Market Update October 15, 2025
Knowing where to invest was much easier last spring when stocks were beaten down and investor sentiment was in the toilet. Now is another story, as the major global stock indexes have since staged an incredible rally. Stock valuations for the S&P 500 are back to nosebleed valuations while stock ownership among households is at a record high percentage. These have historically preceded weak long-term returns. Thankfully, there are pockets of the financial markets that I believe do offer a better balance of risk and reward.
Just how strong has the rally been in stocks? In the second quarter of this year, all three of the major global stock indexes posted double digit returns. The third quarter was outstanding as well, with the S&P 500 up 8.1%, the MSCI EAFE index of established foreign market stocks up 4.8%, and the MSCI Emerging Markets index up 10.6%. Year-to-date these three indexes are up 14.8%, 25.1%, and 27.5%, respectively, through the third quarter. About 11.5% of the return of the MSCI EAFE index can be attributed to the effects of the weakening U.S. Dollar. Periods of USD strength and weakness can last for years. Seeing as we have recently had a particularly long period of USD strength, I would not be surprised to see the current trend of USD weakness to persist for quite some time. This should have a favorable impact on foreign market returns for U.S. investors.
Bonds too have had a very good year so far, with the Bloomberg US Aggregate index up 2% in the third quarter and 6.1% year-to-date. Tempering my enthusiasm somewhat for bonds is that the additional yield investors in corporate bonds receive now over Treasuries is at a very low level. This is the case for both investment grade corporate bonds and high yield bonds (bonds issued by companies with lesser credit ratings). Typically, investors are more handsomely rewarded for the additional credit risk of corporate bonds.
Our country is in the midst of another government shutdown due to Congress’ inability to reach an agreement with regard to its budget. This is the first shutdown since 2018 which also was our longest, lasting 35 days. Shutdowns have historically had seemingly no impact on stock market performance. An extended shutdown would raise the risk of a downgrade of our country’s debt, which could have a negative effect on bond prices, increasing yields and our country’s borrowing costs. While a downgrade warning during the previous shutdown did not negatively impact bonds, another warning or downgrade certainly could.
Gold has been on a tear this year, up 60% as of today. Global central banks were huge buyers of gold the previous three years, likely in response to the freezing of Russian central bank assets held abroad following its invasion of Ukraine early in 2022. Central banks have been increasing their exposure to gold for the past fifteen years as they look to diversify their reserves beyond the USD. The USD has been the reserve currency of the world since World War II and is the most widely used currency in international trade. Demand for gold this year has been heavily driven by investors in gold-backed exchange-traded funds (ETFs). In a classic example of investors’ herd mentality to chase whatever is hot, last month these ETFs had their biggest monthly inflows on record. Silver has amazingly done even better, up 84% through yesterday. This month it hit its highest level ever, breaking above $50 and surpassing its prior record set way back in 1980 when the Hunt brothers famously tried to corner the market.
Much of the gain so far this year for the S&P 500 can be attributed yet again to the so-called Magnificent 7 stocks. These seven stocks were responsible for 45% of the S&P 500’s gain through the third quarter. The enthusiasm over artificial intelligence and gains in the large technology stocks driving this index have led to the index being the most expensive it has ever been on a price-to-sales basis, higher even than the Internet frenzy of the late 1990s. There is debate over whether or not AI will lead to a profitability boon for companies like we saw with the Internet. MIT issued a report in August stating that 95% of companies they surveyed showed no return on their AI investments. The amount of revenue companies will need to generate to warrant the vast sums they are investing in AI is mind boggling. Only time will tell whether their investments will generate the hoped-for improvements in profitability.
To quote William Shakespeare, I believe discretion is the better part of valor.
Sincerely,
Glenn S. Rank, CIMA®
Certified Investment Management Analyst®
President
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· The S&P 500 is an unmanaged capitalization-weighted index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. The S&P 600 Index is a capitalization weighted index comprised of 600 stocks viewed as having a relatively small market capitalization, chosen for market size, liquidity, and industry group representation. The MSCI EAFE index and the MSCI Emerging Markets index are unmanaged indexes compiled by Morgan Stanley Capital International that are generally considered representative of the developed international stock market and emerging international stock market, respectively. International securities involve additional risks including currency fluctuations, differing financial accounting standards, and possible political and economic volatility, and may not be suitable for all investors. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The Bloomberg US Aggregate Bond index is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the U.S. Inclusion of these indexes is for illustrative purposes only. Note that bond prices rise when yields fall, and vice versa, due to the inverse relationship between bond prices and yields. Keep in mind that individuals cannot invest directly in any index and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary.
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