As we enter Q4 and reflect back on the previous quarters, it’s hard not to be impressed by what has transpired. Since the market pullback in March and April of this year, markets (Dow Jones, S&P 500 and Nasdaq) have continued their advance. With all three indices establishing new all-time highs. As we remarked earlier in the year, we were confident that we would continue to see equity growth for a variety of reasons – largely because of the number of positive factors that were feeding the bull market.
Today’s reflections are different from those we observed at the onset of 2025. Although we clearly remain in a bull market, the aforementioned factors (identified below) driving the market higher have adjusted and matured significantly. Balance sheet strength and stability for households and corporations (in particular banks and financial institutions) seem strong and intact. We are not “over-levered” at the moment. Corporations have been resilient to tariff impacts and generally have been able to maintain productivity utilizing the same or less labor. Deregulation and tax changes have also been stimulative. And we now have a Federal Reserve which is likely to cut rates over the next several financial quarters. Policy change came despite inflation running above FED target (approximately 3% verses their 2% mandate).
While we acknowledge these positive factors and where they have taken the capital markets, we also must acknowledge some concerns that we have at this time. One of these concerns is the valuation levels of the markets right now. Currently, the S&P 500’s P/E (price/earnings) ratio is 31. This is a valuation level that we have not seen in a long time. At the time of this update, the S&P 500 is up over 15% year-to-date. Growth stocks (more momentum & technology companies) are up over 17.5% and large-cap value up around 12.5%. By all standards, 2025 has been an impressive year for the various stock market indices.
As markets have advanced to new levels and all-time highs, we are very aware of the notion of “what goes up, can also come down.” So why are valuations a big deal? For us it places added pressure on publicly held companies to “deliver.” Simply put, earnings support stock prices. Shortfalls and unexpectedly weak(er) earnings will drive stock prices lower. We also feel that corporations have done a great job at dealing with tariff pressures. Although some prices have been passed on the consumer, many companies have controlled costs and have not passed along their price increases to the consumer. But this dynamic can also change, which has direct impacts on consumer expenditure. Labor is also a concern, but thankfully we have not yet witnessed significant “downsizing” of labor (unemployment). Companies are doing more with less, and hiring has been largely muted.
A few weeks back, Jerome Powell stated that the markets are “fairly highly valued,” which sounded a little like Alan Greenspan’s comments about “irrational exuberance” back in 1996. Additionally, prominent portfolio managers and investment strategists have stated that 2025 feels a lot like 1999 – a period prior to the technology bubble bursting and when investors faced three consecutive down years in the stock market (2000, 2001 and 2002). Bull markets can continue to advance for longer than many predict and correct when the fundamentals that are needed to support them break down. Remember, the stock market continued to appreciate for close to four years after Alan Greenspan’s famous statement. Artificial intelligence and technological advancements are powerful. Nevertheless, it is important to remember the past, temper our expectations accordingly, and avoid portfolio concentration.
The key takeaway is we think rebalancing should be discussed. In fact, we are encouraged by the prospect for bonds going forward, especially with recent policy shifts, which tend to point to a rate cutting environment in front of us. International markets have also been providing solid diversification as well as market returns. Please reach out to us to discuss any and all of these potential initiatives and suggestions as we are here to help you navigate these changing times going forward.
Author:
Sean Clarke, MBA
From Momentum to Moderation: Market Reflections as we enter Q4
As we enter Q4 and reflect back on the previous quarters, it’s hard not to be impressed by what has transpired. Since the market pullback in March and April of this year, markets (Dow Jones, S&P 500 and Nasdaq) have continued their advance. With all three indices establishing new all-time highs. As we remarked earlier in the year, we were confident that we would continue to see equity growth for a variety of reasons – largely because of the number of positive factors that were feeding the bull market.
Today’s reflections are different from those we observed at the onset of 2025. Although we clearly remain in a bull market, the aforementioned factors (identified below) driving the market higher have adjusted and matured significantly. Balance sheet strength and stability for households and corporations (in particular banks and financial institutions) seem strong and intact. We are not “over-levered” at the moment. Corporations have been resilient to tariff impacts and generally have been able to maintain productivity utilizing the same or less labor. Deregulation and tax changes have also been stimulative. And we now have a Federal Reserve which is likely to cut rates over the next several financial quarters. Policy change came despite inflation running above FED target (approximately 3% verses their 2% mandate).
While we acknowledge these positive factors and where they have taken the capital markets, we also must acknowledge some concerns that we have at this time. One of these concerns is the valuation levels of the markets right now. Currently, the S&P 500’s P/E (price/earnings) ratio is 31. This is a valuation level that we have not seen in a long time. At the time of this update, the S&P 500 is up over 15% year-to-date. Growth stocks (more momentum & technology companies) are up over 17.5% and large-cap value up around 12.5%. By all standards, 2025 has been an impressive year for the various stock market indices.
As markets have advanced to new levels and all-time highs, we are very aware of the notion of “what goes up, can also come down.” So why are valuations a big deal? For us it places added pressure on publicly held companies to “deliver.” Simply put, earnings support stock prices. Shortfalls and unexpectedly weak(er) earnings will drive stock prices lower. We also feel that corporations have done a great job at dealing with tariff pressures. Although some prices have been passed on the consumer, many companies have controlled costs and have not passed along their price increases to the consumer. But this dynamic can also change, which has direct impacts on consumer expenditure. Labor is also a concern, but thankfully we have not yet witnessed significant “downsizing” of labor (unemployment). Companies are doing more with less, and hiring has been largely muted.
A few weeks back, Jerome Powell stated that the markets are “fairly highly valued,” which sounded a little like Alan Greenspan’s comments about “irrational exuberance” back in 1996. Additionally, prominent portfolio managers and investment strategists have stated that 2025 feels a lot like 1999 – a period prior to the technology bubble bursting and when investors faced three consecutive down years in the stock market (2000, 2001 and 2002). Bull markets can continue to advance for longer than many predict and correct when the fundamentals that are needed to support them break down. Remember, the stock market continued to appreciate for close to four years after Alan Greenspan’s famous statement. Artificial intelligence and technological advancements are powerful. Nevertheless, it is important to remember the past, temper our expectations accordingly, and avoid portfolio concentration.
The key takeaway is we think rebalancing should be discussed. In fact, we are encouraged by the prospect for bonds going forward, especially with recent policy shifts, which tend to point to a rate cutting environment in front of us. International markets have also been providing solid diversification as well as market returns. Please reach out to us to discuss any and all of these potential initiatives and suggestions as we are here to help you navigate these changing times going forward.
Sean Clarke, MBA
Managing Director – Investment Advisory
Baldwin & Clarke Advisory Services, LLC
Email: sean@baldwinclarke.com
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