In April, the market had a near-death tariff experience, immediately followed by one of the fastest recoveries ever. You may have expected that the 3rd quarter would be fairly benign and allow everyone some time to breathe. Not so! Investors are totally embracing the Artificial Intelligence theme, buying tech stocks in a race for risk unlike anything we have seen since the “meme stock” craze in 2021.
For the 3rd quarter, the S&P 500 Index® (dominated by the nine >$1 trillion market cap companies) was up 8%. Because this index is “market cap-weighted”, the biggest companies have the largest impact. The equal-weighted version of the S&P 500 was only up 4.8%. Mega cap dominance (of both the index and investor enthusiasm) continues. The biggest surprise for the quarter was the performance of the lower quality assets, particularly small caps. Represented by the broad Russell 2000 index (where roughly 40% of its components lose money), this group gained 12%. This move only brings 2025 performance up to 10%, illustrating how risk appetites have broadened to areas that had previously been shunned. The narrower S&P 600 small cap index, where most companies actually do have earnings is up only 6% all year.
So, the quality of a company has lost its role in market behavior and we aren’t seeing any changes so far in October. The bright spots are areas that we have highlighted several times in the past. International markets continue to perform very well in a long awaited catch-up to US markets. The EAFE index was up 4% in Q3 and is now up 25% YTD. Emerging markets did even better with 10% in the quarter and 29% for the year. At Integras Partners, we have maintained our exposure to the international sector for several years knowing that ultimately value gets discovered.
We are now clearly in a time very reminiscent of 1999-2000. This is a classic corporate spending race to dominate a new technology breakthrough. Trillions will be spent building out the assets necessary to produce an A.I. product that thus far no one has been able to profit from. Many parallels with the Dot-Bomb era have arisen, but one thing remains far different – the large companies primarily involved actually earn money this time. Those earnings are from businesses separate from where they are investing it, but they do have earnings to spend on A.I. Therefore, this cycle could last longer but one thing will remain the same. It will end badly.
There is still time and what is usually a strong quarter on our side before tariff risks and inflation come to the surface. Significant Investor losses often come from sitting still while frozen by what’s happening. If you would like some feedback and recommendations on your financial situation, contact us.
