- Short-term interest rates are headed lower: While the US economy is showing some minor cracks, the Fed is cutting not because of recession fears, but during ongoing economic strength – a positive backdrop for equities.
- Valuations remain mixed: Headline P/Es look stretched, but breaking downs the various indices, there are many great companies with more reasonable prices.
- AI as a structural driver: Rapid adoption of Artificial Intelligence is set to transform profitability and innovation across industries — a key long-term theme.
- Consumer resilience: Solid spending and a largely stable unemployment rate continue to support earnings, despite slower hiring trends
Bull or Bear Case?
I am occasionally “accused” of perennially leaning into the bull, or at least a constructive case for equities, regardless of potential economic and market storm clouds forming. Well, I can certainly just as easily make the bear case for the equity markets but that would be for traders and market timers, neither strategy, in my opinion, serve investors well.
Bear markets are usually short-term events brought on by economic recessions, which tend to be short, or jolting “black swan” events, which tend to be even shorter, or even just investor sentiment, aka fear. Trying to time or trade these events is nearly impossible, even by the most studied professionals. Investing considers economic expansions, which are typically long, and with history as a powerful guide, usually accompanied by positive market returns. As I note below, there are some powerful factors at play that should continue to make the case for owning equities.
The chart below highlights how staying invested has historically delivered stronger long-term results, while missing even a handful of the best days can significantly reduce returns.
Source: Lipper IM, data as of 31st August 2025. Past performance does not predict future returns. The price of shares can go down as well as up and may be affected by movements in the rates of exchange.
But What About Volatility?
Of course, there is no shortage of bone-jarring, sleep-denying, stress-inducing periods of market volatility, but that goes along with equity market investing. If investors don’t have the time horizon – or stomach – to look the other way in return for the potential – and historically validated results – the equity asset class may not be for them. Of course, while the disclosure: “Past performance is no guarantee of future results” is important, I believe that, as long as free market capitalism is the dominant global form of commerce, these patterns have a high probability of repeating themselves. So, as an investor, not a trader or timer, I use history as the denominator and try to see over the economic walls as they occur into the opportunities that longer term cycles present.
This chart shows the history of bear markets and recoveries in the Index 500, underscoring why staying invested through downturns can be rewarding over time.
Source: Lipper IM, data as of 31st August 2025. Past performance does not predict future returns. The price of shares can go down as well as up and may be affected by movements in the rates of exchange.
Is the Market Expensive?
There is a lot in the financial media about how “expensive” the equity market is. And yes, by a number of historical metrics, it is not cheap, with the price/earnings ratio of the S&P 500 north of 30x earnings, with a historical PE of close to half that number. However, if you exclude the “Magnificent 7,” valuations across hundreds of other companies fall to a more reasonable low-to-mid 20x. Many small- and mid-cap businesses, given their current earnings growth trajectory, are trading at levels that certainly merit attention.
As of this writing, the market has begun to broaden, and with the lowering of interest rates – currently restrictive in Fed speak – smaller companies have begun to benefit. As behavioural finance fuels a price opinion bias (investors climb or run into a wall of worry with the news media beating the “all time highs” drum), we often focus on market highs, and how expensive stocks are. Instead, the real focus should be on earnings and earnings growth trends, which give a clearer view of where prices may be heading, particularly at the individual stock level. Yes, that means stock picking matters!
Let’s keep in mind that if markets have historically gone higher over time, that means we’re periodically hitting new highs. Again, it’s not about price. While higher prices create the potential for higher volatility, markets don’t “die” just because of higher valuations. What matters is earnings – and earnings growth is what drives markets upward over the long term. And while this Q3 update focuses on the US, it’s worth noting that markets outside the US – both emerging and developed ex-US – are trading at more attractive levels and have delivered strong returns so far this year.
Headwinds & Tailwinds
For those who have listened to me or read my commentary in the past, you might recall that I take a limited set of economic/market variables – “Headwinds & Tailwinds” – to construct my thoughts on where things may be headed as an investor (not a trader). As that perennial bull case pundit, I think that even at financial news level headlines record prices – there’s the continuing case to be made.
So, here’s a quick summary:
Interest Rates and the Fed
Rates are headed lower. No debate. The US remains in a Goldilocks economic period, though consumer activity has started to slow slightly from very strong levels. As usual, the Fed is trying to get ahead of the trend. Crucially, rate cuts are happening not because of a looming recession (in my opinion), but during a period of continued economic strength. That makes a world of difference to equity prices.
The Fed is effectively playing offence – providing cheaper money in times of strength rather than weakness. So, whatever the resistance from Chair Powell, political pressure on Fed independence from Trump, or the appointment of a new Chair in May, the direction is the same: lower rates are coming. And their effect is not only short term, but also sets the stage for a prolonged period of cheaper corporate and consumer borrowing costs.
Another powerful factor is the $7 trillion of cash still held by consumers. As yields fall, some of that cash is likely to flow back into risk assets, adding more fuel for the equity markets.
Inflation
At 2.9%, inflation is well below its short-lived peak of 9%, but still above the Fed’s target of 2%. Given the impact of tariffs, tax breaks, and lower interest rates, inflation will likely be sticky, but not destructive. While this Fed may “take it slow” on subsequent rate reductions, a Trump Fed with new governors and ultimately a new Chair will likely be less hesitant, and short-term rates will continue to come down.
US Consumer and Employment
Still 70% of the US economy, our massive consumerism – “what, we’re supposed to save???” – is still intact. While the employment figures are getting weird, to use a non-financial term – at 4.3% unemployment = full employment, the consumer, especially the top half of earners, keep the ‘like it, try it, buy it’ mentality going. Back to weird – companies are not firing, but not hiring, immigration lock down is creating job shortages, and wage pressures still exist so the net result is the employment picture remains constructively intact. All this results in relatively stable employment figures. As spending continues, the bottom of the funnel is higher corporate profits and stock prices.
Artificial Intelligence (AI)
AI has been called the next Industrial Revolution. I might go a step further and call it on par with the discovery of fire. We are in the early stages of witnessing capabilities that will transform humankind. Innovation, discovery, speed of new product development, effectiveness, efficiency, education, and many more words to describe what AI will do everywhere. It has been said in the pharmaceutical and medical industry that new drugs and procedures that took a decade or more for development and regulatory approval, could in cases take a year or less. Translating this back to companies and profitability, there will be no more powerful driver than AI. Beyond those merits are the sheer billions – hundreds of billions of dollars being invested in developing capabilities in tools and the energy needed to power and harness. All the big names in tech – yes, the Mag 7 have already begun committing and spending these untold sums, and the downstream effects in companies in all sectors and of all sizes will be enormous.
The impact of AI combined with falling interest rates, could power businesses across every sector in a way that creates a ‘once-in-an’ investment career potential fuel to the US and global equity markets.
Source: Rob Gordon, VAM Investment Director
FOR PROFESSIONAL INVESTORS ONLY.
Data correct as of October 2025.
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