September 2025: Cruisin’
Cruisin’
September 30, 2025
Dow: 46,397
The stock market continues to power ever higher, with the S&P 500 Index recently reaching another new all—time high. The index is up over 14% in 2025 despite a spring correction and has now almost doubled over the trailing three-year period. It is natural for investors to fear losing their recent gains after such a large move, but that emotion is based on looking backward, not forward.
The move is again being driven by the largest companies in the index, some of which are up over 20%, 30%, or 40% in 2025. We can complain that the index is dominated by a smaller number of large companies, but these are the companies that are growing earnings or revenue, or both, at a rapid rate. Earnings growth drives a higher stock price and can also drive a higher valuation, which compounds returns at an even higher rate. QED; the Latin abbreviation for “that which has been demonstrated,” applies here. Current market prices are always a communal best estimate of future earnings power with a discounted valuation estimate — colloquially known as a guess. Most of our equity strategies remain fully invested at all times, so our portfolio managers don’t have to spend time “guessing” if the market is currently undervalued or overvalued. Instead, they can focus their time and effort on finding the best investments in the current market environment. Since the market low on April 8th, the S&P 500 Index is up over 35% in less than six months. It gained 9.5% just on April 9th! Again, QED, the benefits of being fully invested in your chosen equity strategy through all markets.
That does not mean there aren’t things to worry about; there always are. Although tariffs are bringing in significant revenue to the Treasury, their long-term effects on the economy are still a concern. It has been our contention that the tariffs would not cause a significant bump in inflation, but that the larger concern was that they could be an economic shock that could slow the economy and cause a recession. So far, that has not happened, but the Fed does seem to be paying more attention to slower job growth numbers this year.
One large factor overlaying all economic performance this year is the reversal of net migration into the United States. Current estimates are that 1.5 to 2 million immigrants have self deported and left the country. If you would have told us at the beginning of the year that this number of individuals would voluntarily, albeit with some coercion, leave the country, we would have taken the under. These individuals are both producers and consumers, making the overall economy smaller than it otherwise would have been. Without these individuals leaving their jobs, would unemployment have been higher? We don’t know.
The Fed has said that they believe that current interest rates should have the effect of slowing the economy, all else being equal. They have said that rates have been held at these levels due to fear of tariff induced inflation. We have generally taken the dovish side on interest rates, believing that it is easier for Fed policy to restrain inflation than reverse a recession. It is not clear that tariffs will result in sustained upward pressure on inflation, and slowing job growth certainly increases the worry over a possible recession. The Fed seems to have come around to this view. We believe lower rates could be the catalyst that sustains and strengthens this expansion, and we would look forward to a couple more rate cuts in the near future.
GDP rebounded smartly in the second quarter, but payroll growth has slowed significantly in the last few months. We suspect that this caught the attention of the Federal Open Market Committee and resulted in the rate cut at the recent meeting, with more cuts expected. It is troubling that job growth has slowed significantly at a time of net migration out of the country. We would have suspected that fewer individuals employed would have resulted in a tighter job market and upward pressure on wage growth, but that has not happened to date.
It may seem like a cliché, but the present crosscurrents in the economy bear watching. We will focus on companies that have strong growth prospects and reasonable valuations relative to those prospects. We believe the rate cuts will have a positive effect on economic growth and could help unlock the housing market. Lower interest rates this year have also driven better fixed income returns, providing strong returns for balanced investors. Investment opportunities always exist, and we will seek the best of them.
Random Thought: “Protectionism will do little to create jobs and if foreigners retaliate, we will surely lose jobs.”
-Alan Greenspan