An Independent Financial Advisory Firm
An Independent Financial Advisory Firm
You are now leaving the Magnus Financial Group Website and will be entering the Charles Schwab & Co., Inc. (“Schwab”) Website.
Schwab is a registered broker-dealer, and is not affiliated with Magnus Financial Group or any advisor(s) whose name(s) appears on this Website. Magnus Financial Group is/are independently owned and operated. Schwab neither endorses nor recommends Magnus Financial Group. Regardless of any referral or recommendation, Schwab does not endorse or recommend the investment strategy of any advisor. Schwab has agreements with Magnus Financial Group under which Schwab provides Magnus Financial Group with services related to your account. Schwab does not review the Magnus Financial Group Website(s), and makes no representation regarding the content of the Website(s). The information contained in the Magnus Financial Group Website should not be considered to be either a recommendation by Schwab or a solicitation of any offer to purchase or sell any securities.
Market Commentary
Market Commentary – Q3, 2025
Bubblicious
U.S. small-cap stocks outperformed, gaining 12% over the third quarter
Overview
Markets performed well over the third quarter. Every major asset class ended September in positive territory year to date. U.S. small-cap stocks led the way (gaining 12%), pushing the Russell 2000 small-cap index into positive territory for the first time this year and to its highest level since November 2021. U.S. large-cap stocks, as proxied by the S&P 500, brought the index’s third-quarter gains to 8% and its year-to-date gains to 15%, also hitting a new record high. U.S. intermediate-term bonds gained 2% in the third quarter and are up 6% year-to-date, with the Bloomberg U.S. Aggregate Bond Index seeing its strongest returns since 2020.
U.S. intermediate-term bonds are on track for the strongest returns since 2020
By the end of August, the 2025 fiscal deficit reached $1.97 trillion, the largest on record outside a crisis or pandemic
Consumer spending bolstered second quarter GDP growth
Revised payroll data shows softening in the labor market
Payroll data was revised considerably during the third quarter. According to the July employment report, non-farm payrolls rose by only 73,000 jobs, missing expectations by 32,000.9 In addition, May and June payrolls were revised down by a combined 258,000, the largest downward revisions for these months outside of the pandemic.10 The August report was weaker still, showing only 22,000 new jobs created. It also included a further downward revision to June, now showing payrolls declining by 13,000, the first monthly drop in employment since 2020.10 The unemployment rate ticked up to 4.3% in August, the highest level since September 2017 outside of the pandemic period.
The labor market appears to be in a ‘low-firing, low-hiring’ equilibrium
June payrolls declined by 13,000, marking the first monthly job loss since 2020
On September 17, the Federal Reserve lowered interest rates by 0.25%, citing labor market concerns and slowing economic activity—focusing especially on the recent revisions to labor market data. During the Federal Open Market Committee (FOMC) press conference, Fed Chair Jerome Powell said:
“We were looking at 150,000 jobs a month at the time of the last meeting, and now we see the revisions and the new numbers… I don’t want to put too much emphasis on payroll job creation, but it’s just one of the things that suggests that the labor market is really cooling off. And that tells you that it’s time to take that into account in our policy.”13
On September 17, the Fed cut rates, even with inflation above 2%
The rate cut marked a delicate turning point. With inflation still floating above the Fed’s 2% target and growth holding steady, policymakers now face a familiar tension between supporting employment and restraining price pressures. Economic projections released alongside the September rate decision indicate the Fed expects to lower rates by 0.5% before year end, implying one cut at each of the remaining 2025 FOMC meetings.14
Bubblicious
What’s in a bubble? Air, mostly (nothing of tangible substance). This allows the bubble to float unpredictably until it inevitably pops. In the case of a financial bubble, asset prices rise far above their fundamental value, typically fueled by speculation and widespread participation from retail and institutional investors. History is filled with examples.
Railway mania, a 19th-century bubble, illustrates how technological revolution breeds speculative excess. In the 1840s, railways were the cutting-edge technology of the Industrial Revolution, promising faster travel, lower transportation costs, and rapid economic growth. Hundreds of railways and thousands of miles of lines were approved, but many were speculative or poorly planned, built in places where little commerce existed. Capital called in by borrowers soon exceeded what investors could repay. Consequently, credit tightened, demand collapsed, and by 1847, the bubble burst.15 Nevertheless, it left behind hundreds of miles of railway lines still in use today.
In the late 1990s, investors poured money into tech startups that generated little revenue but promised blockbuster results
Driven by excitement over the internet’s potential, investors in the late 1990s poured money into tech startups that generated little revenue but alluringly promised blockbuster results.16 Equity prices, and valuations, peaked in early 2000 before collapsing. It is easy to forget how bubbly things got. For example, in May 1999, eToys, an online toy retailer, went public. Its stock soared 280%—to an $8 billion valuation—on its first day of trading, even though the company’s quarterly revenue was just $30 million and its losses were mounting. The company burned through cash as it attempted to compete with Amazon and Toys “R” Us, and it went bankrupt in February 2001 after demand collapsed and funding dried up.17 CMGI, an internet investment company, backed dozens of startups. Between 1998 and early 2000, its share price skyrocketed more than 1,000%, briefly valuing the company above $50 billion, despite its limited operating income. When the tech tide turned, CMGI’s portfolio imploded, and its stock fell more than 99%.18 Global Crossing was a telecom infrastructure company founded in 1997 that built undersea fiberoptic cables to power the “information superhighway.” Backed by cheap credit and investor euphoria about future internet traffic, its valuation soared past $40 billion by 2000—even though it had never posted a profit.19 Burdened with debt and overexpansion, Global Crossing filed for bankruptcy in 2002.
Notwithstanding the excesses, the dot-com bubble left behind revolutionary technologies, like the internet itself. In the lead up to 2008, cheap credit, lax lending standards, and mortgage securitization drove U.S. home prices to dizzying heights. When borrowers defaulted and mortgage-backed securities unraveled, the bubble burst and triggered the Global Financial Crisis.
Debate is growing over whether the excitement surrounding AI is creating a new bubble
Today, debate is growing over whether the excitement surrounding artificial intelligence (AI) is creating a new bubble. Google search trends for “AI bubble” peaked in mid-August before dropping sharply.20 Similarly, Bloomberg’s News Trends (which tracks all stories and sources published across the Bloomberg terminal) showed bubble concerns peaking shortly after Chinese tech startup DeepSeek launched its AI model in January.21 But per Deutsche Bank Research Institute’s executive director Adrian Cox:
“While there may be a bubble, the moment everyone spots it may be the moment it is least likely to burst.”22
At the same time, Sam Altman, CEO of OpenAI (creator of ChatGPT), said recently:
“Are we in a phase where investors as a whole are overexcited about AI? My opinion is yes. Is AI the most important thing to happen in a very long time? My opinion is also yes.”23
Bubble concerns peaking shortly after Chinese tech startup DeepSeek launched its AI model in January
The top ten S&P 500 holdings now make up a record 39% of the index
The information technology sector led performance in the S&P 500, gaining 13% in the third quarter. The Magnificent Seven (Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia, and Tesla) rose 19% over the third quarter and are up 20% for the year.24 These companies remain the key drivers behind overall market performance: the top ten S&P 500 holdings now make up a record 39% of the index, far surpassing the 1999 peak of 25% and the post-pandemic high of 30%.
Elevated valuations have not slowed the market’s recent strong performance. The tech sector’s 12-month forward price-to-earnings (P/E) ratio is 30x while its price-to-sales ratio stands at 10x—over 40% higher than at the tech bubble peak. Broader market valuations are also stretched: the S&P 500’s 12-month forward P/E ended September at 23x. (For context, the dot-com peak was 24x.)
Elevated valuations have not slowed the market’s recent strong performance
Earnings and revenue growth estimates for the tech sector remain robust
Looking ahead, the tech sector remains a key driver of S&P 500 earnings growth estimates. For 2025, tech earnings are expected to grow by 21% year-over-year and 21% in 2026.25 Revenue growth estimates for the sector remain robust. According to FactSet, tech sector revenues are expected to rise by 14% year-over-year in 2025 and 13% in 2026. The broader S&P 500 is expected to see earnings growth of 11% in 2025, and 14% in 2026.25
Advanced AI models are expensive to build and run, and they require specialized chips, energy-hungry data centers, and large engineering teams. Many AI applications remain experimental, and their paths to profitability are still uncertain. Capital expenditures (capex) have been a defining theme for AI hyperscalers (the largest cloud and infrastructure providers that build, train, and deploy AI models) this year. Since the launch of OpenAI’s ChatGPT large language model in November 2022, mega-cap tech firms have more than doubled annual capex, pouring hundreds of billions of dollars into data centers and other AI-related infrastructure.26,27
Capital expenditures have been a defining theme for AI hyperscalers in 2025
Morgan Stanley expects $3 trillion in AI infrastructure investment by 2029
Data centers are now viewed as AI’s foundational utility and key to the advancement and development of AI models, much like railways or telecom networks from earlier eras. Hyperscalers (specifically Meta, Amazon, Alphabet, Microsoft, and Oracle) will reportedly spend about $340 billion on data center and AI infrastructure in 2025.26,27 This equates to nearly 1% of U.S. GDP. Morgan Stanley expects $3 trillion in AI infrastructure investment by 2029.27 Meta CEO Mark Zuckerberg highlighted the readiness of mega-cap tech firms to keep investing in AI during an interview, commenting on AI superintelligence spending:
“If we end up misspending a couple hundred billion dollars, that’s going to be very unfortunate, obviously. But I would say the risk is higher on the other side.”28
In the same interview, he also noted:
“There’s definitely a possibility, at least empirically, based on past large infrastructure buildouts and how they led to bubbles, that something like that would happen here.”28
The boom is not limited to public markets. OpenAI, the creator of ChatGPT and one of the world’s top AI labs was recently valued at $500 billion, topping SpaceX as the largest U.S. private company.29 OpenAI has been signing deals valued at hundreds of billions of dollars with major infrastructure partners. On September 22, Nvidia announced a strategic partnership with OpenAI to deploy at least ten gigawatts of Nvidia AI systems across OpenAI’s data centers, backed by a $100 billion investment largely earmarked for more Nvidia chips.30 Nvidia noted that:
“OpenAI will channel part of this investment back into Nvidia hardware purchases, effectively creating a cycle of funding and chip demand.”30
OpenAI maintains that its rapid dealmaking and scaling are central to driving future AI breakthroughs
Skepticism is growing about OpenAI’s reliance on a tightly interconnected web of partners
A similar vendor-financing feedback loop occurred late in the dot-com boom
Credit spreads remained tight relative to historical averages
Markets
In both U.S. and international markets, small-cap equities outperformed their large-cap counterparts over the quarter. U.S. small caps rose 12%, compared with an 8% gain for U.S. large-cap stocks. Similarly, international developed market small-cap stocks advanced 6%, outpacing large caps, which gained 5%. Emerging and frontier markets finished the third quarter up 11%. Strong small-cap performance propelled the Russell 2000 into positive territory for the first time this year, and the index ended the quarter up 10.4% year-to-date.
U.S. intermediate-term bonds gained 2% during the quarter. The 10-year U.S. Treasury yield fell to 4.0% in mid-September (the lowest level since April) following the release of the August inflation report and an unusual spike in jobless claims driven by flooding in Texas and seasonal data adjustments around the holiday-shortened week. By the end of September, the 10-year yield had risen slightly to 4.2%. The spread between the 10-year and 2-year Treasury yields remained positive throughout the quarter, finishing at 0.6%. Credit spreads remained tight relative to historical averages, closing the quarter at 2.7%.
Strong small-cap performance propelled the Russell 2000 into positive territory for the first time this year
Gold, which rose 16% over the quarter, reached a record high of $3,866 on September 30
Gold, which rose 16% over the quarter, reached a record high of $3,866 on September 30, following news of an imminent U.S. government shutdown that took effect on October 1, triggered by unresolved budget disputes. West Texas Intermediate (WTI) crude oil prices fell nearly 5% over the quarter, slipping from $65 per barrel to $62 per barrel by the end of September.
The Fed’s dual mandate seems suspended somewhere between caution and complacency
Looking Forward
The Fed’s dual mandate—to balance price stability with maximum employment—now seems suspended somewhere between caution and complacency: caution when it comes to cutting rates amid relatively modest signs of labor softening, and complacency when easing policy while inflation remains stubbornly above target. This tension comes at a time when recent market exuberance feels distinctly bubblicious, forcing investors to balance complacent equity allocations with stretched valuations. Historically, time in the market beats timing the market. The longer the holding period, the more consistent the results. However, entry valuations are critical: buying securities when valuations are low has, on average, generated better performance than buying when valuations are high, and valuations are unambiguously high. This all suggests some caution, even acknowledging that bubbles are unpredictable.
Regardless of how things play out, we will gradually and very incrementally reallocate to asset classes and managers that have been out of favor and we believe offer the best risk-adjusted returns
That said, there are segments of the capital markets that have been ignored, even as others have roared ahead this year. If an AI bubble does burst, we believe the greatest cost would fall to those who are heavily concentrated in AI-related technology. Yet, like the dot-com bubble, the economic and investment fallout would likely remain relatively contained, unlike an event such as the Global Financial Crisis. These possible dislocations could create attractive prices that would give investors compelling entry points into high-quality companies that remain essential drivers of innovation. As for the parts of the market that may have been left behind, we will gradually and very incrementally reallocate to asset classes and managers that have been out of favor and we believe offer the best risk-adjusted returns, acknowledging that no one knows exactly how this will play out.
Citations
Share it :
Disclaimer
Magnus Financial Group LLC (“Magnus”) did not produce and bears no responsibility for any part of this report whatsoever, including but not limited to any microeconomic views, inaccuracies or any errors or omissions. Research and data used in the presentation have come from third-party sources that Magnus has not independently verified presentation and the opinions expressed are not by Magnus or its employees and are current only as of the time made and are subject to change without notice.
This report may include estimates, projections or other forward-looking statements, however, due to numerous factors, actual events may differ substantially from those presented. The graphs and tables making up this report have been based on unaudited, third-party data and performance information provided to us by one or more commercial databases. Except for the historical information contained in this report, certain matters are forward looking statements or projections that are dependent upon risks and uncertainties, including but not limited to factors and considerations such as general market volatility, global economic risk, geopolitical risk, currency risk and other country-specific factors, fiscal and monetary policy, the level of interest rates, security-specific risks, and historical market segment or sector performance relationships as they relate to the business and economic cycle.
Additionally, please be aware that past performance is not a guide to the future performance of any manager or strategy, and that the performance results and historical information provided displayed herein may have been adversely or favorably impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be inferred that these results are indicative of the future performance of any strategy, index, fund, manager or group of managers. Index benchmarks contained in this report are provided so that performance can be compared with the performance of well-known and widely recognized indices. Index results assume the re-investment of all dividends and interest and do not reflect any management fees, transaction costs or expenses.
The information provided is not intended to be, and should not be construed as, investment, legal or tax advice nor should such information contained herein be construed as a recommendation or advice to purchase or sell any security, investment, or portfolio allocation. An investor should consult with their financial advisor to determine the appropriate investment strategies and investment vehicles. Investment decisions should be made based on the investor’s specific financial needs and objectives, goals, time horizon and risk tolerance. This presentation makes no implied or express recommendations concerning the way any client’s accounts should or would be handled, as appropriate investment decisions depend upon the client’s specific investment objectives.
Investment advisory services offered through Magnus; securities offered through third party custodial relationships. More information about Magnus can be found on its Form ADV at www.adviserinfo.sec.gov.
Terms of Use
Definitions
Asset class performance was measured using the following benchmarks: U.S. Large Cap Stocks: S&P 500 TR Index; U.S. Small & Micro Cap: Russell 2000 TR Index; Intl Dev Large Cap Stocks: MSCI EAFE GR Index; Emerging & Frontier Market Stocks: MSCI Emerging Markets GR Index; U.S. Intermediate-Term Muni Bonds: Bloomberg Barclays 1-10 (1-12 Yr) Muni Bond TR Index; U.S. Intermediate-Term Bonds: Bloomberg Barclays U.S. Aggregate Bond TR Index; U.S. High Yield Bonds: Bloomberg Barclays U.S. Corporate High Yield TR Index; U.S. Bank Loans: S&P/LSTA U.S. Leveraged Loan Index; Intl Developed Bonds: Bloomberg Barclays Global Aggregate ex-U.S. Index; Emerging & Frontier Market Bonds: JPMorgan EMBI Global Diversified TR Index; U.S. REITs: MSCI U.S. REIT GR Index, Ex U.S. Real Estate Securities: S&P Global Ex-U.S. Property TR Index; Commodity Futures: Bloomberg Commodity TR Index; Midstream Energy: Alerian MLP TR Index; Gold: LBMA Gold Price, U.S. 60/40: 60% S&P 500 TR Index; 40% Bloomberg Barclays U.S. Aggregate Bond TR Index; Global 60/40: 60% MSCI ACWI GR Index; 40% Bloomberg Barclays Global Aggregate Bond TR Index.