Market Commentary
October 2025
Pros and Cons in Focus:
A Fragile Balance in US Equities
Stocks
Global equities advanced in the third quarter, led by Emerging Market and Small US stocks. The S&P 500 gained close to 8%, with strength concentrated in technology stocks, as resilient earnings and optimism about future Federal Reserve rate cuts supported valuations. International markets contributed positively too. Developed international equities rose in the mid-single digits, while emerging markets outperformed, helped by a weaker U.S. dollar and supportive fundamentals.
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In the US, corporate earnings outperformed expectations while firms raised estimates for future earnings. In response, investors grew more confident that stocks could weather rising economic policy uncertainty from the previous quarter.
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This renewed confidence supported strong performance from large U.S. companies in Q3, reversing a trend of outperformance early in the year from international developed stocks, highlighting the benefits of diversification.
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Heading into year-end, markets remain focused on Fed policy and the durability of economic growth.
Bonds
The U.S. bond market steadied in the third quarter as investors shifted from worries about “higher-for-longer” rates toward growing expectations of Federal Reserve cuts in 2025.
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The 10-year Treasury yield briefly touched mid-quarter highs near 4.6% before falling back toward 4.2% on signs of softer labor markets and easing inflation.
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Credit markets were also strong. High yield and investment-grade spreads tightened, reflecting greater investor confidence that the economy is unlikely to slide into a recession.
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The Fed remained the key driver. Softer data led markets to anticipate a more dovish policy path, pushing yields lower and supporting risk appetite. Even so, concerns over government deficits and heavy Treasury issuance kept yields from falling further.
Bull and Bear Case
Entering the last quarter of 2025, investors increasingly need to take advantage of opportunities in the market while navigating risks. On one hand, economic growth remains stronger than expected, corporate earnings are improving, and the Federal Reserve has begun easing policy, all positives for markets. On the other hand, stock valuations are elevated, and market gains remain heavily concentrated in a handful of companies chasing a single investment theme. With powerful forces pulling in both directions, it is essential to weigh the benefits of staying invested against the risks of overexposure, positioning portfolios to capture upside while managing potential downside.
Economic growth accelerated, defying expectations
GDP Growth in the 2nd quarter of 2025 reached 3.8%, the highest reading since 2023. As of September 30th, The Atlanta Fed estimates Q3 GDP to be higher than Q2, at 3.9%
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Both readings are far ahead of the Federal Reserve’s longer run projection of 1.8% GDP growth.
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Buoyed by strong economic growth, nearly 90% of US stocks increased their earnings projections during the 3rd quarter, the second highest rate in 20 years.
The consensus has been wrong since January
Not only is the economy growing faster than its long-term projection, it is also beating consensus growth forecasts from economists.
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While Economists overestimated the effect of tariffs on GDP following ‘Liberation Day’, predicting growth below 1% in April, even projections in January still substantially underestimated economic growth.
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Consensus projections underestimated GDP because they expected consumer spending to slow down substantially from 2024. Instead, consumer spending remained strong, accounting for 50% of GDP during the 2nd quarter and 60% of GDP in the most recent estimate for the 3rd quarter.
Don't Fight the Fed
In September the Federal Reserve lowered the Federal funds rate by 0.25%, the first cut in interest rates since December 2024.
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Often, the Federal Reserve cuts rates as the economy is entering a recession. Stocks tend to perform poorly during recessions, even when the Fed is cutting rates.
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However, given strong economic growth and relatively low unemployment, the odds of a recession in the next 12 months appear low.
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When the Fed cuts rates during non-recessionary periods stocks prices have risen far faster than their historical average.
Valuations Approaching Dot-Com and Covid Extremes
Valuations rose significantly over the past 3 years on the back of strong returns in the stock market as investors began pricing in more earnings growth for the US companies.
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Since the Inception of the S&P 500, stocks have been more expensive only twice, at the peak of the Dot-Com bubble from 1999-2000 and during the aftermath of Covid in 2021.
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Over shorter periods stocks can remain expensive, but over longer periods companies with elevated valuations have produced lower returns.
Concentration Magnifies Market Risk
Stock Concentration remains at an all-time high, dominated by just a few mega-cap tech stocks.
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Market concentration rises when the largest companies outperform. In the short term this outperformance propels the stock market higher, but when it persists over longer periods it also increases the market’s vulnerability to a scenario in which just a few stocks fall in value.
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To compound this risk, the 8 largest stocks are committing an unprecedented level of investment toward the development of a single theme, Artificial Intelligence, creating systemic risk among these concentrated stocks.
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If advancements in AI fail to deliver profits at the pace promised by tech firms, it will be difficult for investors to justify such expensive valuations, leading to a steep correction.
Portfolio Positioning
Stocks
Economic growth has accelerated in recent quarters, and the Federal Reserve has begun cutting interest rates, conditions that have historically supported strong stock performance. However, stock market concentration is at an all-time high, and valuations are not far behind. Future profits in the stock market are increasingly tied to a few expensive stocks all chasing the same crowded investment theme. There’s no doubt that A.I. is a major technological advancement, however, just as the invention of the internet/email was also a substantial productivity generator, the hype pushing the narrative can drive stock prices to unrealistic levels like we saw in the Dot Com bubble in late 90’s. In that case, financial gravity’ eventually set in and reconciled the hype with justified stock prices.
Favoring portfolios that hold the largest stocks at concentrations lower than the overall market will reduce exposure to systemic risks in mega-cap tech stocks while increasing exposure to less expensive stocks that are not dependent on AI monetization and able to benefit from positive macro-economic factors.
Bonds
Last quarter the 10-year treasury rate declined as the market began to price-in rate cuts from the Fed. Often, the 10-year treasury rate will continue to fall during an easing cycle that culminates in a recession, but when the Fed cuts rates in a non-recession environment, the 10-year usually bottoms before the first cut. Remember, when rates fall, bond prices rise. The longer the maturity, the greater the increase in price. Because it is less likely that interest rates on the 10-year will fall further, we favor shorter term bonds, whose price is less sensitive to interest rates than longer term bonds.
High yield spreads, the extra interest earned over less risky treasury bonds, is at its lowest point in almost 20 years. This means that investors are being paid less to hold riskier bonds. Because of this dynamic, we reduced exposure to high yield bonds by half earlier this year. Since then, spreads have compressed further. While we continue to hold these bonds as economic growth remains strong, we remain ready to reduce, or even eliminate, this exposure if spreads compress further or the future pace of economic growth is in doubt.
Atlantic Edge Insights
Matthew Cochran, CFA
Robert Filosa, CFA
Ethan Caldarelli, CFA
Opinions expressed in this commentary may change as conditions warrant and are for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. No graph, chart, formula or other device can, in and of itself, be used to determine which securities to buy or sell, or when to buy or sell such securities, or can assist persons in making those decisions. Consider seeking advice from a professional before implementing any investing strategy.
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