The Year of AI – Financial Markets Like IT!

The financial markets and diversified portfolios are up nicely, delivering impressive gains YTD, driven by strong corporate earnings, resilient consumer spending, and continued enthusiasm around artificial intelligence (AI) with Capital and Information Technology (IT) expenditures up significantly. Technology and growth-oriented sectors have fueled the major indices to new highs. Disciplined investors who stayed the course through the recent volatility have been rewarded. However, as we look ahead to the next 6-12 months, it’s important to have prospective and temper expectations. It’s fair to ask what’s next as we look ahead in the financial markets and will the party end soon?

Learning from the Dot com era and What Happened to the Tariff Tantrum?

Despite selling off almost 20% in April (yes 20%!), the S&P500 recovered quickly in Q2 and Q3 and is up 13% for the year as of this writing while the aggregate bond market was up 6.3%, putting diversified portfolios up across the board.  International stocks continue their 2025 outperformance up over 20% YTD. Much of the recent market momentum has been driven by mega-cap tech stocks, leading to concerns around narrow market leadership (w/ 7-8 stocks making up over 30% of the S&P500) and elevated valuations. There are growing discussions around the potential of an “AI Bubble”, reminiscent of the innovation fueled exuberance of the Dot.com boom/bust of the early 2000s. In this context, we believe maintaining a well-diversified portfolio remains as important as ever. Diversification across sectors, asset classes, and geographies can limit concentration exposure to a single trend or theme. While it is always tempting to chase performance, we believe our more balanced approach helps us achieve stock market-like expected (but not guaranteed) returns while lowering the overall risk in the portfolio.  Recent examples include a few strategies, which have become more accessible in recent years, offering lower volatility while maintaining healthy returns and yield such as:

Energy Infrastructure and Alternative Investments – as global energy needs continue to grow these funds have healthy returns that aren’t directly tied to the stock market.

Structured Notes – these are essentially corporate bonds with equity/stock like expected returns (7%-10%) with less volatility and customized levels of market protection.

Investment-Grade Floating Rate and Securitized Credit Funds – investment grade floating rate and CLO markets offer higher expected returns than some conventional bonds while still maintaining low volatility.

Year End Tax Planning

As we enter Q4, a reminder that some tax planning options like individual 401K and Roth conversions need to be done soon.  We incorporate these strategies into the financial planning process, but please reach out if you have any questions.  As always, it is a joy to partner with and serve you in your financial journey!

Regards,

 

Mitch Anderson                                              Destin Tompkins