Market Commentary

The third quarter was defined by broad-based gains across global equity markets, with the S&P 500 and Nasdaq both reaching record highs. At the core of this rally lies a powerful structural driver: the surge in capital expenditures (capex) dedicated to artificial intelligence (AI) development. These investments, led by “hyperscalers”– large cloud computing companies such as Alphabet, Amazon, Meta, Microsoft, and Oracle– are funding the construction of data centers designed to manage intensive AI workloads. Recent estimates suggest hyperscalers will deploy more than $300 billion in capex during this calendar year.

The broader economic impact of this wave of spending is both profound and far-reaching. First, hyperscaler capex directly boosts GDP through increased infrastructure and technology investment. Second, it acts as a cascading growth engine across multiple sectors, from semiconductors and real estate to utilities, energy, and cloud hardware. Finally, these investments stimulate job creation, both directly (in construction, IT, and engineering) and indirectly (through heightened demand for support services). In short, hyperscaler spending has become a powerful multi-sector economic accelerator.

Fueled by AI optimism, both stocks and bonds have had robust performance. As of September 30th, the S&P 500 and the Bloomberg Aggregate Bond Index have delivered year-to-date returns of 17.6% and 6.1%, respectively. Over the three-year period ending September 30th, the S&P 500 has sported an impressive 24.9% annualized return, resulting in nearly 75% of cumulative growth. This robust growth, combined with an easing monetary backdrop, almost feels too good to last.

Elevated debt levels and leverage continue to cast a long shadow. While companies have traditionally funded capex through operating cash flows, many are now turning to debt financing. Moreover, return on investment (ROI) for AI-related capex remains uncertain, as the technology and its commercial applications are still in the early stages. Current market valuations suggest optimism, but the timing of productivity gains and revenue realization may be longer than expected. As such, the timing of ROI on AI-related capex creates a risk for investors.

Governments, too, are grappling with rising debt. U.S. federal debt now exceeds $35 trillion, 125% of GDP. Whether for corporations or countries, debt holders are eager for lower interest rates, yet cutting rates too quickly risks reigniting inflation. In addition to a 0.25% cut in rates in September, recent projections from the Federal Open Market Committee suggest two additional rate cuts by the end of the year, taking the Federal Funds Rate from its current 4.25% to 3.75%. Markets reacted positively to the news of more cuts than previously expected, sending the Nasdaq, Dow, S&P 500, and Russell 2000 to new highs following the announcement.

If there is one key takeaway from this evolving market landscape, it is the value of staying invested. Despite volatility and uncertainty, portfolio returns of late have exceeded many forward-looking forecasts, rewarding investors who remained disciplined and patient. A fundamental component of our portfolio construction process is a focus on long-term needs and risk tolerance, rather than short-term noise, and we continue to remind clients of the importance of maintaining this focus.