Market Recap

Since April’s tariff-related market volatility, global equities have enjoyed a smooth ascent, although US equities have continued to lag their international counterparts.  Core fixed income has also found its footing, handily outperforming cash equivalents as long-term rates have edged slightly lower.  While the April turmoil was jarring, the remainder of the year has revealed a global economy characterized by its resilience and adaptability.

Looking Ahead

Although volatility has been minimal over the past five months, uncertainty around the growth outlook remains.  Periods of market tranquility present an opportunity to evaluate portfolio positioning and review allocations for unintended concentrations.  A global investment allocation has paid off in 2025, and a diversified approach is likely to continue to provide better risk-adjusted return opportunities than a concentrated portfolio.  US growth is expected to remain positive but slower, due to inflationary concerns, a weaker consumer and broader economic uncertainty.  Long-term yields have declined slightly throughout the year but remain at attractive levels, particularly relative to cash.  While the Fed has signaled the potential for two additional rate cuts this year, the specter of inflation may slow their progress, barring a deterioration in the labor market.

Looking Ahead

Thus far, 2025 has been a case study in the benefits of diversification and the resilience of capital markets.  While US equities bounced back well following April’s uncertainty, a globally diversified portfolio weathered volatility much better.  US equity markets are in a precarious position, given elevated levels of concentration and inflated valuations.  There is no shortage of alarming headlines, and their frequency is unlikely to decrease.  However, the stark reality is that most day-to-day news doesn’t drive long-term market returns.  Gradual, incremental economic growth does.  As such, we seek to construct portfolios to match client objectives and risk tolerances, rather than chasing the latest trend.  The end of the year presents an opportune time to evaluate your asset allocation, consider potential rebalancing and assess the adequacy of cash reserves.  Please don’t hesitate to reach out to your advisor to schedule time to discuss your financial plan, including your goals and planning assumptions.  Allowing planning to drive the investment approach, rather than reactions to market fluctuations or prognostication, helps ensure that your portfolio remains aligned with your vision for the future.

Leading Topics

Economic Fundamentals

US real GDP growth expectations for 2025 and 2026 have decelerated to just under a 2% pace.  While that represents a slower growth trajectory relative to the past decade, it’s far from a recessionary level.  Consumer spending has remained resilient, although discretionary spending growth has become increasingly concentrated in a narrow subset of households.  The domestic labor market presents a paradox: hiring has slowed but unemployment hasn’t increased dramatically.  The trajectory of private sector job growth has remained largely intact, while much of the slowdown has occurred in the public sector.  Although the US outlook points toward a period of slower economic growth, the global outlook is more appealing, with the IMF estimating 3%+ growth globally in 2025 and 2026.  The outlook is more indicative of a period of more gradual growth rather than a recession, barring an unforeseen shock.

Global Equity Markets

Although international equities have outperformed their US counterparts in 2025, international valuations remain reasonable relative to historical averages.  About half of international equity performance in 2025 has been due to Dollar depreciation, rather than valuation expansion.  Domestically, valuations remain a concern, particularly in the largest S&P 500 components.  US markets have become increasingly concentrated, with 10 companies making up approximately 40% of the S&P 500 market cap.  The combination of lofty valuations and concentration make US equities vulnerable to negative shocks.  Broadening exposure seems wise given more favorable valuations and growth opportunities elsewhere.  The concentrated performance of the past decade was at least partially fueled by a strong Dollar and low interest rates and may not persist if those trends shift.  Growth equities typically don’t meaningfully outperform their value counterparts in higher interest rate environments.  Exposure to countries with different economic catalysts and varied demographic trends allows portfolios to better weather economic uncertainty and opens multiple avenues for growth.

The Federal Reserve, Inflation & Fixed Income

The Fed implemented a 25 bp rate cut in September, after taking a cautious approach to easing financial conditions.  The Fed anticipates approximately two additional cuts this year.  Since April, long-term yields have declined slightly, as the market’s worst fears around the inflationary impact of tariffs have thus far been avoided.  The slight decline in long-term rates and the higher absolute level of yields has driven impressive fixed income performance year-to-date.  While yields are appealing, it’s important to ensure that your fixed income portfolio is appropriately positioned.  Treasuries currently offer minimal term premium out to the 10-year portion of the yield curve.  Extending duration along the Treasury curve reduces reinvestment risk but doesn’t offer a compelling yield improvement.  However, corporate and municipal bond spreads have widened relative to Treasuries, offering attractive yields without the need to assume excessive credit risk.  Investors with outsized cash holdings are vulnerable to reinvestment risk and should consider duration extension.

Economic Outlook: A Mixed Picture

Although US GDP growth improved in the second quarter, the granular GDP components tell a tale of slowing growth.  In the quarter, real GDP increased by 3.8% year-over-year.  However, two components of GDP, net exports and changes in inventories, are in a state of flux due to tariff-related activity.  In the first quarter, net exports dropped as retailers pulled forward imports, driving an increase in inventories.  In the second quarter, those trends reversed, as net exports jumped and inventories declined sharply.  Once both are excluded, you obtain a clearer picture of underlying demand growth, with real year-over-year GDP growth closer to 2%.  That represents a deceleration from the past few years but is more consistent with an economy that is slowing gradually rather than on the brink of recession.

The consumer has weakened steadily, as COVID stimulus has evaporated and the cumulative impact of elevated inflation has taken a toll, particularly on lower income consumers.  The consumer is bifurcated, with the top 10% of households by income representing over 50% of consumer spending.  Rate cuts may negatively impact the spending of wealthier households, who generally don’t have revolving debt balances and hold generous cash reserves.

The labor market has normalized, with job openings back around 2019 levels.  Although hiring has slowed, layoffs have not increased and remain well below pre-COVID levels.  The unemployment rate has ticked up slightly but remains near multi-decade lows.  A reduced demand for labor appears to have been partially offset by a decline in supply.  In 2024, about 4 million Americans turned 65, while only 3.6 million children were born.  As the population ages, the workforce is likely to continue to shrink, barring a loosening of immigration restrictions.

US economic fundamentals aren’t as robust as they were a few years ago.  However, the tariff-related concerns around demand destruction we saw earlier in the year seem to be exaggerated.  When you pick apart the components of the US economy, the indicators point to a gradual growth slowdown as opposed to a high level of recession risk.  Possible catalysts to boost the growth trajectory could include a loosening of immigration restrictions or some resolution of the trade war, neither of which appears imminent.

US Equities: Valuation & Concentration

US equities have continued their steady upward climb since April.  S&P 500 valuations are now well above historical averages, hovering around levels not seen since early 2022, when interest rates were substantially lower.  Although imperfect, there is a negative correlation between starting valuations and subsequent returns.  More concerning than the overall level of domestic equity valuations is the degree of concentration.  Currently, 10 companies make up approximately 40% of the S&P 500.  The combination of elevated concentration levels and strained valuations leaves US equities vulnerable to a negative shock.

Higher interest rates typically place downward pressure on valuations.  This is particularly true for “growth” equities that have a larger proportion of their expected earnings occurring further out in the future.  When interest rates increase, those future earnings are discounted at a higher rate, making them less valuable in present terms.  Although US growth equities have outperformed other segments of the equity market over the past decade, the economic environment has shifted.  A combination of slower US growth expectations and higher interest rates may promote broader market performance than we’ve seen in recent years.  Historically, the returns of value and growth equities have been similar when interest rates are elevated (10-year treasury over 4%), a stark contrast to recent growth outperformance.  Given the US Government’s prolific debt issuance and ongoing inflation risks, the likelihood of substantially lower long-term interest rates appears minimal in the near term.  Furthermore, international equities present an opportunity to diversify away from US concentration, while gaining exposure to markets that offer compelling growth opportunities at reasonable valuations.

Inflation & The Federal Reserve

The gradual downward drift in inflation that began in 2022 has stalled.  Since April, inflation figures have trended upward, although to a lesser extent than some feared during the early days of the tariff uncertainty.  The absence of a sharp inflationary spike is likely due to a few factors: supply chain adaptability, tariff delays, and offsetting disinflation in other categories.  The pace of housing inflation has declined meaningfully over the past few years, which has helped counteract the minor tariff-driven bump in goods inflation.

The Fed executed their first interest rate cut of 2025 in September, and markets expect two additional cuts before the end of the year.  Rate cuts, combined with continued tariff impacts, are likely to keep inflation above the Fed’s 2% target in the near term.  While lower short-term rates may reduce the discount rate for firms and investors, the impact on the consumer is ambiguous.  As of the end of 2024, US households had about $14 trillion in cash accounts, money market investments and other short-term deposits.  The interest rates on those accounts will be impacted almost immediately when rate cuts occur.  On the liability side, American households have about $7.5 trillion in revolving debt and floating rate mortgages that will benefit from the Fed’s rate cuts.  As such, a reduction in short-term rates may not spur significant new demand the consumer side.  Marginal corporate investments may also be limited due to uncertainty around trade policy.  Although the Fed has control over short-term rates, shifts at the short end of the yield curve may not translate to long-term rates.  Increasing amounts of Treasury issuance or a lack of faith in the Fed’s commitment to inflation reduction may drive long-term yields higher even as short-term rates decline, akin to the yield curve steepening that occurred in 2024.

Fixed Income: The Land of Quiet Opportunity

While many market prognosticators focus on equities, the opportunities available in fixed income are hard to ignore.  The yield curve has steepened over the past year and may continue to do so if the Fed persists in reducing short-term rates.  In December of 2024, the 10-year Treasury yield surpassed the Fed Funds rate, meaning that investors no longer need to accept a yield discount to reap the benefits of duration extension.  After the fixed income volatility of 2022, many investors have been content collecting 4-5% in cash-adjacent investments without taking on duration risk.  However, investors with substantial amounts of cash and money market holdings are vulnerable to reinvestment risk.  Modest duration extension seems prudent in order to lock in higher rates.  After all, the best predictor of future fixed income returns is starting yields.

The bond market is both vast and complex, which is why we believe that using skilled fixed income managers is essential.  While a market-cap weighting in many equity strategies has a logical basis, we don’t believe that the same holds true in fixed income.  Buying bonds from the issuers with the most debt seems like a sub-optimal approach.  Although the Treasury curve has steepened, the term premium isn’t overly compelling, relative to other segments of fixed income.  An area that looks particularly enticing is municipal bonds, particularly at the longer end of the yield curve.  For high-tax-bracket investors, municipal bonds offer compelling tax-equivalent yields, without the need to take on excessive credit risk.  Currently, 10-year AAA municipal bonds offer tax-equivalent yields of around 4.8%, with even higher yields on offer for those willing to take additional duration or modest credit risk.  On the taxable side, the Bloomberg US Aggregate Bond Index offers a yield of around 4.3%, approximately a 30 bp improvement on current money market yields, a gap that is likely to widen if the Fed continues to ease financial conditions.

International Equities: Growth at Value Prices

Although US equities have substantially outperformed their international counterparts for the better part of 15 years, international equities present a compelling diversification opportunity at reasonable valuations.  Adding to non-US exposure is not necessarily a bet on US underperformance, but an insurance policy against the concentrated and expensive nature of US equity markets.  Although international valuations are compelling, there’s more to the story.  Several regions boast intriguing tailwinds, with growth in India and Japan far outpacing US GDP growth over the past 5 years, and Europe keeping pace, even while dealing with a slow rebound from COVID.  Another factor that has spurred international performance this year is flows.  Since the Global Financial Crisis, US equities have seen substantial inflows from international investors.  That dynamic reversed this year, beginning with the DeepSeek AI launch in January, followed by a further crisis of confidence during the tariff-driven volatility of April.  The US share of global equity market cap peaked around 68% in late 2024, nearly doubling over the prior 15 years.  While the optimal US weighting is debatable, having two thirds of global equity value concentrated in a single country seems extreme.

Outside of concentration and valuation, there are several catalysts for international equities.  Europe is rife with intriguing growth opportunities.  European banks have taken advantage of the higher rate environment and have outperformed the Magnificent 7 over the past three years, demonstrating the potential for value-style equities in a higher interest rate world.  Europe has also shown a commitment to investing in long-neglected infrastructure and defense projects.  The combination of the conflict in Ukraine and the trade war have shifted the European perspective somewhat in the direction of self-reliance, as evidenced by meaningful commitments to infrastructure and defense spending.  One of the most substantial is Germany’s commitment to invest 500 billion Euros in infrastructure over the next 12 years.  Outside of Europe, the world’s two emerging powers, India and China, offer compelling opportunities.  In India, population growth is part of the story, but more significant is the shift from a goods-based economy to a more robust services sector that supports higher levels of domestic consumption.  The Indian middle class has grown at an annualized rate of about 6% over the past 25 years and is expected to continue to expand rapidly.  The Chinese growth story has been less linear, with a slow recovery from COVID compounded by the bursting of a real estate bubble.  However, the government and central bank have taken drastic steps to shore up the property sector and stimulate the economy.  Although the Chinese population is aging, the economy is evolving to one that is more balanced between the manufacturing and services sectors.  Valuations are also appealing, with Chinese equities trading at around 13x forward earnings, even after tremendous performance year-to-date.

Two constants during the 15-year era of US equity market exceptionalism were a strong Dollar and historically low interest rates.  As both of those have shifted, so has the global economic landscape and the relative attractiveness of various investment opportunities.  The gap in returns between US and international equities in 2025 offers a powerful example of the benefits of a geographically diversified portfolio.

Behavioral Finance: Why is Stock Picking So Difficult

As financial advisors, we’re occasionally forced to confront one of the misconceptions about our profession.  Although the vocation has evolved dramatically over the past three decades, there remains a societal perception that our focus is on attempting to pick the next hot stock.  While stock pitches may have been a meaningful reason why financial advisors were hired in a bygone era, the profession has evolved.  At Journey Wealth, we focus on developing a financial plan that matches your goals with your financial circumstances before we consider making an investment recommendation.  We then construct a diversified allocation that aligns the requirements of your plan and adjust when we feel that the plan requires it or when fundamentals justify a shift.

Why do we believe in taking a diversified approach rather than building concentrated portfolios?  Because the data supports our method.  While the market has proven to be a consistent engine of wealth generation when investors remain invested over long periods, individual stocks have a similar return distribution to lottery tickets, with a few big winners and many losers.  Hendrik Bessembinder conducted a study of individual stock returns over a 90-year period and concluded that approximately 60% of US stocks underperformed Treasury bills.  The most common outcome (median) for individual stocks was a complete loss.  This speaks to the skewness of equity returns, where a handful of companies account for the vast majority of returns.  If the data is so stark, why do some investors insist on picking individual stocks?  The answer is likely rooted in the cognitive bias of overconfidence.  This bias was beneficial in some stages of our evolution but is actively harmful when it comes to investing.  As Robert Shiller, a Nobel Prize-winning economist put it, “individual investors and money managers persist in their belief that they are endowed with more and better information than others, and that they can profit by picking stocks.”  We prefer the data-supported approach and invest in a globally diversified portfolio, whose asset allocation aligns with your personal objectives and level of risk tolerance, rather than embarking on a quest to find the next undiscovered gem.

What it All Means

Equity Outlook

After a brief pull-back in April, US equity valuations and concentration levels have once again become a concern.  We believe that a meaningful allocation outside the largest S&P 500 constituents, including international and value equities, offers diversification benefits as well as exposure to attractive growth trends.  International equity exposure also helps reduce sensitivity to a weaker Dollar and trade-related volatility.

Inflation & The Federal Reserve

The downtrend in inflation has stalled, as an uptick in goods inflation has offset the favorable trends in other categories.  The Fed executed their first interest rate cut of 2025 in September, and markets expect two additional cuts before the end of the year.  Given the ratio of consumer cash reserves to floating rate debt, rate cuts may not prove to be as stimulative as in past cutting cycles.  Cuts in short-term rates may not translate to long-term yields, due to investor reticence around the path of inflation.

Economic Outlook

Recent US economic data points toward an outlook of slower growth rather than a substantial recession risk.  The consumer has weakened as COVID stimulus has evaporated, and inflation has taken its toll.  However, the labor market appears stable, with reductions in demand balanced by supply.  While US economic fundamentals are less robust than they were a few years ago, the tariff-related concerns around demand destruction we saw earlier in the year seem to be exaggerated.

Fixed Income Opportunities

Fixed income offers attractive yields without the need to accept substantial credit risk.  These yields are appealing given elevated equity valuations and cash yields that are likely to continue to decline.  Starting yields have proven to be an excellent predictor of future returns.  Given the potential for interest rate volatility, we recommend an active approach to the asset class.  Municipal bonds appear particularly appealing for those in higher tax-brackets.  Investors with outsized cash holdings are vulnerable to reinvestment risk and should consider duration extension.

Relevant Disclosures: This information was prepared by FSM Wealth Advisors, LLC d/b/a Journey Wealth Management, LLC (“Journey”), a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Journey’s Form ADV Part 2A and Part 2B can be obtained by written request directly to: 22901 Millcreek Blvd., Suite 225, Cleveland OH 44122. 

The information herein was obtained from various sources. Journey does not guarantee the accuracy or completeness of information provided by third parties. The information provided herein is provided as of the date indicated and believed to be reliable. Journey assumes no obligation to update this information, or to advise on further developments relating to it.

Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance is not indicative of future results. Neither the information nor any opinion expressed herein should be construed as solicitation to buy or sell a security or as personalized investment, tax, or legal advice. For advice specific to your situation, please consult an appropriately qualified professional investment, tax or legal adviser.