We entered the third quarter amidst tariff uncertainties and concerns for a slowing economy. The economy has remained resilient, with quarterly GDP growth exceeding 3%. Consumer spending and income growth have outpaced inflation thus far. Corporate earnings continue to meet or even beat expectations, and we anticipate this trend to continue as third quarter earnings reports start coming in. Inflation has edged higher but remains in check, albeit nearly 1% higher than the Fed’s 2% inflation target.
Further boosting equities, on September 17 the Fed initiated a new rate cutting cycle with a 25-basis point cut to the Fed Funds rate and clear signals that two more cuts are likely this year. New job growth has been weak while the unemployment rate remains stable.
Against this backdrop equity market returns have been robust, with the S&P 500 advancing 8.1% and 14.8% for the third quarter and year to date respectively. Corporate operating fundamentals are strong heading into the fourth quarter, while valuations remain at historically high levels. These valuations are at odds with ongoing issues such as tariff and trade policies, directives impacting Fed independence, the government shutdown, geopolitical tensions and the Federal Deficit.
The advent of Artificial Intelligence (AI) is driving equity markets and impacting the economy in new, and thus far, positive ways. Massive capital spending on AI infrastructure has been embraced by financial markets, however the timing, feasibility and expected return on this multi trillion-dollar investment has recently been called into question. Parallels to the late nineties dotcom boom – and eventual bust – have been surfacing.
We are evaluating other grounded AI beneficiaries based on proven use cases to drive growth and margins. We are closely monitoring implementation of AI in areas such as software and digital advertising to identify favorable and unfavorable impacts. We will avoid excessive valuations and/or speculative business models that lack clarity. Inevitable surprises and exogenous factors will occur, and we are mindful of the risks.
Befitting solid economic and stock market fundamentals, equities closed the third quarter near all-time highs. Economic growth in the coming year will likely be driven by tax, trade and policy initiatives, but a fractured Congress could limit meaningful legislation. We believe rising inflation remains a major risk to financial asset valuations.
The information contained in this communication is provided for general purposes only, and was prepared in reliance on independent, third-party sources that Fairview Capital Investment Management, LLC (“Fairview Capital”), an SEC-registered investment adviser, believes are reliable. Nevertheless, Fairview Capital does not guarantee its accuracy or timeliness of any information provided herein. The information reflects subjective judgments, assumptions and Fairview Capital’s opinion on the date made and may change without notice; Fairview Capital is not obligated to update this information. Nothing in this communication should be construed as investment or tax advice, a solicitation, offer, or recommendation, to buy or sell any security. Investment management services are offered only pursuant to a written investment management agreement, which investors are urged to carefully read and consider in determining whether such agreement is suitable for their individual needs and circumstances. The information in this communication should not be construed as an endorsement, recommendation or sponsorship of any company or security. If this post mentions a specific investment or security, we or our affiliates may have a position in that security (either long or short), and we may profit from a price change in that security.
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