Markets shrugged off a cooling labor market to finish the quarter near all-time highs. The third quarter was characterized by the resumption of Federal Reserve rate cuts, federal government interventions in markets, and continued strength across stocks and bonds.

In September, the Federal Reserve lowered the federal funds rate by 0.25%, marking its first cut in nine months. The decision was nearly unanimous, with 11 members supporting a 0.25% reduction and one favoring a deeper 0.50% cut. While inflation remains stubborn, sitting near 3.0%, the Fed is increasingly focused on labor market weakness. Job creation has undershot expectations for three consecutive months, and job creation from the prior 12 months was revised downward by -911,000. ⁽¹⁾ With its dual mandate of price stability and maximum employment, the Fed signaled concern that economic momentum may be slipping.

The U.S. government drew attention during the quarter with two notable announcements. The first was its investments in public companies — including a stock investment in Intel and revenue-sharing agreements with Nvidia and AMD on Chinese chip sales. While government action as an “investor of last resort” has historical precedent in times of crisis, such moves at market highs are unusual. The second notable announcement in Q3 was an executive order directing regulators to review the use of alternative investments such as private equity, hedge funds, and direct real estate within retirement plan lineups. The push toward alternatives could be due to many factors, but one driver is a slowdown in their fundraising ambitions and the need to find new investors.

Equity markets rallied in September, with the S&P 500 gaining 3.4% for the month and closing the quarter at a record high. ⁽¹⁾ Historically, the weakest month of the calendar, September, instead added momentum to an already strong year. Technology stocks led Q3 returns, driven by announcements in artificial intelligence investment. One of the biggest headlines came in early September from Oracle, which announced OpenAI would buy $300 billion in computing power from the company over five years starting in 2027. ⁽²⁾ The announcement led shares of Oracle to rally 43% for the day. OpenAI generates approximately $10 billion in revenue a year ⁽³⁾, so barring additional outside investment, it remains to be seen how they will pay $60 billion a year for computing power alone. ⁽²⁾ Then, later in the month, Nvidia announced a $100 billion investment into OpenAI to help them build out their AI infrastructure, which uses those Oracle servers for computing power. There is a high degree of interconnectedness in these deals, causing some to question whether this circular spending pattern between the companies is contributing to a bubble.

JFG Outlook

Investors have enjoyed a decade of above-average stock returns, granted with some heartburn along the way. In the past 10 years, the S&P 500 has returned 15% annually, well above its historical average return of close to 10%. ⁽¹⁾ However, despite this strong past performance, looking ahead, we believe U.S. stock markets are at risk of underperforming. Stock valuations as measured by the forward price to earnings ratio, earnings yields, and the now popular “Buffett Indicator” (US stock market capitalization as a % of US GDP) all sit at extremes similar to 2021, 2001, and 1968.

For investors, discipline will be critical. During April’s 20% drawdown in just over 14 days, we followed our process, deploying cash strategically in stocks we felt could look past tariff headlines and outperform in the long run. That same preparation is vital today:

• Investors should clearly understand how much income they require from portfolios and position that amount defensively in investments such as cash and bonds.
  
• Any remaining capital can be managed opportunistically for long-term returns.
  

When investors position part of their portfolio defensively, it doesn’t mean they have to forego solid returns. We had repeatedly become more optimistic on bond returns, and through the third quarter, the bond market returned 6.2%, on pace for its highest annual return since 2020. ⁽¹⁾ In portfolio management, sometimes you can win by not losing and preparing for investment opportunities that might not be available today. Keeping part of the portfolio in cash or bonds can provide much-needed capital to buy stocks when the time is right.

Further on diversification, investors should consider investing in international stock markets. While international stock performance has trailed the US meaningfully over the past decade, the valuation differential between US and international stocks remains near an all-time high. At a time when AI investments are announced every other week, looking beyond the headlines to attractively priced stocks abroad could be timely.

Staying in touch with your investment objectives is critical when markets run hotter or colder than normal. At a time like this, when we’ve experienced a tremendous run in stocks, it is worth revisiting what allocation is right for you.

Thank you for your continued trust in Juno Financial Group.

Sources

1. FactSet
   
2. Wall Street Journal
   
3. Reuters