Market Recap

2025 has been a case study in the resilience of capital markets.  Although there has been no shortage of uncertainty surrounding global trade, markets have largely shrugged off those concerns.  Global equities and fixed income have performed admirably, with cash equivalents lagging.  Although the concentrated nature of large cap US equities warrants some caution, there are plenty of market segments that offer appealing growth prospects and reasonable valuations.  While employment remains stable, the domestic consumer has weakened.  Corporate investment has also slowed, likely due to trade uncertainty.  International equities continue to offer a compelling opportunity set due to reasonable valuations, broader diversification and intriguing growth tailwinds.  Domestically, the Fed has pivoted from a focus on taming inflation to supporting the labor market.  Ample issuance of government debt is likely to maintain a floor on longer-term bond yields.  While predicting the precise path and impact of trade policy is impossible, the worst-case scenarios appear to have been avoided.

Looking Ahead

While it may not have felt like it during the first half of the year, 2025 has yielded impressive performance for nearly all asset classes.  Periods of relative market tranquility present an opportune time for rebalancing portfolios to ensure that your allocation is aligned with your risk target and goals.  While global fundamentals remain stable, lofty valuations in certain segments leave markets vulnerable to negative surprises.  Given the concentration within US equity markets, we believe that a globally diversified approach will continue to prove beneficial.  Fixed income offers a meaningful yield improvement over cash equivalents and is playing its intended role as a volatility mitigator.  While it’s often tempting to prognosticate, we advocate building portfolios to achieve your long-term goals as opposed to trying to predict the next market event.  Please don’t hesitate to reach out to your advisor to schedule time to discuss your financial plan, including your goals and planning assumptions.

Leading Topics

The Economy

Although tariffs present an ongoing risk, the impact has been less severe than initially feared.  The current effective tariff rate is around 16%, after gradual moderation from a peak of 30% on Liberation Day.  GDP growth has settled into a slower yet still positive trajectory.  While hiring has slowed, unemployment hasn’t increased substantially.  The disconnect is likely related to demographic factors, as elevated retirements aren’t being fully offset by new entrants into the workforce.  While the overall economic picture is one of stability, further labor market weakness could place a damper on the growth outlook.

Federal Reserve / Interest Rates

The Fed has continued easing interest rates to prevent further weakening in the labor market.  The Fed also announced an end to the quantitative tightening program that has been in place since 2022.  Markets are pricing in about a 50% chance of an additional rate cut in December.  The Fed seems to have abandoned their battle with inflation over fears of deterioration in the labor market.  While the Fed is making concerted efforts to lower borrowing costs, elevated Federal debt issuance is likely to maintain a floor on long-term rates.

Fixed Income

There is a meaningful yield advantage in core fixed income relative to cash.  Bonds also offer protection against a decline in short-term rates.  Although cash can be a tempting haven in periods of uncertainty, the asset class has historically underperformed fixed income in most market environments.  This held true in 2025, with fixed income dramatically outperforming cash.  Although duration can increase risk in an environment where interest rates are rising rapidly, it can also present opportunities for outperformance during periods of equity market volatility.  For investors with outsized cash reserves, modest duration extension merits consideration.

Equities: Valuation & Concentration

Elevated valuations and concentration in US equities make them vulnerable to negative surprises.  The S&P 500’s valuation has climbed well above the long-term average, although earnings growth thus far in 2025 has remained steady.  While the bulk of returns have been generated by a narrow segment of the equity universe over the past decade, there’s no guarantee that that will continue.  The combination of favorable valuations, a weaker US growth outlook and shifts in global trade dynamics make international equities particularly appealing.  We recommend reviewing your exposure to ensure that your equity allocation isn’t overly concentrated in the largest and most richly valued components.

Economic Fundamentals: Trade Policy & The Labor Market

Although trade uncertainty continues to present an economic risk, the impact has been less severe than many feared.  This is likely due to several factors, including some meaningful tariff exemptions, trade deals and an impressive level of supply chain flexibility.  While it’s impossible to forecast the trajectory of trade policy, the effective tariff rate has trended steadily downward from a peak of nearly 30% on Liberation Day to about 16%.  The risk of tariffs increasing substantially seems to have largely passed.  Furthermore, the Supreme Court may place constraints around the constitutionality of the executive branch unilaterally imposing tariffs, further limiting the risk of trade war escalation.

In recent months, the Fed has pivoted their focus from fighting inflation to promoting labor market stability.  The labor market has cooled slightly, as supply and demand have gradually come into a state of balance post-COVID.  Many commentators have pointed to a slowdown in hiring as a forewarning of economic weakness.  However, focusing solely on the change in the employment figures paints a misleading picture.  Job openings remain well above their pre-COVID levels and layoffs have hardly changed over the past two years.  As such, while the number of new jobs added each month has slowed, the cause may be more structural rather than an indication of economic weakness.  A reduced demand for labor appears to have been largely 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.  The unemployment rate remains near multi-decade lows.  While there’s plenty of noise around the labor market and the automation of some jobs, short-term concerns are likely overstated.  Although fundamentals aren’t as robust as they were a few years ago, when you pick apart the components of the US economy, the indicators point to a gradual growth slowdown as opposed to an imminent recessionary risk.

Equity Markets: Valuation & Concentration

Since April’s volatility, US equity markets have experienced six months of relative tranquility.  While valuations are elevated relative to historic norms, the larger concern is the level of concentration present in US equity indices.  Although many have traditionally viewed the S&P 500 as a gold-standard of diversification, that’s no longer the case.  Ten companies now represent approximately 40% of the index.  Any number of unforeseen factors could adversely impact the narrow group of firms that make up an increasingly outsized proportion of the domestic equity market.  While AI investment has propelled recent growth, a deceleration in the investment cycle or a slower realization of productivity gains could disproportionately impact some of the larger components of the S&P 500.

The S&P 500 is currently trading at around 23x forward earnings, well above the 20-year average of 16.8x.  The gap is even more dramatic if you isolate the 10 largest companies in the index, which are trading near 30x multiples.  While these valuations are far from their Dot-Com era levels and the 10 largest S&P 500 components are cash-flow positive, we’ve never seen positive 10-year returns starting from these valuation levels.  Against the backdrop of slowing US growth, elevated government debt levels and sustained higher long-term interest rates, there seem to be few catalysts to propel valuations higher.  Although valuations can stray from historical averages for extended periods, the combination of elevated multiples and a high degree of concentration creates a ripe environment for volatility.  While we have concerns around domestic valuations and concentration levels, we don’t recommend avoiding US large cap equities entirely. The current environment presents an opportunity to review portfolios for unintended concentrations.  While concentration isn’t inherently bad, it can promote increased volatility, akin to what we saw in April.  There are several areas, including small cap domestic equities as well as international equities, where valuations are nearer to their historical averages and investors can gain exposure to a broader set of growth catalysts.

The Federal Reserve & Fixed Income

After several years of hawkish policy focused on taming inflation, the Fed has recently pivoted to a more dovish stance, touting their readiness to support the labor market.  That accommodative shift came in the form of two reductions in the Fed Funds rate thus far this year, with markets pricing in a potential additional cut in December.  Additionally, the Fed recently announced their intention to end the quantitative tightening program that has been in place since 2022.

While much focus has been placed on the short end of the yield curve, over which the Fed exerts the most direct control, recent developments have brought the long end into focus.  The Fed’s decision to end quantitative tightening likely represents an effort to cap long-term yields.  This goes hand in hand with the recent announcement that the Treasury intends to issue more short-term bills, while leaving auction sizes for longer-dated instruments unchanged.  While the reductions in the Fed Funds rate are beneficial for consumers with floating rate debt, they don’t have a direct impact on long-term rates which influence critical segments such as housing.  The Fed’s decision to end quantitative tightening is likely an effort to ensure there are ample reserves in the financial system while also attempting to stimulate long-term capital investment.

Fixed income has demonstrated convincing outperformance relative to cash equivalents in 2025.  As the Fed has reduced the Fed Funds rate and long-term yields have declined slightly, fixed income investors willing to accept duration risk have benefitted considerably.  Year-to-date, core fixed income has approximately doubled the performance of money market funds, a meaningful gap.  While long-term rates declined in 2025, providing a tailwind for fixed income, the direction of long-term rates in 2026 is uncertain.  Regardless of the path of rates, the best predictor of fixed income returns is starting yields.  Currently, the Bloomberg Aggregate Bond Index offers a yield of about 4.3%, a meaningful premium over cash yields.  That gap is likely to continue to widen given expectations for additional rate cuts.  While we believe that reducing excessive cash holdings is prudent, we recommend extending duration modestly given limited steepness in the yield curve.

Housing: A Tale of Supply

The housing market has shifted dramatically in 2025.  After peaking around 7% early in the year, the average rate on 30-year mortgages has declined to around 6.2%.  Although rates have decreased, home sales haven’t picked up meaningfully.  In fact, home sales have hovered around similar levels since 2023, with annualized existing home sales of about 4 million units per year.

The shift in 2025 came in the form of an influx of supply.  The inventory of existing homes on the market is at the highest level in over 5 years, at about 1.5 million homes.  Currently, the average length of time that a house spends on the market exceeds 60 days, a far cry from the frenzied COVID era, when the average dipped below 20 days.  A few years ago, supply was the constraint, as homeowners were hesitant to give up low-interest rate mortgages.  The issue has shifted to one of affordability rather than supply.  There’s plenty of inventory on the market but its not priced attractively for buyers.  Although rates have declined slightly, overall affordability remains near all time lows, suggesting that some downward pressure on home prices is likely necessary to alleviate the supply imbalance.  This is evidenced by the lengthening of the sales cycle, as well as increased seller concessions.

Given the glut of supply, construction of new homes is likely to remain muted.  For investors, the low level of affordability is likely to continue to drive robust demand for multi-family housing.  The outlook is regionally nuanced.  The markets that saw the most construction during COVID, namely Florida and Texas, are now experiencing the most softness.  The areas where supply didn’t jump as dramatically are seeing more balanced supply and demand as well as steadier price appreciation, primarily in the Midwest and Northeast.

International Equities: Diversification & Growth

US equities have outpaced their foreign counterparts over the past 15 years.  That outperformance was built on a foundation of low interest rates and a strong dollar.  Those tailwinds have shifted over the past few years.  While there are risks to investing globally, we believe that there is a greater risk in concentrating investment exposure domestically.  In an era where US equity markets are both concentrated and richly valued, international equities present an opportunity to diversify into areas with more reasonable valuations, while maintaining exposure to compelling growth trends.

Domestic equity valuations have surpassed their COVID-era peak, with the S&P 500 currently trading at around 23x forward earnings.  By contrast, international equities are trading at about 17x, even after a period of outperformance in 2025.  US equities also present an elevated degree of concentration risk.  As of the end of October, 10 companies represent over 40% of the S&P 500 market cap.  By contrast, the top ten constituents of the ACWI ex-US Index represent just 12% of the Index.  Outside of the diversification benefits, international equities offer exposure to compelling growth opportunities, particularly in Europe and Asia.  European investments in infrastructure and the growth of the middle class in Asia are likely to provide long-term tailwinds in those regions.

We believe that a meaningful allocation to international equities provides an insurance policy against the lofty valuations and concentration present domestically.  Over the past 50 years, US and international markets have taken turns leading global performance.  It’s impossible to know when the paradigm will change, but several of the elements that have driven US outperformance have shifted.  US interest rates are no longer at historically low levels.  Those higher rates make elevated valuations more difficult to justify.  As the Dollar has weakened and US rates have increased, the relative attractiveness of various investment opportunities has shifted.  The gap in returns between US and international equities in 2025 offers a powerful case study in the benefits of a globally diversified portfolio.

Behavioral Finance: How Do You Define Risk?

Many investors treat risk as a linear spectrum where bonds carry greater risk than cash and equities carry more risk than bonds.  If you equate volatility with risk, that spectrum would serve as an accurate representation.  However, we like to view risk as multi-dimensional.  While cash has a low level of volatility, it comes with a high risk of purchasing power erosion.  Bonds carry a higher level of volatility than cash but also a lower level of reinvestment risk.  Rather than the simplistic view that certain asset classes carry more risk than others, we prefer the framework that various assets classes carry different kinds of risks.  They each serve their own unique roles.

When you need money in the next few weeks or months, putting that capital into equities would be an ill-advised decision.  However, the logic works both ways.  We sometimes come across clients with funds that have no near-term purpose, yet they’re hesitant to invest in equities.  Many times, they’re waiting for what they perceive as the perfect entry point.  We’ve seen far more wealth lost in anticipation of better entry points than we’ve seen eviscerated by market downturns.  As such, we firmly believe that attempting to find the perfect time to invest is a misguided pursuit.

Over the past 30 years, a 60/40 portfolio of equities and fixed income has delivered positive performance in 99% of rolling 5-year periods.  After 10 years, that improves to 100%.  During that time, the real value of cash has been constantly eroded by inflation.  Although cash can feel like a haven, it rarely outperforms inflation over extended periods.  While it may be tempting to sit on excess cash for a variety of reasons, including elevated valuations or economic uncertainty, holding cash above and beyond your prudent reserve requirements is a losing game.  Given the historical performance of cash relative to equities and fixed income over extended time periods, I’d argue that holding excessive cash presents a similar level of risk as holding too little.  When holding excessive cash reserves, you exchange the potential for volatility for a loss of purchasing power.

What it All Means

Equity Valuations

US Equity markets remain highly concentrated.  Valuations, particularly for the largest US companies, are well above historic norms.  If your portfolio looks like the S&P 500, it may be more exposed to volatility than a more diversified allocation.  We recommend reviewing your investment allocation for potential concentrations and broadening out exposure where possible.

The Fed & Fixed Income

The Fed has shifted their focus from fighting inflation to supporting the labor market.  The Fed is expected to continue easing conditions by cutting rates in December and stabilizing the size of their balance sheet.  Although long-term yields have declined throughout the year, there are attractive opportunities available in fixed income, particularly relative to cash.  As the Fed has resumed their rate cutting cycle, locking in higher long-term rates seems prudent.

Housing Market

The housing market has shifted in 2025, with a substantial increase in supply.  Due to a lack of affordability, transaction volume hasn’t increased.  There’s likely to be some downward pressure on prices as the market finds an equilibrium, although the outlook varies regionally.

International Opportunities

Although US equities have outpaced their foreign peers over the past decade, there’s no guarantee that outperformance will continue.  While there are risks to investing globally, we believe that there is a greater risk in concentrating investment exposure domestically.  International equities present an opportunity to diversify into segments with more reasonable valuations, while also gaining exposure to compelling growth trends.

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.