by Nathan White, CIO
The third quarter of 2025 was another reminder of just how resilient markets can be in the face of economic and policy uncertainty. U.S. equities pushed to new highs, with the S&P 500 advancing strongly on the back of continued enthusiasm for artificial intelligence and robust consumer spending. Growth leadership has remained narrow, however, as a handful of mega-cap technology names continue to dominate returns. Fixed income markets were more subdued. Yields declined modestly as the Federal Reserve signaled a shift toward a more dovish stance, consistent with its recognition that long-term inflation is likely to run closer to 3% rather than the outdated 2% target. Credit spreads remain historically tight, reflecting investor confidence, though this also means limited compensation for taking risk in corporate bonds.
Despite elevated valuations, the overall backdrop remains constructive. Several dynamics support a bullish outlook. Monetary policy is becoming more accommodative, with the Fed leaning dovish and the administration pursuing pro-growth fiscal measures, which together should keep liquidity conditions supportive. Corporate earnings have held up well despite tariff-related cost pressures, with profitable companies that use capital efficiently continuing to reward investors. Moreover, small-cap and international equities are showing signs of catching up, which could broaden market leadership beyond the largest names.
Even in a bullish environment, risks are mounting that could create volatility. Market concentration remains one of the most important to watch, as the “Magnificent 7” now comprise more than 30% of the S&P 500’s weight. While these companies are innovative leaders, history suggests that extreme dominance rarely persists indefinitely. The current AI enthusiasm also brings risks, as valuations in leading firms have become stretched. Previous cycles—from dot-com to cloud—remind us that hype can push prices far above fundamentals before reality reasserts itself. In addition, global and policy uncertainties remain, with large fiscal deficits, persistent inflation pressures, and geopolitical frictions presenting ongoing challenges.
We remain constructive and positioned for upside but disciplined in managing concentration and valuation risk. Our strategies balance exposure to innovative leaders with diversified holdings in attractively valued companies outside the mega-cap core. For example, our Fundamental 20 strategy has delivered market-like returns this year without heavy reliance on the Magnificent 7, while our Fast Movers strategy has captured growth through select technology and semiconductor names. In fixed income, we continue to prioritize capital preservation, avoiding excess risk-taking while monitoring spreads as a key barometer of economic stress.
As we look forward, the path is likely to feature both booms and pullbacks. AI and other secular innovations provide a solid foundation for growth, but markets may at times get ahead of themselves. By balancing optimism with discipline, participating in the upside while avoiding overconcentration, we believe portfolios are well-positioned for the evolving landscape of late 2025 and beyond.
Model Portfolio Performance and Positioning
The Managed Income model was up about 1.31% for the quarter and 3.55% the year. The allocation remains balanced to capture income, minimize volatility and reduce risk. While the pace inflation has moderated from the highs, inflation is starting to stick at a higher level and could rise in the short term due to effects from tariffs. Prices will remain high and the only way to get them down would be through an economic slowdown or recession. Regarding interest rates, the market is expecting two more quarter point rate cuts this year and another half to one percent decrease next year. Elsewhere in the fixed-income space, the spread between safe securities and corporate and/or high yield fixed income has significantly narrowed after the tariff volatility and is now by historical standards near lows. These spreads are a primary indicator of stress in the real economy, and I consider them a particularly important bell whether that I monitor closely. Now is not the time to increase risk when spreads are so narrow. Managed Income will remain focused on protecting capital and will primarily only add risk when conditions get extreme (i.e., recessions).
Our equity and growth strategies have performed well for the year so far compared to relevant benchmarks. By way of comparison, the S&P 500 is up 14.8%, the Dow Jones Industrial Average 9.1%, the NASDAQ is up 17.3% and the Russell 2000 (Small Caps) is up 10.4%.
Fundamental 20 is up 14.5% for the year. This is in line with the performance S&P 500 but without significant exposure to the MAG 7 group that has powered so much of the gain in market averages. This strategy focuses on highly profitable companies that have excellent value compared to their cash flows and/or net income. We look for companies that are using their capital efficiently to make money. During the quarter we kept our holdings intact. We plan to make changes during the fourth quarter to take advantage of tax loss harvesting and add new names that our looking more attractive.
The Fast Movers strategy is up just over 27% for the year and is our best performing subset strategy. This is our most aggressive strategy that actively seeks high growth and therefore can experience regular large drawdowns. The strategy has performed well due to exposure to both selected MAG 7 stocks and separate software and semiconductor stocks. The strategy now holds seven technology, six consumer discretionary, four communication services, one healthcare, one industrial, and one consumer staple positions. There are changes forthcoming to align with our updated rankings during the final phase of the year.
The Liquidity Factor Strategy is up 16.2% for the year. This strategy uses a proprietary method to take advantage of pricing anomalies in stocks that are less liquid and relatively ignored by the market. The strategy is comprised of ten holdings that see little turnover. There were no holding changes for the quarter. The primary exposures remain in the Consumer Discretionary and Healthcare sectors. The Relative Strength ETF component of our Top Flight model is up about 10% for the year. Small caps finally had an exceptionally good quarter to get in line with the broader market. The strategy is now allocated to ETFs representing Small Caps and Dow Jones Industrials Index of thirty stocks but may add exposure to emerging markets during the fourth quarter.
The Top Flight Model Portfolio is up slightly at 16.4% for the year. As mentioned previously, this compares very favorably to the broad market indices beating the S&P 500, the Dow Jones Industrial Average, and the Russell 2000. Our equity screens are now seeing increasing movement and due to the rally in stocks from the tariff volatility earlier in the year. We did not make any dramatic moves during that chaotic period and surmised it would be better to hold steady, which in hindsight was the correct mover to have made. Top Flight is now comprised of 25% Fast Movers, 40-50% Fundamental 20, 10-20% Liquidity Factor, and 15% ETF RS. Among our overall equity holdings, the top five performers for the third quarter were Applovin Corp (+105%), Tesla (+40%), Lyft Inc (+40%), Alphabet (+38%), and Palantir Technologies (+34%). The worst performers were Lululemon (-25%), Atlassian (-21%), Vestis (-21%), Strategy Inc (-20%) and Intuitive Surgical (-18%).