“The stock market has predicted nine of the last five recessions“
—Paul Samuelson, the first American economist to with the Nobel Prize in Economic Sciences
May 15, 1915 – December 13, 2009
Paul Samuelson was one of the most accomplished and respected American economists of the 20th century. In 1970, he became the first American to receive the Nobel Prize in Economic Sciences. A trusted advisor to Presidents John F. Kennedy and Lyndon B. Johnson and a consultant to the U.S. Treasury, Samuelson combined academic rigor with real-world impact. Born in Gary, Indiana, in 1915, he earned his bachelor’s degree from the University of Chicago and his master’s and doctorate from Harvard.
As the uncertainty surrounding America’s trade policy intensified, peaking during President Trump’s “Liberation Day” announcement on April 2, 2025, economists and market forecasters appeared convinced the US was headed into a recession. Markets responded accordingly, selling off sharply. We too were concerned about the tariff levels announced that afternoon, which were not only higher than anticipated but also appeared to lack a clear framework. Ultimately, the administration adjusted course following what proved to be a clear market repudiation of the new tariff rates.
We have long advocated that investors build portfolios in line with their risk tolerances and not based on forecasts of future market prices. More specifically, probabilistic thinking, not deterministic models, serves as a more reliable guide. Even as AI becomes a greater part of our daily lives, we continue to believe the ability to reliably forecast the future will remain out of investors’ grasp. Our best counsel remains diversification through gaining exposure to a range of risk factors, so portfolios have multiple paths to success rather than binary outcomes. We take solace in knowing nearly every major economist was wrong about a recession earlier this year. However, we have a high degree of confidence this pattern will repeat itself in the future.
FIGURE 1
Source: eVestments
Quarter Highlights in Equity Markets
The post-Liberation Day rebound that began in the second quarter continued through the entire third quarter. The narrow leadership group remained those companies tied to the growth in AI and the surrounding ecosystem therein. This group includes the traditional “Magnificent Seven” names, most notably recent performance standouts NVIDIA (NVDA), Microsoft (MSFT), and Tesla (TSLA), as well as related companies such as GE Vernova (GEV), Quanta Services (PWR) and others connected to the power generation and distribution buildout required to energize future data centers.
Outside the US, equity markets have experienced even stronger gains, driven by several factors. In Europe, the financial burden of NATO’s security commitments has begun to shift from the US to European nations, leading to a notable increase in defense spending, most significantly in Germany. The US dollar has weakened considerably in 2025, enhancing international market returns for US-based investors through favorable currency translation effects. Japan has continued to deliver strong equity market performance, supported by long-awaited structural reforms, driving better economic outcomes within “Japan Inc.”. The government is also encouraging households to invest in domestic equities, an asset class long shunned by local investors in favor of overseas markets. In China, the government has implemented a series of economic stimulus programs aimed at reigniting growth following the severe slowdown caused by the stringent COVID-19 restrictions. This stimulus has resulted in strong equity market appreciation.
In the US, the Federal Reserve resumed its rate-cutting cycle in September, lowering the federal funds rate by a quarter point. This move followed a lengthy pause as the Fed assessed the economy’s resilience and the potential effects of the new US tariff regime. It has been nearly a century since tariff barriers have reached their current levels. The passage of the new One Big Beautiful Bill (OBBB) during the quarter helped offset some of the drag the tariffs imposed on America’s consumer-led economy. Earlier fears that the incoming administration might pursue fiscal restraint proved unfounded, as the continued deficit spending embedded in the OBBB has been greeted warmly by equity markets, and perhaps more surprisingly, without protest from the bond market. Deficit hawks, it seems, have replaced the bald eagle on the endangered species list and the day of reckoning has been delayed, at least for now. Bonds have rallied strongly to date in 2025, building on gains of the prior two years, after a historic sell-off in 2022. Frequently mentioned bond market vigilantism has yet to appear.
Macroeconomic & Policy Analysis
Monetary policy will remain challenging as signs of a labor market slowdown emerge. Unlike prior periods, however, we are not seeing a significant rise in the unemployment rate. At first glance, those two conditions seem incompatible, but the explanation lies in demographics. The retirement of the baby boom generation, now in its final stages and expected to conclude by 2030, is coinciding with the long-term decline in US fertility rates. The US is no longer just short on babies; after decades of this pattern, it is now running short of working-age Americans. This dynamic has already played out in Europe and Japan, but the US has avoided the same fate, due to more open immigration policies. With both legal and illegal immigration pathways now more constrained, the US faces a shrinking labor force. In this reality, job creation can fall without a corresponding rise in unemployment.
Walmart (WMT) CEO Doug McMillon recently commented that the company’s 2.1 million-person workforce will likely remain flat over the next three years as artificial intelligence drives greater productivity. As the nation’s largest employer, this will likely reverberate across broader segments of the labor market. We expect the unemployment rate to remain below 5%, a level where policymakers have generally become concerned. The larger question is whether productivity gains alone can sustain economic growth in the absence of labor force expansion. Fortunately, American policymakers can look to other countries, such as Japan, Germany, South Korea, and Italy, for insight into how they managed this same demographic challenge, and what policy responses were effective and which were not, as they will face these issues to a greater degree before the US does.
Geopolitics
We don’t often discuss geopolitics in this letter, but current developments will undoubtedly have significant impacts on capital markets and therefore warrant discussion. The two regions most in focus today are the Middle East and Europe.
Beginning with the Middle East, President Trump entered his second term with a renewed “America First” agenda. Topping that agenda are efforts to keep oil prices low and attract greater foreign direct investment (FDI) into the US to foster what he has described as a new golden age of American industry. Achieving lasting peace in the Middle East would certainly advance both objectives. The region remains home to the world’s largest petroleum reserves, which have generated vast capital surpluses and sovereign wealth funds eager to invest abroad. Together, these factors could help realize both of Trump’s goals.
President Trump’s return to power has coincided with Israel’s ongoing retaliating against Hamas following the October 7th, 2023, attacks. The response has extended beyond Gaza to a broader regional effort, as Israel seeks to defend itself against threats from Hezbollah in Lebanon, instability in Syria following the collapse of the Assad regime, and Iran’s continued nuclear ambitions. The administration’s latest efforts to broker a cease fire and secure the release of Jewish hostages held by Hamas align with its “America First” objectives. Success on this front would not only represent a humanitarian achievement but could also encourage further FDI in the US and help maintain low and stable energy prices. Trump made notable progress on this front during his first term with the Abraham Accords, which advanced recognition of Israel by several Arab states. Renewed diplomatic efforts could cement recognition from the remaining nations in the region, counterbalance Russian and Chinese influence, and strengthen US relations with Saudi Arabia led by Crown Prince Mohammed bin Salman.
In Europe, we have seen a rapid shift from Trump’s early overtures toward Vladimir Putin, when he frequently suggested the war between Russia and Ukraine could be resolved quickly, to what now appears to be an evolution in his thinking. This change followed the in-person summit Trump hosted with Putin in Alaska on August 15th, which ended without a positive result. Since then, the administration’s posture toward Russia has become noticeably firmer. Trump has reportedly grown increasingly frustrated after Putin violated several verbal assurances made ahead of the meeting, pledging interest in a peaceful resolution while simultaneously escalating bombing and drone attacks on Ukrainian civilian targets, including residential buildings, schools and hospitals.
More recently, there have been several incursions into NATO airspace, including violations over Poland, Germany, Estonia, Denmark, Finland, and Romania. Major European airports in cities such as Copenhagen, Oslo, and Munich have also experienced operational disruptions. Closer to home, in September, US fighter jets were scrambled over Alaska as Russian jets moved toward US airspace. These developments have prompted several responses. First, Ukrainian forces, supported by US intelligence and technology, have intensified strikes on Russia’s energy infrastructure in an effort to disrupt the country’s primary source of revenue, oil. The goal is to limit Russia’s ability to finance the purchase of Chinese and Iranian drones, the same drones making incursions into NATO-country airspace. In turn, NATO has launched Operation Eastern Sentry to reinforce its eastern flank through additional fighter jet deployments. During the September UN General Assembly meeting in New York, when asked at a joint press conference with Ukrainian President Zelensky whether NATO should shoot down Russian aircraft violating its airspace, Trump responded, “Yes”.
We view the recent developments in Europe as further evidence of the broader “America First” agenda taking shape, particularly through galvanizing of the American/European alliance and deepening European demand for American weaponry, and energy. The European Union (EU), as a single bloc, remains America’s largest trading partner for goods and services, and deepening that relationship represents a clear economic positive for the US and Europe. Should a lasting peace be achieved in Ukraine, the reconstruction that follows would offer significant opportunity for American and European firms, especially in infrastructure, energy and agriculture. Prior to the Russian invasion, Ukraine was a global leader in the production of wheat, barley, corn, and sunflower seed oil, sectors that could once again play a vital role in regional recovery.
Our Asset Class Views
During the quarter, we made modest adjustments to our asset allocation views, as illustrated in Figure 4 below. We reduced our long-held overweight position in investment-grade fixed income to a neutral weighting, reflecting a more balanced view of risk and reward in the current environment. We moved to overweight in the aftermath of the 2022 rate-hiking cycle, which inflicted historic losses on investment-grade credit. The primary driver of that correction was the Federal Reserve’s prolonged zero-interest-rate policy, which began in 2008 during the Global Financial Crisis. This drove bond prices to record highs as rates plummeted. With markets having since rebounded, we now view risks in investment-grade credit as more balanced and no longer asymmetrically skewed to the upside, warranting a neutral stance.
Within our equity positioning, we have moved our overweight positions in both US small-caps and mid-caps to significantly overweight from an overweight position. We believe several factors are at play, making this area attractive. First, we see a relative valuation gap between large-cap and smaller-cap companies that could beget a cycle of merger and acquisition (M&A) activity as larger firms use appreciated equity prices as currency to finance deals. The significantly higher earnings multiples of large-cap names make what would otherwise be dilutive transactions less so, given the wide valuation disparity. This puts larger companies in a position where they can grow faster through acquisition than they could grow organically. We are seeing evidence of this M&A wave already taking shape. In addition, the current US administration has adopted a far more laissez-faire approach to regulation, a shift not lost on corporate CEOs. Many recognize that this window of opportunity may not stay open indefinitely and are eager to act while conditions remain favorable. Finally, we believe falling interest rates will further support deal-making by reducing financing costs and lowering the hurdle for new transactions.
Our views elsewhere are unchanged from our last letter to you.
FIGURE 2
Source: FineMark National Bank & Trust
Note: These are our current, broad views on the major asset classes employed in family allocations. Due to the high degree of customization FineMark provides, these views won’t be uniformly expressed in every portfolio.
Welcome Back
As summer has officially ended and cooler temperatures arrive with the fall season, our offices in our Sunbelt locations are abuzz with activity. We are about to restart our FineMark-style in-office events and look forward to you joining us for some time well spent. Please look out for invitations to these events from your FineMark advisor.
Thank you for your continued confidence in FineMark and for trusting us to manage your wealth.
2025 Third Review and Commentary
By Christopher Battifarano, CFA®, CAIA
Executive Vice President & Chief Investment Officer
Articles In This Issue:
Five Year-End Financial Planning Tips
Download 2025 Q3 Newsletter Here
