Quarterly Review and Outlook - October 2025

"How do we know when irrational exuberance has unduly escalated asset values? "

–  Alan Greenspan, 1996 

"Tonight I’m gonna party like it’s 1999."

–  Prince, 1982 

If the markets had a soundtrack this year, it might sound like a mashup between the upbeat rhythms of the late artist known as Prince and the somber tones of a Federal Reserve press conference – exuberant in tempo, yet hesitant in the lyrical message. Stocks keep finding their rhythm, even as investors glance nervously at the sheet music, wondering if they’re dancing too close to the edge of a cliff.

We’ve written before about the “Wall of Worry,” the paradoxical situation where equities rise not in the absence of anxiety but because of it.[1] In 2023, we noted that unease helps keep investors disciplined – they diversify, they rebalance portfolios, and they stay engaged rather than euphoric. Two years later, the same dynamic seems to be playing out. Markets continue their ascent to record highs, with investors climbing carefully, one anxious foothold at a time.

Stock Market Valuations: Echoes of 1999 With a Twist

Valuation anxiety sits at the top of the list of current worries. Stocks have rallied sharply in 2025 since the Spring’s tariff-related selloff, extending solid gains from the prior two years. Prince may have invited us to party like it’s 1999, but few investors seem to be in the mood for that kind of celebration. The parallels to the late-1990s tech boom are easy to draw – high expectations, elevated price multiples, and a concentrated market dominated by a handful of mega-cap names. But there’s an important difference: today’s technology and communications sector leaders have delivered earnings growth that helps explain their elevated valuations. These two sectors now represent nearly 37% of projected earnings for the S&P 500[2] – meaning that earnings strength, not just hype, may be behind much of the market’s rally.

And while valuations are still a concern, historically it has been an economic slowdown that causes earnings to decline and price multiples to contract, not high stock valuations alone. When growth continues and earnings expand, elevated valuations can persist far longer than many expect. Still, sentiment has turned cautious. There’s growing chatter in the financial media about a possible “AI bubble,” and that very worry could be a healthy sign – a reminder that investors remain skeptical enough to keep speculation in check. We’ll have a few more thoughts about the long-term AI opportunity below.

The US Government Shutdown: Fear and Loathing

Meanwhile, the government shutdown, less than a week old at the time of this writing, adds new bricks to our wall of worries. If the shutdown persists, history offers perspective. During the 16-day government shutdown in 2013, about 800,000 federal workers were furloughed,[3] trimming GDP by 0.3% that year.[4]

Bond markets, for now, remain calm. Treasury payments should continue unabated, avoiding the specter of default (unlike during debt ceiling stalemates.) But a prolonged political standoff could sap investor confidence more broadly, especially if the government proceeds with threatened mass layoffs. The Federal Reserve, facing limited fresh data due to government office closures, is expected to move ahead with a modest 0.25% cut to the bellwether Fed Funds rate at its October meeting,[5] with markets pricing in at least one more cut before year-end.

AI: Between Innovation and Imagination

Much of the stock market valuation debate centers on AI-related stocks, which fuel the bull case for U.S. equities. The story seems compelling, but the math is demanding. AI infrastructure spending may only be just beginning, and the next leg could require trillions of dollars in data centers, semiconductors, power generation, and cooling technology. That spending supports a strong narrative, but it doesn’t guarantee profits will meet the lofty expectations embedded in stock prices today. Still, AI is not merely a marketing label, as it is already accelerating scientific and industrial progress in profound ways:

• Drug Repurposing and Optimization: AI models demonstrated how a rheumatoid arthritis drug could help fight Covid-19, and the drug has since been granted emergency use status for severe forms of the virus.[6]
• Personalized Medicine: AI tools can predict a patient’s response to cancer treatments based on certain genomic markers, allowing for better medication selection.⁶
• Safe-driving technology: AI is playing a key role in next-generation autonomous driving and driver assistance systems such automatic emergency braking, making transportation safer and more efficient.[7]

These examples remind us that AI’s impact on innovation is real and measurable, with greater breakthroughs likely to come. But investors should be careful not to confuse scientific advances with guaranteed corporate earnings. And as AI evolves, so do its social and economic implications, such as potential job displacement.

Outlook: Steady Rhythm, Cautious Tempo

For now, the market continues to climb its familiar Wall of Worry. Fundamentals remain supportive, even as risks – from valuations to political uncertainty – keep investors alert. A gradual softening in Fed interest rate policy, policy, modest earnings growth, and the pace of innovation all support a cautiously optimistic outlook for the rest of 2025. As always, we encourage you to reach out at any time to discuss your portfolio to ensure your mix of assets is appropriate and aligned with your financial goals.

Last, if you know anyone who might enjoy reading this newsletter or benefit from Evermay’s perspective and services, please feel free to forward it – or, better yet, have them give us a call. We’re always happy to share our insights, offer a second opinion, or simply talk through how to make sense of a fast-changing investment landscape.

With best regards for the remainder of the year,

Mitch Schlesinger
Chief Investment Strategist

[1] https://evermaywealth.com/newsroom/q2-2023-review
[2] Yardeni Research Inc., Sept 23, 2025
[3] Wikipedia, “2013 United States federal government shutdown”
[4] Trust Company of the West, “U.S. Government Shutdown: A Look at Past Impact and Future Implications”
[5] CME Group Fedwatch Tool, Oct 7, 2025
[6] NIH, “Transformative Role of Artificial Intelligence in Drug Discovery and Translational Medicine”, Aug 29, 2025
[7] Automax Group, “The Role of Artificial Intelligence in Modern Vehicles: Driving in 2025”, March 7, 2025

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