State of the Markets – Q4 2025

As we close out 2025, I revisited my Mid-Year Market Outlook published on June 11 on the Wealthstone website. In that report, I wrote:

“Based on our analysis, we believe the second half of 2025 will mark a durable recovery for U.S. equity markets. We anticipate a rotation back toward U.S. large-cap leadership, with a continued focus on the transformative power of artificial intelligence. Looking toward 2026 and 2027, we expect the proliferation of AI to be complemented by advances in autonomous driving, quantum computing, and intelligent robotics. The dawn of commercial space travel this decade also places a premium on technologies like reusable rockets. Our long-term strategy remains centered on a core holding in the S&P 500, augmented with satellite positions in these revolutionary technologies.”

That outlook has held up remarkably well. The second half of 2025 has indeed delivered a strong rebound in equity markets, driven largely by large-cap technology and AI-linked names. The economy, however, tells a more nuanced story — one of strength in innovation but softness beneath the surface.

Technology Still Leads the Charge

Artificial intelligence continues to reshape industries at an accelerating pace. We’re still early in this revolution, as reflected in sustained earnings growth from the sector’s leaders — Nvidia, Microsoft, Alphabet, AMD, Broadcom, and others. Corporate adoption of AI is expanding across nearly every sector. Tesla, for example, is merging its vehicle systems with xAI to create deeper integration between autonomous driving, voice assistance, and adaptive learning — essentially bringing “super-intelligent copilots” into cars.

At the same time, quantum computing, intelligent robotics, and autonomous mobility are gaining traction faster than many expected. Firms like Rigetti Computing, IonQ, and D-Wave — all early-stage innovators — have seen their valuations surge as investors position ahead of potential breakthroughs. These companies are not yet consistently profitable, but their progress highlights a growing investor appetite for frontier technologies that could accelerate scientific and industrial advancement in the years ahead.

Are We in a Bubble?

Many investors are asking that question. The concern stems from high valuations, strong index returns, and heavy sector concentration. But context matters.

The S&P 500 today is fundamentally different from the one our parents invested in. It’s now roughly 34 % technology, up from under 10 % two decades ago. Because the index is market-cap weighted, its valuation reflects the dominance of its largest constituents. The S&P 500’s current P/E ratio of about 31 × may seem elevated, but that’s in line with the Nasdaq-100’s 34 × and consistent with a tech-heavy composition.

If you believe, as I do, that we are in the early stages of a long-term technological transformation led by AI, robotics, quantum computing, and automation, then today’s valuations are not irrational. They reflect a re-rating of the market toward innovation-driven growth rather than speculative excess.

Economic and Policy Crosswinds

Beneath the market’s surface, the macro picture is more complex. Inflation has cooled but remains sticky around the 3 % range, while economic growth has slowed to a moderate pace. The Federal Reserve — having begun its rate-cutting cycle earlier this year — is expected to deliver another quarter-point cut at its October 2025 meeting, bringing the target range closer to 4 %.

The Fed’s challenge is delicate: stimulating a softening labor market without reigniting inflation. Unemployment has edged higher, particularly in manufacturing and retail, while corporate capital spending remains solid thanks to AI investment. Chair Jerome Powell has emphasized that the Fed will “proceed carefully,” prioritizing employment stability even if inflation temporarily exceeds its 2 % target.

Meanwhile, tariff enforcement and trade friction have re-emerged as inflationary forces. U.S.–China trade negotiations remain unsettled, with talk of broader tariffs on technology imports. Beijing, in turn, has hinted at restricting rare-earth exports, vital to semiconductor and EV production. These tensions add to supply-chain uncertainty and underscore why many U.S. firms are reshoring production.

Political and Geopolitical Landscape

The government shutdown that began on October 1, 2025 has become one of the longest in history, delaying critical data releases from agencies such as the Bureau of Labor Statistics and the Bureau of Economic Analysis. That data vacuum complicates the Fed’s decision-making process, forcing reliance on private-sector indicators such as ADP’s payroll report and state-level submissions.

With mid-term elections approaching in 2026, the shutdown has taken on political overtones. Betting markets currently show Democrats with a roughly 15 % probability edge in retaking the House, while Republicans are expected to retain control of the Senate — a divided Congress scenario that historically coincides with steady market performance but limited fiscal progress.

Abroad, tensions persist over China–Taiwan and the Russia–Ukraine conflict, while instability in Venezuela and Colombia could disrupt energy markets if hostilities intensify. Collectively, these issues add volatility risk but also highlight the relative stability and innovation leadership of U.S. markets.

Investment Outlook

Despite the near-term headwinds — inflation uncertainty, trade disputes, and political dysfunction — I remain constructively optimistic. The secular forces driving innovation and productivity remain intact. Short-term volatility could increase through year-end, creating opportunities for investors sitting on elevated cash positions to redeploy strategically.

Looking ahead to 2026 and 2027, I expect continued leadership from the technology sector, supported by strong balance sheets, AI-driven productivity gains, and healthy consumer spending. The key variable to watch is inflation: if it drifts higher while political pressure pushes for further rate cuts, the Fed could find itself behind the curve again, potentially forcing sharper tightening later. For now, however, the base case remains a soft landing, steady disinflation, and a constructive backdrop for risk assets.

Wealthstone portfolios remain positioned for that scenario — emphasizing quality U.S. large-caps, diversified global exposure, and targeted investments in transformative technologies.

As always, I appreciate your continued trust and partnership. Please don’t hesitate to reach out with any questions about your portfolio or the economic outlook as we head into 2026.

—
Zak Gardezy, CFP®
Founder & CEO • Wealthstone Private Wealth Management

Sources:

• Federal Reserve Press Releases & Minutes (September–October 2025)

• S&P Dow Jones Indices Sector Weightings (Q3 2025)

• Nasdaq Inc., Market Data (October 2025)

• U.S. Department of Commerce and Bureau of Economic Analysis (2025)

• Bloomberg Markets / Reuters / FactSet Earnings Summary (2025)

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Disclaimer:
This material is provided for informational purposes only and should not be construed as investment, tax, or legal advice. The opinions expressed are as of the date of publication and are subject to change without notice. Past performance is not indicative of future results. All investments involve risk, including possible loss of principal. Wealthstone Private Wealth Management is a Registered Investment Adviser in Arizona. Advisory services are offered only where Wealthstone and its representatives are properly licensed or exempt from licensure. Always consult your financial and tax professionals before making investment decisions.