Low Quality Makes a Play
In our 3Q 2025 commentary we delve into the key drivers behind market performance, focusing on four key questions:
1. How will Federal Reserve interest rate cuts impact the economy and stocks, in particular small caps?
At its September meeting, the Fed cut the federal funds rate by 25 basis points—the first move since December—after previously signaling a wait-and-see approach under the new administration. If the cut reflects confidence in subdued inflation and a shift toward a neutral rate, it could broadly support equities; however, if it signals concern over labor market weakness, it may weigh on more speculative, lower-quality stocks.
2. What are the risks and opportunities associated with some of the administration’s policies on tariffs, immigration, and deregulation?
Recent policy shifts present both opportunities and risks, with regulatory easing potentially improving financial conditions and supporting business activity. However, restrictive immigration measures could pose long-term economic challenges by dampening population growth, straining public resources, and curbing consumer demand.
3. How is AI impacting the economy today and what are the investment opportunities?
AI-related infrastructure investment continues to expand, with hyper scalers driving significant capacity build-outs that could support broader economic activity. While this presents opportunities across mega-cap tech, private markets, and adjacent sectors, the concentration of spending and potential cost implications for consumers warrant a selective, valuation-conscious approach.
4. What are the opportunities in international markets?
Several international markets—including South Korea, Spain, Japan, and Canada—have outperformed over the trailing 12 months. This relative strength reflects more attractive valuations abroad, reinforcing the case for diversification amid uncertainty around economic growth, interest rates, and market direction.
You can also listen to our Q3 analysis in Episode 294 of our stock market podcast, Kaynecast.
