The Investing Cycle
Advances in computing, semiconductors, medicine, and energy have been key drivers of the current business cycle. Many of the world’s largest corporations are investing heavily in new technologies to unlock future profitability. These capital investments have not only fueled innovation but also supported the broader stock market and corporate earnings. It is working circularly throughout markets, where one company’s capital expense is another’s revenue. Add robust consumer spending to it, and record-breaking corporate profits emerge for market investors to share. Except, it’s not so simple. Investors are asked to pay more for future earnings now than in other periods of the past. Paying above-average prices for earnings can sometimes diminish investment returns later.
Beneath the surface, the market has been shaped by a wave of mergers, acquisitions, and strategic partnerships. Investors often interpret institutional risk-taking as a positive signal, with deal-making by banks and private equity investors helping to support valuations in public equity markets. Recent announcements highlight the scale of capital investments in the market. In September, news broke that Oracle, OpenAI, and SoftBank plan to build five new data centers. In addition, NVIDIA has committed billions to supply GPUs to OpenAI and Intel, and Meta has pledged billions for computing services hosted by CoreWeave. Even the US government is participating, targeting significant investments in Intel and companies involved in rare earths and advanced materials.
Yet even at these historically high levels of investment, risks remain. Many professionals recall the internet build-out before the dot-com crash, when a handful of global leaders over-invested in fiber-optic networks to meet anticipated demand. Bandwidth, however, developed more slowly than expected, leaving many overextended businesses bankrupt.
“Investors often interpret institutional risk-taking as a positive signal, with deal-making by banks and private equity investors helping to support valuations in public equity markets.”
The current investment cycle may evoke similar concerns. Physical and operational constraints are significant to turn multi-billion-dollar infrastructure investments into sustainable income streams. For one, the energy required to power Oracle’s planned data centers could match the power needs of four nuclear power plants or supply electricity to three to four million homes. Moreover, Oracle intends to finance the build-out with public debt, thereby adding to its already leveraged balance sheet. Funding these projects through debt adds balance sheet risk and complexity to corporations, highlighting both infrastructure limitations and company-specific vulnerabilities in this new era of ambitious spending.
Corporate and government spending on next-generation technologies shows no signs of slowing, and neither do the stakes. Profits are high, valuations are stretched, and infrastructure plans are massive, evoking echoes of past cycles where optimism ran ahead of reality. Investors are chasing transformative growth, but the risks, from operational bottlenecks to balance sheet strains, can’t be ignored. In today’s market, the winners will be those who can distinguish bold innovation and positive change from those who overextend and over-invest.
Tariffs
August marked the first whole month of receipts from the new “reciprocal” tariffs, totaling nearly $29.5 billion in customs duties, which was a record month. This heavy revenue collection came as a sticky August inflation report led many economists to attribute rising consumer prices to the upward pressure from these duties.
High-level trade negotiations between the US and China were a primary focus and led to critical progress following a call between President Trump and China’s President. This discussion also included the topic of a potential sale of TikTok’s US operations. The result was a framework deal to preserve the US operations of the app, which would be acquired by a consortium including Oracle.
Looking forward, the trade landscape faces significant legal and strategic shifts. The Supreme Court is poised to review the legal challenge to Trump’s broad “reciprocal” tariffs, specifically those imposed using the 1977 International Emergency Economic Powers Act. Arguments are scheduled for November 5, and a decision is possible by year-end.
Since an adverse ruling could potentially force the administration to refund about half of the recent tariff revenues, the White House is already shifting its strategy. The administration is refocusing on the more legally secure authority granted by Section 232 of the Trade Expansion Act, which targets sectors on national security grounds. This pivot has led to a slew of sector-specific tariff promises.
Globally, the World Trade Organization (WTO) delivered a contrasting outlook. While global trade was resilient in the first half of 2025, boosted significantly by AI-related trade, the WTO sharply downgraded its forecast for 2026. This downgrade is based on an expected slowdown as the full impact of US tariffs is fully in effect.
Economy
Although the recent government shutdown is concerning, it had previously occurred back in 2018. These types of shutdowns affect many things, but one area critically important to investors is the potential impacts on the Bureau of Labor Statistics (BLS), a key source of data.
President Trump repeatedly promised to use the shutdown to make “irreversible” cuts, saying, “A lot of good can come from shutdowns.” By the second day, the White House was actively working to identify thousands of federal jobs to cut permanently, targeting agencies deemed “a waste of the taxpayer dollar”.
Shifting to the topic of inflation, the August Producer Price Index unexpectedly fell by 0.1% from July. This deceleration in wholesale inflation was partly attributed to narrower profit margins at retailers and wholesalers, suggesting that businesses might be absorbing the cost of tariffs rather than passing them entirely on to consumers. Further, the Consumer Price Index (CPI) showed core prices (excluding food and energy) holding steady at 3.1% year-over-year in August.
Finally, the labor markets have continued to soften quite dramatically. The economy added only 22,000 jobs in August, well below the forecast of 75,000. Furthermore, the job growth for June was revised significantly lower, now ending in negative territory. This resulted in three months of slowing job growth. In addition, the Labor Department also reported that employers had added 911,000 fewer jobs than initially reported in the 12 months ending in March. And finally, this softening trend was underscored by the unemployment rate, which ticked up to 4.3% in August, reaching its highest level since October 2021.
Federal Reserve
The Fed proceeded with its first rate cut of 2025, marking a significant policy shift. The decision to cut rates was driven primarily by a deteriorating labor market, despite persistent inflation, shifting the balance of risks away from inflation toward maximizing employment.
“The Fed’s move to begin easing rates has opened the door to new opportunities for growth and improved market liquidity.”
Fed Chair Powell emphasized that the period of “waiting and watching” was over, noting that the central bank now faced a “difficult situation” in which its dual mandate of price stability and maximum employment was in tension. Powell stated that “there are no risk-free paths now”.
Looking ahead, estimates are for two more rate cuts this year, up from the estimates in June. The rate decision intensified political scrutiny and deep divisions within the Fed. Newly confirmed Fed Governor Miran dissented from the quarter-point cut, arguing in favor of an even larger half-point reduction. Treasury Secretary Bessent echoed this sentiment, expressing surprise that Powell had not signaled a clearer agenda for aggressive cuts, suggesting a destination of “at least 100 to 150 basis points” before year-end.
On a related note, the Treasury has continued “quantitative tightening”, which means it is intentionally not repurchasing bonds that are maturing off of its balance sheet. This has put increased liquidity into the market. The Secured Overnight Financing Rate, or SOFR, recently rose above the Fed’s target rate, which is an unusual development. Ultimately, this raised questions about how much longer the Fed could continue unwinding its balance sheet without draining essential liquidity and potentially reducing the effectiveness of rate cuts.
Stocks
President Donald Trump publicly advocated for the US to do away with quarterly earnings reports, urging securities regulators to switch to a six-month reporting period instead. Quarterly reporting has been mandated by the Securities and Exchange Commission since 1970. Trump argued that this change would “save money” and “allow managers to focus on properly running their companies”. Supporters of the shift claim that quarterly reporting is costly and time-consuming, and that it forces executives to focus too much on short-term targets rather than long-term planning. However, opponents argue that quarterly reports provide investors with valuable financial updates and essential context to gauge a company’s health and prospects, noting that the original 1970 policy shift was designed to reduce “information asymmetry” that occurred when companies could hide shrinking profits during economic downturns.
Overall, stocks continue to perform well. In the US, large cap stocks outperformed smaller cap stocks for the month of September; the return differential since the beginning of the year is quite significant.
Foreign stocks continue the outperformance relative to US stocks. On a year-to-date basis, foreign stocks have roughly twice the return of US stocks. This strong foreign stock performance has now brought the three year average annual returns to similar levels to those of US stocks.
Bonds
Bonds had a strong month in September. The Fed rate cut helped bring down the yields in the short-term end of the yield curve. However, the yield curve is now currently in a strange shape, where short term rates are higher than intermediate term rates, but the long-term rates are the highest of all maturities. Overall, it appears the yield curve is starting to normalize, where longer maturities deliver greater yields, but that process is taking some time.
Long-term bonds outperformed shorter-term bonds for the month of September. Yet still, longer-term bonds have rather unattractive returns over the one, three, and five-year periods.
High yield (low quality) bonds and bank loans continue to generate attractive returns, bringing the one and three year average returns into the 7% and nearly 11% range, respectively. These types of bonds continue to serve as the highest return bond sectors.
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The performance information presented in the asset category section of this report is based on equal-weighted averages of the following Morningstar Categories: US Stocks (US Fund Large Blend, US Fund Mid-Cap Blend, US Fund Small-Blend), Foreign Stocks (US Fund Foreign Large Blend, US Fund Foreign Small/Mid Blend, US Fund Diversified Emerging Mkts), US Bonds (US Fund Intermediate Government, US Fund Inflation-Protected Bond, US Fund Corporate Bond, US Fund High Yield Bond, US Fund Bank Loan), Foreign Bonds (US Fund World Bond, US Fund Emerging Markets Bond), Hard Assets (US Fund Commodities Precious Metals, US Fund Commodities Energy, US Fund Global Real Estate, US Fund Real Estate), Hybrid Assets (US Fund Convertibles, US Fund Preferred Stock).
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Bureau of Labor Statistics. Unemployment Rate, Total Nonfarm Employment, Labor Force Participation, Consumer Price Index, Producers Price Index. www.bls.gov. United States, Department of Commerce, Bureau of Economic Analysis. Personal Consumption Expenditures, Gross Domestic Product, Consumer Spending, Personal Income and Outlays. www.bea.gov. Federal Reserve. Fed Funds Rate, Fed Funds Target Range, Minutes of the Federal Open Market Committee, Board of the Federal Reserve System Calendar. www.federalreserve.gov. Trump, Donald. @realDonaldTrump. Truth Social.
