bonds endured one of their weakest months in decades, driven largely by technical factors such as heavy issuance and weak near-term demand rather than deteriorating credit quality. Higher yields have improved the attractiveness of the asset class for tax-sensitive investors.[7]
Looking ahead: balance of risks and opportunities. Potential tailwinds include continued AI investment, productivity gains, earnings momentum, and resilient consumer spending. Key risks remain concentrated in elevated rates, geopolitical tensions, AI-related regulatory and infrastructure constraints, and the market’s dependence on a relatively small group of stocks. Whether leadership broadens beyond AI winners may be one of the most important market developments to watch in the quarters ahead.
