By Tim Courtney, Chief Investment Officer

As we move into the fourth quarter, the market keeps moving on while growth appears to be slowing, inflation remains at 3%, and the Federal Reserve starts to cut rates.¹ Against this backdrop, we will primarily be watching developments in three areas: policies, valuations and the balance between inflation and bond yields.

1. Policy developments. Disputes around trade and tax legislation created uncertainty earlier this year, although the passage of the tax bill eliminated several areas of investor concern. International conflicts have had less of an effect on markets, which have been focused more on fiscal and monetary policy. What matters more now is how the Fed’s rate cuts interact with the broader economy. Cutting rates can help stimulate growth, but if done too quickly, it could reignite inflation.²
2. Valuations and market concentration. The price paid for an asset is one of the best indicators of future returns. Since U.S. large caps are trading well above long-term averages, there are concerns about their future returns.³ That does not mean they cannot continue to perform, but it does mean many companies must meet very high expectations to maintain their stock prices. Market gains also remain concentrated in a small number of companies,⁴ which increases the risk if leadership falters. Investors should be cautious about leaning too heavily on expensive sectors while maintaining diversification to participate if leadership expands. 
3. Inflation and bond yields. Inflation has settled near 3%,⁵ low enough to calm fears but high enough to remain a concern. The Fed’s cuts come when price pressures are not fully resolved, raising the possibility that inflation could accelerate again. If that happens, it would weigh on both stocks and bonds. Fixed income is particularly exposed because yields have already moved down. A 10-year Treasury offers about 4% while inflation is near 3%, leaving little margin for error.⁶ If inflation moves higher, real returns could fall quickly.

Our base case, as it has been for the last year and a half, is that growth is slowing due to interest rates having their desired effect on the economy and inflation. The economic data today is very noisy and, as it often is contradictory. Some areas, like GDP, show continued strength, while others, like labor, weaken.⁷

Investing with discipline remains essential. Policy moves, expensive valuations, and inflation pressures will continue influencing the market. However, what matters for long-term returns is the same as it always has been: maintaining a process for buying assets at reasonable prices, periodically rebalancing those assets, and not overreacting to the headlines. We won’t have a perfectly clear picture of the above topics by the end of the quarter. Still, developments in these areas will likely drive market behavior and guide us on how to incorporate changes into portfolios and allocations.

As always, contact your Exencial advisor with any questions.

Sources:

1. CNN Business (9/17/25) - Fed announces first rate cut in nine months, signals more reductions to come
2. Investopedia (6/15/25) - Impact of Federal Reserve Interest Rate Changes
3. Morningstar (data as of 9/23/25) - Morningstar US Large Cap Index
4. Reuters (7/23/25) - US stock market concentration risks come to fore as megacaps report earnings
5. U.S. Bureau of Labor Statistics (9/11/25) - Consumer Price Index Summary
6. U.S. Department of the Treasury (data as of 9/23/25) - Daily Treasury Par Yield Curve Rates
7. Yahoo! Finance (9/14/25) - Economists talk about a 'soft landing' a lot. What is it?

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