As we enter the final stretch of 2025, we wanted to share a positive yet balanced perspective on the markets and economy. It’s human nature to focus more on potential risks than opportunities—rooted in our evolutionary instinct to stay alert to dangers. As Morgan Housel notes in The Psychology of Money, “Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.” Warnings grab our attention in a way that good news often doesn’t, amplified by a relentless 24/7 news cycle that thrives on crises.
Behavioral finance highlights this through concepts like loss aversion and negativity bias: we feel the sting of potential losses more deeply than the joy of gains. While real risks such as geopolitical tensions, evolving monetary policies, and economic vulnerabilities deserve attention. However, history reminds us that progress, innovation, and resilience are the steady forces that drive long-term success in markets and economies. Risks and opportunities are constant companions in investing, and our inherent tendency toward pessimism makes it all the more crucial to highlight the positives to maintain a clear-eyed perspective.
That said, we must address a key question on many minds: Is the U.S. stock market in a bubble? We’ve asked ourselves this question many times, especially when we watch certain stocks soar to levels that feel unsustainable. There’s increasing commentary suggesting we might be, especially in popular sectors like AI, where prices are climbing not always based on fundamentals but on herd mentality and the fear of missing out. Investors chase rising valuations without deeper scrutiny, a classic behavioral trap that can lead to regrettable decisions. Ironically, when impulsive buying floods in and pushes prices even higher at first, it looks like easy wins—which only draws in more people and inflates the bubble further. As disciplined investors, it’s crucial to stay cautious: bubbles always burst eventually, and history shows that getting caught up in the hype can lead to painful losses. That’s why we prioritize fundamentals, rigorous analysis, and long-term value to safeguard your portfolio.
Turning to the positives, the year began with widespread predictions of volatility and uncertainty, yet the economy has demonstrated impressive resilience. Core drivers of growth are strengthening, including lower interest rates, fiscal boosts from the One Big Beautiful Bill Act (such as enhanced SALT deductions and accelerated depreciation), and AI-related capital expenditures expected to surpass $300 billion. While tariffs introduce some fluidity, we’re seeing clearer paths forward through negotiations with major trading partners.
S&P 500 companies reported solid year-over-year gains in second-quarter earnings and revenues, propelled by mega-cap tech, financials, healthcare, and select consumer sectors—these more than compensated for softer results in energy and staples. Third-quarter indicators suggest continued momentum, and encouragingly, this expansion is broadening: Mid- and small-cap firms, having adjusted to higher rates, are now contributing to the earnings upswing alongside their larger peers. Vibrant sector performances, a resurgence in IPOs and M&A deals, and substantial capital investments all point to building confidence rather than a looming downturn.
AI’s role is particularly exciting, as it transitions from specialized uses to broad economic integration, enhancing productivity. Take Eli Lilly, a holding in our portfolios: Their recent launch of Lilly TuneLab provides biotech companies with access to advanced AI models, potentially speeding up drug discovery and amplifying AI’s ripple effects across industries.
In Europe, too, the outlook is brightening, thanks to strategic public investments and reforms in areas such as capital goods, defense, financials, and utilities. The region is embracing debt-financed initiatives for defense and infrastructure, with the €750 billion NextGenerationEU fund now fully underway. Over the next 12–18 months, this will fund critical projects in semiconductors and digital infrastructure, acting as a stabilizing force against global slowdowns and generating positive economic multipliers. What was once a fragmented landscape is evolving into a more unified, proactive powerhouse, and we’re selectively invested in European firms poised to capitalize on this wave of public spending and construction.
As we look forward, our strategy remains centered on uncovering durable opportunities while vigilantly navigating uncertainties. We’re positive about the many tailwinds in play but equally committed to watching for risks and adjusting as needed. We’ll continue to keep you updated through our regular communications.
We value your partnership and welcome comments or questions—feel free to contact us at Cardinal Capital anytime.
