Market Commentary: 2025 Q3

Valuations remain at record highs

The stock market reached new heights over the past three months, with major indices hitting all-time records despite ongoing economic uncertainties. The summer rally showed impressive breadth, with both large technology companies and smaller firms participating. Corporate earnings continued to exceed expectations, providing fundamental support for the advance even as questions emerged about the sustainability of current valuations. This resilience has been notable, particularly given the volatility experienced earlier in the year.

Federal Reserve policy remained center stage as Chair Powell signaled a potential shift toward lower interest rates at the Jackson Hole symposium. After maintaining rates, Powell’s comments opened the door to resuming rate cuts, giving markets an additional boost. The central bank finds itself walking a tightrope between supporting the labor market and managing inflation. The weak August employment report has bolstered the case for rate cuts, with markets current expecting action at the September meeting.

Looking forward, it’s important to consider that stock valuations sit well above their historical averages. This situation may reflect expectations of persistent inflation rather than optimism about business growth. With the market’s price-to-earnings ratio near 27-30, compared to a long-term average closer to 16-20, stocks are priced at levels that historically have preceded lower returns. The federal deficit is projected to reach $1.9 trillion this year, with debt ratios rising to levels not seen since WWII. This combination of tariff-driven price pressure and massive deficit spending creates an inflationary environment. Owning real assets can potentially keep pace with inflation, even if those assets appear expensive by traditional measures.