Hewson's Q4 2025 Outlook

Hewson's Quarterly Outlook

2025 Q4 | October 3, 2025

Equity markets are entering the 4th quarter in a positive position that have been largely fueled by AI tailwinds, which continue to drive expectations and earnings higher. Below I touch on our thoughts for the short and medium term, as well as what we are doing in your portfolios to position us for optimized performance.

Current State

The term “goldilocks” in finance has been used to describe a near perfect situation where many variables come together to create an excellent environment for equity indexes to go higher. Although this market is not without its complex problems, none of those problems NEED to be solved today.

The Recipe for Good Stock Market Returns

GDP

The last estimate of U.S. Q3 GDP came in at a better-than-expected pace of growth of 3.8%. Normal pace of expansion is around 2%.

Jobs

Employment numbers have been solid despite a wobble in recent months. We have undoubtedly seen a slowdown in hiring, however we have also seen a lack of firing. Since the economic environment has been so chaotic, firms are hesitant to lay off workers based on economic variables that are constantly influx. Companies learned during COVID that finding and re-hiring workers can be difficult when the labour market is as tight as it is. The less risky option would be to keep a higher number of employees and then only lay them off when you have certainty that you need too.

The Fed

Leaving out all the political ramifications of which there are many…

We must also consider a Federal Reserve Bank that is now conducting monetary policy with easing in mind. Most economists would argue that current interest rates would be considered restrictive from a historical perspective. In September, the Fed made their first cut of 0.25% in over a year. One to two more cuts are expected throughout 2025.

The Fed cutting and easing policy into a market that is healthy and expanding is much different than a Fed cutting into a market that is contracting. As long as employment holds, this easing could be the single most important market factor for the next 3 months.

Inflation

Inflation is still above the Fed’s target of 2% BUT the Fed seems to have shifted their focus to the other part of their mandate, employment. In recent Fed meeting minutes, it has been stated that the Fed plans to get to 2% inflation by 2027.

For me, it’s hard to believe that 2% is a real target if they have not been there since 2022. I have mentioned a few times in our weekly newsletter that I believe the Fed is considering a range of inflation (2%-3%), and not simply trying to hit 2% as they balance the employment side of their mandate.

Adding to the economic good news, we have yet to see any large tariff implications in recent inflation data. Perhaps it is coming or perhaps its impact has been blurred by other factors. Fed Chair Powell stated that he believes any impact from tariffs would be short-term and temporary in nature. This is exactly what the equity market wants to hear. This essentially lengthens the runway for stocks to drift higher without worrying that stubborn inflation (if it occurs) would ruin the party.

Longer Term Considerations

Over the longer term, we need to address:

The extreme concentration in 7-10 companies within the S&P and the problems that this could lead too.
The current high valuations for most indexes.
The amount of good to excellent news that is already priced into stocks on the belief that AI funding, building, and financing, goes on indefinitely.

S&P 500 Concentration

The world’s largest index has never been as concentrated as it is right now, ever. Much of the index’s performance is dictated by 7-10 companies. This does not have to end any time soon, as the biggest companies are the most profitable as well, but this type of activity traditionally does not end well when it does eventually cease. Any broadening outside the mega cap 7-10 stocks would be a welcomed sign of equity market health.

Expensive Valuations

Valuations matter. S&P 500 is trading over 23 times (Price/earnings, also known as the PE ratio) earnings which is historically high. As stated above, much of the return and thus value has been created in only a small number of companies. The P/E ratio for the S&P 490 (a colloquially term for the S&P 500 without the biggest players) is much more digestible at around 18 times, which is considered reasonable.

However, if everybody owns the MAG-7 or Super-10 as they are called, a drop in earnings, for any reason, could lead to substantial stock price drops as usually the stocks that have gone up the most, go down the most in a correction. Heading into Q4 earnings reports (U.S. banks begin reporting in two weeks) earnings estimates look healthy and we do not see major concerns at this stage.

AI Spending & Build-out

Is there an AI bubble? There are obvious signs of the AI trade getting out of hand. It is both like 1999/2000 in some ways but also very different others. I really do not like all the mysterious funding deals that have occurred over the last quarter. Intel, Oracle, the U.S. Government, Open AI, Nvidia and MGX (an Abu Dhabi investment firm).

MGX, if you are not aware, bought $2 Billion of the Trump Family’s new stablecoin (crypto) and was just surprisingly announced as part of the new TikTok consortium.

I think that it is also fair to assume that all the good AI news is already priced into stocks. SO, if the good news is priced in, can we even deliver the infrastructure and power needed to bring the good news to fruition? I do not know. Also, this good news needs to continue without an unexpected economic shock that could perhaps pause spending or extend the wait time for the good news to become profitable. i.e. making investors wait for improved earnings from these hefty AI expenditures.

On the plus side, unlike 1999/2000 the companies that are most heavily involved with AI are also the largest and most profitable. These are real companies, making and spending real money. That was not the case in the dotcom bubble. While the spend on AI by these large companies is large in dollar terms, when we look at it as a percentage of their spend, it is much less concerning.

Asset Allocation

Most of our portfolios are situated in the neutral (not overweight, not underweight) position in terms of equity holdings. This should not be a surprise given our favorable outlook in the short-term. We have also concluded that this is the best positioning in a market that is highly vulnerable to political posturing and the current level of uncertainty that is coming from the White House.

Sector Bias

Although we feel gaining extra returns from an active asset allocation perspective is difficult with this U.S. President and his willingness to “speak openly” about anything at all, it does provide us with a better opportunity to focus on the sectors that will benefit from the new strategies being put forth.

We have recently dropped our allocation in the Information Technology sector and increased our weight in the dividend paying and dividend growing Utilities and defensive sectors. For necessary context, the S&P 500 is now 32% Information Technology, whereas our portfolios are 12%-15% on average.

To be clear, we are still believers in the AI revolution. However, we will soon need to see this extensive spending backed up by actual profits.

We remain overweight in both the Industrial and Infrastructure sectors as well as defensive dividend paying areas of the market. Nothing from the last quarter of economic activity tells us that the onshoring trade is losing any steam.

Stock Selection

Despite our view that equity markets seem well positioned for the next few months, we are still sticking with high quality North American companies, with proven management teams, competitive products, and that operate in sectors with high barriers to entry. Given the later stages of the cycle that we deem ourselves to be in (in terms of valuations) we find chasing higher returns in lower quality, foreign or emerging market companies, to be too risky for our clients at this time.

The Bottom Line

The current equity market setup, with easing Fed policy, and a healthy U.S. economy, should provide the fuel that indexes need to go higher, with better earnings in the next quarter.

We are and will remain glued to economic releases (although the current government shut down clouds the narrative a little bit). We will continue to expect surprises, volatility and a little chaos, but will rest easy knowing that the companies we own are in sectors that are expanding, have competitive products and are in excellent financial shape.

As always, we are long-term investors looking for good companies to own, for long periods of time. Staying invested is the key.

Team photo of Hewson Wealth Partners