Resilience: Markets That Bend, Not Break
The economy in 2025 proves its remarkable ability to adapt and thrive, even when faced with significant challenges. Rising tariffs, inflation concerns, and a volatile dollar fail to stop the S&P 500 from reaching record highs. Tech giants like Nvidia and Alphabet lead the charge, with Nvidia making history as the first company to hit a $5 trillion valuation. AI is no longer just a buzzword—it is a transformative economic engine. (A visual of Nvidia’s valuation growth or a comparison with other tech leaders would enhance this section.)
The AI Driven Supercycle is Real
The Tech Supercyle is Real
We are in the initial phase of a long-term technology revolution fueled by artificial intelligence. Unlike the dot-com bubble, today's technology leaders are immensely profitable. The semiconductor and AI sectors alone drove roughly 40% of U.S. GDP expansion in the first half of 2025. The core issue is no longer if this trend will persist, but which companies possess the resilience to navigate practical hurdles like immense energy requirements and regulatory scrutiny.
Further complicating this landscape is the U.S.-China dynamic. A late-October truce has ostensibly de-escalated trade tensions, resuming the flow of rare earth magnets to U.S. industries and agricultural goods to China. Yet, many remain skeptical of this agreement's durability. Beijing's leverage extends beyond rare earths, with export licensing now required for EV batteries and continued dominance in pharmaceutical precursors. This reliance means leading chipmakers like Nvidia and AMD remain tethered to Chinese inputs, adding a layer of geopolitical risk to the tech narrative.
A Market of Winners and Losers
Beneath the surface of the S&P 500 and Nasdaq 100 rallies, a more complex picture emerges as sector performance diverges significantly.
Utilities
The surge in electricity demand from AI and data centers is a massive tailwind for this sector. Utilities are becoming a core part of the tech growth story. The core challenge for utilities is a delicate balancing act. They must invest heavily in new infrastructure to ensure grid reliability and support technological growth. At the same time, they face pressure to keep customer rates low and meet aggressive decarbonization goals. Navigating these competing priorities will be the defining task for the sector moving forward. We see not signs of this trend slowing down. The sector’s strong fundamentals and defensive characteristics are also very attractive in a time of economic uncertainty.
Consumer Discretionary
We're seeing a "K-shaped" economy. High-income spending buoys luxury brands, while lower-income households are cutting back on non-essentials. Zennie Baria from CNN point out Luxury handbags from brands like Chanel, Louis Vuitton, and Hermès aren’t just fashion statements but assets. Studies reveal that iconic bags like the Hermès Birkin have outpaced even the S&P 500, with a steady 14.2% annual increase in value from 1980 to 2015. While stocks fluctuate, these bags continue to climb.
On the other hand, fast food chains and restaurants are having an abysmal year. Lower-income consumers are opting to eat at home, too. In its most recent quarter, McDonald’s reported double-digit declines in visits from low-income customers, another element of the "bifurcated" U.S. economy that Fed Chair Jerome Powell mentioned last week
Healthcare
Despite recent flat earnings, strong revenue growth and a forecast for 16% annual earnings growth suggest the sector is poised for a positive turn. While earnings for healthcare companies have been stagnant over the last three years, revenues have grown at a rate of 8.9% per year. This indicates that while sales are increasing, costs or reinvestment levels have risen in tandem, keeping profits steady.However, the projected growth coupled with standout company performances like Eli Lilly's recent gains, suggests that the healthcare sector may be on the cusp of a positive turn.
Health care stocks gained +11.1% during the three-month period ending October 31, trailing only tech and comm services.
Energy
Stocks began November with gains, suggesting the seven-month rally in global equities may still have room to run. Within this context, the energy sector remains a key area of focus. OPEC+ announced it will pause output increases after another modest hike, a move made as the market faces a potential oversupply that has seen Brent crude prices drop 10% over the past three months.
Adding to the complexity are geopolitical factors. Increased U.S. sanctions on Russia have created new questions about supply prospects from one of the world's major exporters, pulling oil prices back from recent lows. This delicate balance between supply management and geopolitical tension will continue to drive volatility in the energy markets.
We are poised to take a larger position in energy stocks in the near future.
Fixed Income and Macro Headwinds
Bond markets rallied as Treasury yields eased following the Federal Reserve's second consecutive 0.25% rate cut. The 10-year Treasury yield fell below 4% in October for the first time in over a year. Corporate bonds have led the charge, with investment grade and high-yield corporates offering compelling average yields of 4.8% and 6.7%, respectively. However, credit spreads are near multi-decade lows, signaling elevated risk appetite from bond investors. This confidence was tested in October by a series of high-profile bankruptcies and fraud allegations, which rattled regional banks and specialty finance companies.
Meanwhile, the U.S. is navigating its second-longest government shutdown in history. The CBO projects it will reduce Q4 GDP by 1.0%. So far, capital markets have remained resilient, focusing instead on strong corporate earnings and Fed policy. However, the shutdown has created a data blackout, with agencies like the Bureau of Labor Statistics halting operations. This lack of visibility into key economic metrics like job growth and retail sales complicates the Fed's decision-making process.
The Path Forward
As we approach the end of 2025, the global economy is in a precarious position. The old maps no longer apply. Corporate earnings are off to their best start since 2021, with 83% of S&P 500 firms beating EPS estimates. The Fed has resumed its easing cycle, though Chair Powell has indicated a December cut is not guaranteed.
Optimism around the AI revolution is warranted, but it must be balanced with a cautious eye on policy uncertainty and sector-specific challenges. The tectonic plates of the global economy are shifting, and a discerning, informed approach is essential to navigate a world where the rules are being rewritten in real time.
Will a Government Shut Down Kill the Market Momentum?
Will a Government Shutdown Kill the Market Momentum?
September delivered a fascinating mix of market strength and political noise. While headlines were dominated by the government shutdown and interest rate chatter, the real story for investors was one of broadening growth and surprising resilience.
The Fed, the Shutdown, and the Real Economy
The biggest news item in September was the Federal Reserve's decision to cut interest rates by 0.25%. This move, along with signals of more cuts to come, shows the Fed is shifting its focus from inflation to protecting the labor market. Their own projections see unemployment remaining historically low through 2028, reinforcing a confident outlook for the U.S. economy.
Of course, the government shutdown added a layer of uncertainty. Historically, shutdowns have had minimal long-term economic impact, and markets have often risen during them. The main issue this time is the delay in economic data, which complicates the Fed's job. Without official reports from the Bureau of Labor Statistics, the Fed is flying a bit blind. Still, the futures market is pricing in a 98% chance of another quarter-point cut in October. My take is that the Fed has seen enough softening in private labor data to proceed with its plan to support the economy.
Critical Question:
How Long ? The shutdown could also affect economic productivity. According to JP Morgan, each week, a shutdown subtracts about 0.1% of annualized GDP growth via reduced government activity. A shutdown longer than a month or so may begin to damage investor sentiment, even though the economic backdrop is positive. We will be in unchartered territory if the shut down lasts several months.
Growth Appetite at Play
- The S&P 500 posted eight new closing highs and is up 14.83% year-to-date.
- International markets outperformed, with developed markets up 25.72% and emerging markets up 28.22% year-to-date.
- A weaker U.S. dollar has made foreign assets more attractive, driving investor interest overseas.
Growth Stocks and the Mag 7
Within the U.S. market, the preference for growth stocks continues. The Russell 1000 Growth Index gained 10.5% in September, nearly double the rise of its value counterpart. This trend is largely powered by the "Magnificent 7"—tech giants like Nvidia, Microsoft, and Alphabet—which now account for nearly 35% of the S&P 500's market value. In September alone, this small group was responsible for 64% of the index's total return.
While their dominance is undeniable, it also highlights where value might be found. Small-cap stocks, for instance, are trading at a significant 16% discount to our fair value estimates. As professionals with large cash positions chase performance into year-end, we believe any market dips will be shallow and met with strong buying, particularly in these undervalued areas.
Finding Opportunity Amidst the Noise
So what does this mean for your portfolio?
- Diversification is Paying Off: The outperformance of international equities is a powerful reminder that a global approach is essential. Tariff concerns in the U.S. are leading many to look abroad, and the results speak for themselves.
- Look for Value: While growth and tech have had a great run, small-cap and value stocks appear much more attractive from a valuation standpoint.
- Don't Fear the Headlines: The market has a way of looking past short-term political drama. The underlying fundamentals—strong earnings, a supportive Fed, and broadening global growth—paint an optimistic picture.
The great performance chase to year-end is on. Many managers who were defensively positioned earlier this year are now trailing their benchmarks and need to put cash to work. This creates a strong technical tailwind for stocks. While the path forward is never a straight line, the foundation for continued growth looks solid.
Finding Opportunity Amidst the Noise
So what does this mean for your portfolio?
- Diversification is Paying Off: The outperformance of international equities is a powerful reminder that a global approach is essential. Tariff concerns in the U.S. are leading many to look abroad, and the results speak for themselves.
- Look for Value: While growth and tech have had a great run, small-cap and value stocks appear much more attractive from a valuation standpoint.
- Don't Fear the Headlines: The market has a way of looking past short-term political drama. The underlying fundamentals—strong earnings, a supportive Fed, and broadening global growth—paint an optimistic picture.
The great performance chase to year-end is on. Many managers who were defensively positioned earlier this year are now trailing their benchmarks and need to put cash to work. This creates a strong technical tailwind for stocks. While the path forward is never a straight line, the foundation for continued growth looks solid.
How Many Stocks Do You Really Need?
How Many Stocks Do You Really Need?
How many stocks does it take to build a truly diversified portfolio? For years, the conventional wisdom has been that holding around 20 to 30 stocks is enough to smooth out the bumps. It’s a number I’ve heard countless times in my own career. However, a fascinating study from the CFA Institute suggests the real answer is more nuanced. It turns out, "one size fits all" is not a winning strategy.
The study reveals that the magic number for peak diversification changes significantly based on your portfolio's style. Whether you're focused on large-cap giants or nimble small-cap innovators, your approach to diversification should adapt. This insight challenges us to look beyond generic rules and tailor our strategies for better risk management.
Let's explore the key findings and what they mean for building a more resilient investment portfolio.
Large-Cap vs. Small-Cap: A Tale of Two Volatilities
One of the most striking comparisons in the study is between large-cap and small-cap stocks. The data shows a clear difference in how many stocks are needed to effectively reduce risk.
The Large Cap Plateau
For portfolios focused on large, established companies, the benefits of diversification start to diminish relatively quickly. The study found that a 10-stock large-cap portfolio had an average volatility of 20%. When expanded to 40 stocks, that volatility only dropped to 17%.
This tells us that after about 15 stocks, the added benefit of each new position becomes marginal. Large-cap stocks are generally more stable, and their performance is often influenced by broad market trends. Adding more of them beyond a certain point doesn't significantly reduce company-specific risk.
The Small Cap Advantage
Small-cap stocks, on the other hand, tell a very different story. A 10-stock portfolio in this category started with a much higher mean volatility of 32%. By increasing the number of stocks to 40, the volatility fell to 25%—a substantial 7-percentage-point drop.
The study suggests that peak diversification for small-cap portfolios is achieved with around 26 stocks. Because smaller companies carry more individual risk, spreading your investment across a larger number of them provides a much more powerful risk-reduction benefit. It’s a clear case where adding more names to the list genuinely pays off.
The Dividend Factor: Are Dividend Stocks Safer?
The study also examined the difference between portfolios holding dividend-paying stocks and those holding non-dividend payers. As many investors might suspect, dividend portfolios are inherently less volatile.
Non-Dividend Portfolios
For stocks that don't pay dividends, volatility decreased from 26% with 10 stocks to 21% with 40 stocks. Similar to small-caps, the optimal number of stocks for diversification in this category was found to be around 26. These stocks often include growth-oriented companies where price appreciation is the primary driver of returns, making them more volatile by nature.
Dividend Portfolios
In contrast, a 10-stock dividend portfolio had a starting volatility of just 19%, which dropped to 16% with 40 stocks. Because these companies are often mature, stable, and return capital to shareholders, they start from a lower risk base. Consequently, you need fewer stocks to achieve effective diversification. The dividend itself acts as a buffer against market swings.
Growth Vs. Value
When comparing growth and value investment styles, the study found no significant difference in their diversification needs. Both types of portfolios showed a consistent reduction in risk as more stocks were added.
This suggests that regardless of whether you are hunting for undervalued gems (value) or high-potential innovators (growth), the mechanical benefit of adding more stocks to your portfolio remains roughly the same. The path to risk reduction is consistent across these two fundamental strategies.
Home Bias
The analysis also touched on the geographical diversification between US domestic and international portfolios. The findings indicated that adding more stocks to a US domestic portfolio was slightly more effective at reducing volatility than doing the same for an international portfolio.
This might be due to various factors, including the depth and liquidity of the US market. However, it’s a reminder that even the geographic focus of your portfolio can influence how diversification works in practice.
The Ultimate Takeaway: Tailor Your Strategy
So, what is the ideal number of stocks? The CFA Institute study makes it clear: there is no single answer. The concept of peak diversification is not a fixed number but a variable that depends entirely on your portfolio's specific characteristics.
Here’s a quick summary of the peak diversification points:
- Large-Cap: Around 15 stocks
- Small-Cap: Around 26 stocks
- Non-Dividend: Around 26 stocks
- Dividend: Fewer stocks needed due to lower inherent risk
The most important lesson from this research is the need for a tailored approach. Portfolio managers and individual investors should move beyond generic advice and think critically about their holdings. By understanding the unique risk profile of your chosen investment style, you can balance the benefits of risk reduction with the advantages of specialization. This allows for a more intentional and effective strategy, helping you navigate market uncertainty with greater confidence.
Eccles, A., Coffey, L., & Horstmeyer, D. (2021, May 6). Peak diversification: How many stocks best diversify an equity portfolio? CFA Institute. Retrieved from https://blogs.cfainstitute.org/investor/2021/05/06/peak-diversification-how-many-stocks-best-diversify-an-equity-portfolio/#:~:text=All%20in%20all%2C%20these%20results,stocks%20to%20optimally%20reduce%20volatility.
Why August Rally Reveals More than Most Market Observers Realize
The Broadening That Changes Everything
-
Small-Cap Comeback & Market Broadening: August shattered expectations with small caps leading the charge and the "average" stock finally joining the rally, signaling a seismic shift in market confidence and breadth.
-
Fed's Balancing Act: Powell's pivot to balancing inflation and employment marks a game-changing moment, as labor constraints and sticky inflation challenge the Fed's next moves.
-
Earnings Defy the Doubters: With S&P 500 earnings growth doubling forecasts and 80% of companies beating expectations, the market's foundation proves stronger than the skeptics imagined.
For the better part of 2024, we've watched a narrow group of mega-cap technology stocks carry the entire market on their shoulders. August flipped that script entirely. The equal-weight S&P 500 hit new all-time highs, signaling that the "average" large-cap stock finally joined the party. This isn't just a statistical curiosity—it's a fundamental shift that speaks volumes about investor confidence spreading beyond the usual suspects.
I've been watching markets long enough to know that sustainable bull runs require broad participation. When Health Care emerges as the month's top performer while Utilities trail (a complete reversal from July), you're seeing real rotation based on changing economic expectations. This isn't momentum chasing; it's smart money repositioning for what comes next.
Small-Cap Revival Caught My Eye.
The S&P 600 Small Cap Index gained roughly 7%, marking its best month of outperformance over the S&P 500 Index in over a year. Many hedge funds were shorting small-cap stocks, with the CFTC reporting that non-commercial short positions in the Russell 2000 had hit their highest levels since 2022. As small-cap stock prices rose, a massive covering of short positions occurred, further bolstering the rally; however, the underlying fundamentals tell a more compelling story.
Small-Cap Revival Caught My Eye.
The S&P 600 Small Cap Index gained roughly 7%, marking its best month of outperformance over the S&P 500 Index in over a year. Many hedge funds were shorting small-cap stocks, with the CFTC reporting that non-commercial short positions in the Russell 2000 had hit their highest levels since 2022. As small-cap stock prices rose, a massive covering of short positions occurred, further bolstering the rally; however, the underlying fundamentals tell a more compelling story.
The FED
Reading Between the Fed's Lines
Jerome Powell's Jackson Hole speech marked a pivotal moment that many investors underappreciated. His shift from a singular focus on inflation to balancing the dual mandate of employment and price stability represents the most significant change in Fed messaging since the post-COVID era began.
Here's my take: Powell's acknowledgment that "policy in restrictive territory" reveals the Fed is increasingly concerned about the labor market softening. The unemployment rate edged up to 4.2% in July—still historically low, but the trajectory matters more than the level. With net immigration near zero, our labor supply constraints create a unique dynamic where unemployment won't spike dramatically even as job demand slows.
This creates an interesting paradox. A lower labor supply should theoretically support wages and potentially lead to inflation, but it also constrains economic growth. The productivity question becomes critical: can AI and technological advancements offset this demographic headwind? MIT's recent finding that 95% of AI pilot programs deliver no measurable return suggests we might be waiting longer for that productivity boost than many expect.
inflation
Inflation Reality Check
While markets experienced relatively stable Consumer Price Index data of 2.7%, I’ve been watching inflation numbers beyond just the headlines. Core inflation (excluding food and energy) increased 3.1% year-over-year and 0.3% monthly, surpassing expectations and hitting its highest level since February. Price increases in furniture and other imported goods may have contributed to this rise, signaling that tariffs are beginning to filter through the economy. However, it's still early to draw definitive conclusions.
This presents a significant policy dilemma, as some argue that tariffs primarily lead to one-time price adjustments and therefore should not influence monetary decisions. However, others caution that the broader and longer-term effects of tariffs may not yet be fully understood or realized. Personally, I lean toward caution. With goods like furniture—where the U.S. leads global imports while China dominates exports—we're seeing exactly what economic theory predicts when trade barriers rise.
The Fed's challenge intensifies when you consider labor market dynamics. Certain industries, such as construction, hospitality, and agriculture, rely heavily on immigration to fill workforce gaps. Restricted labor supply in these sectors could drive wage inflation even as overall job growth slows. It sets the stage for sustained inflation in the services sector, potentially complicating the Federal Reserve's plans to reduce interest rates.
The Bottom Line
Geopolitical Noise vs. Market Signals
In August, markets showed resilience, ignoring potential volatility triggers like trade tensions and the attempted firing of Fed Governor Lisa Cook. The VIX hit 52-week lows, reflecting investor psychology: either political uncertainty is priced in, or markets are focusing on macroeconomic fundamentals. A weaker dollar, paired with stable Treasury yields, supports the latter. Despite talk of declining U.S. exceptionalism, U.S. equities continue to outperform globally, with a weaker dollar potentially benefiting exporters and multinationals.
September's Challenge, October's Opportunity
As September begins, markets are overbought with little room for error. While September is historically volatile, strong pre-September trends often defy seasonal weakness. Key factors to watch include jobs data, earnings growth, Fed policy clarity, and broadening market leadership.
UX vs. UI design: expectations vs. reality
25 surprising facts about wireframes
Understand the background of design
You must be logged in to post a comment.