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Market Commentary

Monthly Financial Markets Commentary — October 1, 2025

The mania for stocks continued in the month of September, with investors continuing to bid up stocks in the face of deteriorating fundamentals. The rally is a matter of multiple expansion rather than fundamentals, as earnings estimates have not increased. Broad measures of employment and business activity continue to slide, and there are worrying signs in consumer delinquencies, bankruptcy filings, unemployment claims, private employment and consumer sentiment. Breadth in the market is terrible, with only two stocks, Nvidia and Microsoft, accounting for 15% of the S&P 500 Index.

By historical measures, such as price-earnings, price-to-sales, market-cap-to-GDP, Schiller CAPE Ratio, stocks are grossly overvalued. But investors, particularly retail investors, remain sanguine, as momentum has returned. Every dip in the market since 2010 has proven to be a buying opportunity. It is therefore not surprising that a generation of investors and investment advisors has come to believe the stock market only goes up, even in the short term. It is no coincidence that during this same period the Federal Reserve engaged in massive money printing, cementing the belief in the "Fed Put". A common trope these days is that valuation and fundamentals do not matter for the stock market in the short run. One has to ask the question, however, when does the short-run become the long-run?

For 2025 the S&P 500 Index, the capitalization-weighted broadest measure of U.S. stock market performance, has returned 14.56%. The Nasdaq Composite Index, another capitalization-weighted index, but more reflective of growth stocks, has returned 17.53%. Finally, the Dow Jones Industrial Average, a price-weighted index, has returned 10.45%. All returns are on a total return basis that includes dividends.

The Morningstar U.S. Aggregate Bond Index, a broad measure of the U.S. bond market, has returned 6.09% for the year. The Fed recently cut the Fed Funds Rate by .25%; nevertheless the long-end of the curve has not fallen that much, indicating the Fed has almost no control over long-term rates. Credit spreads remain at very low levels, meaning that investors are demanding very little premium over so-called risk-free 10-year treasuries.

The sectors in the equity market that have performed the best in 2025 are Communication Services, Industrials, and Information Technology at 23.4%, 15.9% and 21.4%, respectively. Real Estate, Consumer Staples, and Energy have fared the worst at 2.7%, 1.8% and 3.3%, respectively. Technology, and particularly Artificial Intelligence, has been the theme this quarter as it has been for most of the past three years. Cracks in this ediface are beginning to appear however, with stories of "round-tripping" and "vendor financing" being used by market darlings such Nvidia to continue to meet lofty earnings expectations.

The comparison of current price/earnings ratios and dividend yields as of October 1, 2025 to those of the prior year is as follows.

* based on 12-month trailing data

Much of the advance in 2024 in the equity markets was due to multiple expansion rather than fundamentals - this continues into the current year. The dividend yield, which is at historic lows, is a reliable metric of valuation, since it cannot be manipulated as earnings frequently are. There is general agreement that Wall Street analysts are overestimating 2025 corporate profits and will be taking those estimates down during the year. Dividend yields have continued to fall in the current year.

Gold and crude oil most recently traded at $3,885.75 and $65.25, respectively, compared to $2,675.50 and $70.25 one year earlier. Gold has risen in reaction to global political instability, increased holdings by all central banks and general concerns about the value of the dollar and creditworthiness of the United States. Year to date, Gold has significantly outperformed the S&P 500 index (as it has since January of 2000). The drop in the price of oil is concerning, as it frequently is an indication of the weakness of the economy and a harbinger of slower economic activity.