Third Quarter Market Commentary
Equity markets have defied expectations in 2025 — climbing to record highs despite a volatile start, rising valuations and persistent investor skepticism. As we enter the final quarter, this rally underscores a familiar tension between momentum and valuation. At Elevage Partners, we’re focused on the balance of opportunity and discipline: anticipating what could shift next, rather than reacting after the fact.
A Rally Few Expected
This so-called “most hated rally” has been marked by record-setting index performance alongside deep investor skepticism and deteriorating consumer confidence. Many institutions that reduced risk exposure earlier in the year have been slow to re-enter, reflecting how uncomfortable strong recoveries can feel when sentiment hasn’t yet caught up with price momentum. At Elevage Partners, we view that disconnect as a reminder that markets often climb a wall of worry.
Valuations Stretch Higher
Despite the surprising upward momentum, valuations tell a more complex story. As of Sept. 30, the S&P 500 traded at 22.5 times forward 12-month earnings. This is well above its five-year average of 19.9 and 10-year average of 18.6 (Source: FactSet). This widening gap between the moving averages and today’s multiple is worth watching closely.
Chart prepared by Elevage Partners for illustrative purposes only.
Part of what supports today’s higher valuations is the structural evolution of the U.S. economy. We’ve moved steadily toward an asset-light mode — one driven more by data, intellectual property and software than by heavy equipment or physical capital. Traditional measures such as GDP may understate the value being created in this digital, innovation-led environment, which helps explain why forward P/E ratios appear elevated relative to history.
In the past, when price growth outpaces earnings growth by this margin, it suggests investors are paying a premium for future expectations rather than current fundamentals. In 2025, that premium has been fueled largely by enthusiasm surrounding artificial intelligence and the productivity gains it promises to deliver. Elevated valuations don’t necessarily mean the market is overheated, but they do raise the bar.
Companies must continue delivering strong earnings to justify today’s prices. When expectations run this high, even minor disappointments can lead to outsized market reactions. At Elevage Partners, we see this not as a signal to retreat, but as a reason to stay selective. We are favoring firms with proven profitability, durable balance sheets and business models that can support sustainable growth even if enthusiasm cools.
The Fed’s Balancing Act
Federal Reserve Chair Jerome Powell faces a delicate challenge: curbing inflation while supporting a labor market showing early signs of weakness. The Personal Consumption Expenditures (PCE) index has ticked higher as tariff costs filter through the economy, while the unemployment rate rose to 4.3% in August, its highest level in four years. In response, the Fed cut rates at its Sept. 17 meeting after a nine-month pause, describing the move as a “risk management” approach. This was less a signal of retreat and more a recalibration in an effort to preserve job gains while allowing time for price pressures to ease. The decision underscores the Fed’s shifting focus from fighting inflation at all costs to managing the trade-offs between policy tightening and economic stability.
Fixed Income in a Shifting Rate Landscape
The easing of monetary policy has been constructive for our fixed income strategies. We continue to emphasize income generation through a diversified mix of Treasuries, mortgage-backed securities, leveraged loans and high-yield funds. In an environment where small changes in rates can cause large swings in long-duration bond prices, our preference for shorter maturities reflects a deliberate trade-off: steadier income and less exposure to price volatility.
This approach allows us to remain flexible should yields move higher, while still capturing attractive opportunities across sectors. With government deficits expanding and long-term Treasury issuance increasing, we continue to monitor the longer end of the yield curve carefully, favoring shorter-duration holdings to help manage price risk as rates adjust.
Policy Risk on the Horizon
Looking ahead, the Supreme Court’s pending review of the administration’s tariff authority could prove pivotal. If the court upholds the lower ruling that the president exceeded his power, the resulting policy reversal may trigger renewed volatility, particularly across Treasury markets. Ironically, tariffs that initially unsettled investors have since become a notable source of Treasury revenue. Removing them abruptly could inject fresh uncertainty, both economically and legally.
Markets dislike vacuums of clarity, and this decision could test how resilient investor confidence remains in the face of shifting policy frameworks. Were tariffs ultimately reversed, the Treasury could face complex questions about previously collected levies — an outcome that might place renewed upward pressure on long-term yields. The irony, of course, is that the same policy that unsettled markets earlier in the year has since become a notable source of fiscal stability.
What We’re Watching in the Fourth Quarter
This has proven to be a year of contradictions — growth where many expected contractions and resilience where most saw fragility. As the year draws to a close, the U.S. economy continues to grow at roughly 2%, defying predictions of a post-tariff recession. At Elevage Partners, our role is not to predict each turn of the market but to prepare for the range of outcomes those turns might bring.
We remain guided by discipline — balancing risk, monitoring valuations and ensuring your portfolio remains aligned with your long-term goals. History shows that new highs are not a reason to retreat but a reminder to stay focused on fundamentals and readiness.
Another issue we’re watching as the fourth quarter unfolds is the ongoing government shutdown. While it has generated significant headlines, market reaction has been limited so far. Historically, short-term shutdowns have had minimal lasting impact on economic growth or corporate earnings, and we see little evidence that this episode will alter that pattern. Still, we remain attentive to potential ripple effects if the impasse extends, particularly around consumer sentiment and federal spending data.
At Elevage Partners, we anticipate — we prepare. Our team continues to evaluate opportunities, manage risk exposure and position portfolios for resilience across market cycles. If you have questions about your investments or would like to review your plan, please reach out to me or your advisor.
Thierry Hasse
Chief Investment Officer
Elevage Partners
The information contained herein represents the views of Elevage Partners at a specific point in time and is based on information believed to be reliable. No representation or warranty is made concerning the accuracy of any data compiled herein In addition, there can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Any statement non-factual in nature constitutes only current opinion which is subject to change. These materials are provided for informational purposes only and do not constitute investment advice. Any reference to a security listed herein does not constitute a recommendation to buy, sell, or hold such security. Past performance is no guarantee of future results. The historical returns of any securities and/or sectors mentioned in this commentary are not necessarily indicative of their future performance.