By Daniel McGarvey, CFA on behalf of Stonebridge Financial Group advisors
With the end of the year fast approaching, the coming weeks could be a suitable time for investors to review the risk profile of their allocations. We have now had three years of fantastic market returns since the inflation spike of 2022, and these bull runs can often lead to portfolio drift and an underappreciation of market risk. We are not predicting a reversal of the uptrend, but there are some potential flies in the ointment worth keeping an eye on.
The main theme on investors’ minds continues to be the AI (artificial intelligence) trade, which has driven market returns but also led to all-time highs in market concentration and concerns about dependency loops reminiscent of those seen in the megadeals of the dot-com bubble. Our sense is that these large investments between major players are backed by more substantive demand than those seen decades ago, but there is no denying that the market has become heavily exposed to the promise of AI, for better or for worse. We are certainly not recommending to bet against this theme, as it could very well still be in its early stages, but if at some point there are signs of reality not meeting expectations there could be widespread consequences for the enormous companies involved in the tangled web of AI expenditures.
The exuberance seen in public markets has also led to increased risk taking in private assets, as evidenced by the explosion of private credit from a relatively small corner of the fixed income industry to a $3 trillion market. Many of these funds have excellent underwriting standards, but there are also plenty extending loans to higher risk companies which may not be in optimal health, with less regulatory scrutiny. Private equity is also showing signs of froth and weakening standards at the same time that private assets are being introduced into some 401k plans.
It’s anyone’s guess whether these public and private markets are in bubble territory or still in the early stages of a new environment, but it is worth noting that these investment gains have disproportionately benefited higher earners. The top 20% income cohort accounts for the vast majority of equity and mutual fund ownership (see chart below) and over two thirds of overall net household wealth.
Source: Bank of America Institute
Additionally, the top 10% accounts for approximately half of all consumer spending, which is the primary component of GDP (gross domestic product). Our economy as a whole is chugging along, but the growth is not well distributed, and larger cracks could form if lower-earning households find it increasingly difficult to pay their bills.
While monetary and fiscal policy have shifted towards addressing economic growth, we are not completely out of the woods on inflation either. The Federal Reserve has not quite met its 2% inflation goal, and overly accommodative policy could cause a second wave like the ones we have seen in prior inflationary regimes. Inflationary trends like deglobalization and resource scarcity are unlikely to reverse course anytime soon.
There are encouraging trends to watch as well, of course, but with valuations at all-time highs it’s important to keep a balanced perspective. For investors who may not have rebalanced in the last few years, it could be especially important to make sure that portfolio drift has not led to a mismatch with risk tolerance. As an example, a hypothetical portfolio that began with a 60/40 allocation at the start of 2019, with an equal blend of value and growth equities, would now be a 75/25 portfolio with a strong growth tilt if there were no rebalancing (see chart below).
Source: J.P. Morgan Asset Management
Another crucial consideration as we enter the final months of 2025 is tax strategy. This could include paying attention to items such as mutual fund capital gain distributions, loss harvesting, retirement and HSA contributions, back-door Roth strategies, charitable giving, required minimum distributions, and more. Many of these are considerations we monitor as wealth managers, but needs vary from individual to individual, and they are worth discussing with your financial advisor and/or tax professional.
In October the S&P 500 returned 2.3% as earnings continued to impress. The Bloomberg US Aggregate Bond Index returned 0.6% on the back of the Federal Reserve’s decision to cut rates by 0.25%, and the 10-Year Treasury Rate hovered in the 3.9%-4.1% range.
Material discussed is meant for general/informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions.
November 2025 Commentary: Items to Watch into Year-End
By Daniel McGarvey, CFA on behalf of Stonebridge Financial Group advisors
With the end of the year fast approaching, the coming weeks could be a suitable time for investors to review the risk profile of their allocations. We have now had three years of fantastic market returns since the inflation spike of 2022, and these bull runs can often lead to portfolio drift and an underappreciation of market risk. We are not predicting a reversal of the uptrend, but there are some potential flies in the ointment worth keeping an eye on.
The main theme on investors’ minds continues to be the AI (artificial intelligence) trade, which has driven market returns but also led to all-time highs in market concentration and concerns about dependency loops reminiscent of those seen in the megadeals of the dot-com bubble. Our sense is that these large investments between major players are backed by more substantive demand than those seen decades ago, but there is no denying that the market has become heavily exposed to the promise of AI, for better or for worse. We are certainly not recommending to bet against this theme, as it could very well still be in its early stages, but if at some point there are signs of reality not meeting expectations there could be widespread consequences for the enormous companies involved in the tangled web of AI expenditures.
The exuberance seen in public markets has also led to increased risk taking in private assets, as evidenced by the explosion of private credit from a relatively small corner of the fixed income industry to a $3 trillion market. Many of these funds have excellent underwriting standards, but there are also plenty extending loans to higher risk companies which may not be in optimal health, with less regulatory scrutiny. Private equity is also showing signs of froth and weakening standards at the same time that private assets are being introduced into some 401k plans.
It’s anyone’s guess whether these public and private markets are in bubble territory or still in the early stages of a new environment, but it is worth noting that these investment gains have disproportionately benefited higher earners. The top 20% income cohort accounts for the vast majority of equity and mutual fund ownership (see chart below) and over two thirds of overall net household wealth.
Source: Bank of America Institute
Additionally, the top 10% accounts for approximately half of all consumer spending, which is the primary component of GDP (gross domestic product). Our economy as a whole is chugging along, but the growth is not well distributed, and larger cracks could form if lower-earning households find it increasingly difficult to pay their bills.
While monetary and fiscal policy have shifted towards addressing economic growth, we are not completely out of the woods on inflation either. The Federal Reserve has not quite met its 2% inflation goal, and overly accommodative policy could cause a second wave like the ones we have seen in prior inflationary regimes. Inflationary trends like deglobalization and resource scarcity are unlikely to reverse course anytime soon.
There are encouraging trends to watch as well, of course, but with valuations at all-time highs it’s important to keep a balanced perspective. For investors who may not have rebalanced in the last few years, it could be especially important to make sure that portfolio drift has not led to a mismatch with risk tolerance. As an example, a hypothetical portfolio that began with a 60/40 allocation at the start of 2019, with an equal blend of value and growth equities, would now be a 75/25 portfolio with a strong growth tilt if there were no rebalancing (see chart below).
Source: J.P. Morgan Asset Management
Another crucial consideration as we enter the final months of 2025 is tax strategy. This could include paying attention to items such as mutual fund capital gain distributions, loss harvesting, retirement and HSA contributions, back-door Roth strategies, charitable giving, required minimum distributions, and more. Many of these are considerations we monitor as wealth managers, but needs vary from individual to individual, and they are worth discussing with your financial advisor and/or tax professional.
In October the S&P 500 returned 2.3% as earnings continued to impress. The Bloomberg US Aggregate Bond Index returned 0.6% on the back of the Federal Reserve’s decision to cut rates by 0.25%, and the 10-Year Treasury Rate hovered in the 3.9%-4.1% range.
Material discussed is meant for general/informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions.
Stonebridge Financial Group
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