September 29, 2025: Fade the bubble noise and stay risk-on

BY MATT ORTON, CFA, AND JOEY DEL GUERCIO, CFA¹

Key takeaways

• Despite pessimistic sentiment and headline-driven fears, the U.S economy and artificial intelligence-related sectors continue to show strength.

• Remaining diversified, taking advantage of short-term volatility, and being mindful of near-term catalysts could provide an opportunity to lean into durable, secular growth themes.

• With a potential U.S. government shutdown looming, investors should brace for possible delays in key economic employment data releases that may heighten market volatility during quarter-end rebalancing.

As we enter the final quarter of 2025, investor sentiment remains pessimistic, but looking forward we believe this pessimism is misplaced.²

While concern is common at market highs, a visible bifurcation of the economy and the barrage of Washington headlines are weighing on investors. These fears have fueled claims that artificial intelligence (AI) is in a bubble or that U.S. economic strength is a mirage. We disagree and continue to believe in balanced portfolios that have exposure to companies benefiting from the AI trade and economic resilience. With interest rates declining, investors may find opportunities to rebalance or deploy cash, but we recommend caution ahead of key catalysts this week: quarter-end rebalancing, a likely government shutdown, and the September payrolls report. Investors should be ready to use downside opportunistically and lean into the parts of the market exposed to the key long-term durable secular growth themes we have favored all year.

Gains across the S&P 500 have been broad-based this quarter
2025 third quarter-to-date S&P 500 Index sector returns

Source: Bloomberg, as of 9/26/2025.

There are a few cross-currents for the market to navigate in the short term before entering earnings season. It shouldn’t be a surprise to see some consolidation across the equity complex. Stronger than expected economic data is adding pressure to U.S. Federal Reserve (Fed) rate cut expectations. Currently, “good news is bad news” with respect to Fed rate cuts. Market pricing for Fed easing this year stands at approximately 40 basis points (bps) after recent changes. This is shallow relative to the Federal Open Market Committee’s (FOMC) median year-end dot and our belief that there will be two additional 25-bp rate cuts. Fed Chair Jerome Powell may be operating with one-sided data dependence heading into the end of the year to avoid labor market tail risks. However, there may be political costs to a sudden hawkish turn. It seems that Powell is trying to lower the temperature in the conflict with the current administration. If there is a strong nonfarm payrolls number above 100,000, the consolidation could accelerate. This could create a positive entry point for investors.

In addition to the Fed, there are also some cross-currents regarding sentiment and positioning.

There are a few clusters of froth in areas like nuclear power, quantum computing, and some AI supply chain stocks, including those in hardware, graphics processing units (GPUs), central processing units (CPUs), and application-specific integrated circuits (ASICs). Volatility has also been incredibly low, leading commodity trading advisors, volatility target funds, and risk parity strategies to near maximum long positioning. This leaves some of the momentum winners — notably U.S. tech and European banks — more susceptible to a pullback should volatility pick up from a global perspective. Algorithmic selling is ticking up and sits at its highest level since July, when we started the quarter with a vicious, short-lived rotation. These are all areas with strong fundamental strength and should be accumulated on weaknesses.

The likelihood of a government shutdown could also create some noise, but this too should fade. The biggest risk is a delay in the non-farm payroll report, which shouldn’t create any material headwinds. For example, in October 2013 a shutdown delayed the non-payroll release several days. That shutdown resulted in an initial shallow S&P 500 Index pullback of -2.5% and then a nice bounce back. Should we experience a market pullback this week, there is cash on the sidelines that we believe could provide a floor to any temporary selloff with dips buyable.

Past government shutdowns’ effect on equities and U.S. Treasury yields

Source: Bloomberg, as of 9/26/2025.

Investment Playbook

We believe easing financial conditions, resilient growth, and fiscal support should keep risk assets supported. Positioning is balanced, liquidity is ample, and extended sentiment is limited to highest momentum pockets of the market. This week’s technical rebalancing could reset higher-beta areas, offering entry points to themes with year-end potential. While noise around the government shutdown persists, we don’t believe it will have a meaningful impact on the market. We remain optimistic despite concerns and remain bullish about several key themes:

• Staying long cyclicality. Strength in the macroeconomic data is bullish for cyclical equities into year-end. We are optimistic about the economy’s prospects for continued growth and see economists changing their tune by increasing their real gross domestic product (GDP) estimates for the third quarter and 2025 following upside data. For the Institute for Supply Management (ISM) manufacturing Purchasing Managers’ Index this week, keep an eye on new orders, which in August rose above 50, a level that indicates growth in the manufacturing sector. Further strength could provide a positive reading, particularly for domestic cyclicals. We favor industrial cyclicals that benefited from easing monetary policy, capital expenditures (capex) tailwinds from the One Big Beautiful Bill Act and expected earnings re-acceleration into 2026. Additionally, we favor financials to position around economic resiliency and increased capital market activity, given the push for deregulation. This remains the case today, and we believe we will see positive results from the big banks when they report third-quarter earnings results.

• Leaning into AI 2.0. Artificial intelligence remains a central theme as hyperscalers continue to throw off cash and increase their capex, supporting the semiconductor complex and a number of downstream companies. The success of recent tech initial public offerings (IPOs) and a robust calendar is indicative of strong demand. Comparing volatility, momentum, and convexity of returns of the current AI cycle to the 1990s dot-com bubble shows that the current investor behavior is subdued. The leadership of this cycle remains highly profitable with clean balance sheets. However, there are bottlenecks to the AI buildout in the United States, which opens up potential AI 2.0 opportunities. For example, computer demand is surging, and U.S. power demand is rising by 4% year-over-year, compared with 1% historically. Additionally, there are opportunities to play a role broadening AI adoption and applications, including robotics.

• Gold as a portfolio ballast. We are bullish on gold to augment portfolio diversification and provide a downside ballast to potential volatility around the Fed and quarter-end. Over the past 25 years, gold has not fallen when the Fed eased, and inflation was above 2%. Additionally, gold has returned approximately 13% annually during periods of inflationary easing. Demand remains strong in retail and central banks, and with increased politicization impacting the front and back end of the curve, we believe gold could provide a better hedge to downside than Treasuries in the near term. However, we should keep in mind the recent appreciation of the dollar and the potential for upcoming economic data to keep upward pressure on rates. Inflows into precious metal exchange-traded funds (ETFs), including gold, jumped to a record $13.5 billion in September, almost doubling August’s net influx. Also, since ChatGPT’s release, gold has outperformed the Nasdaq^® 100 Index. Regardless, we believe the potential remains for prices to continue to rise given strong demand and technicals.

What to watch

U.S. employment figures dominate the news this week with the release of the ADP^® National Employment Report™, the monthly Job Openings and Labor Turnover Survey (JOLTS) figures, weekly jobless claims, and then the September jobs report on Friday. However, with the likelihood of a government shutdown on Wednesday, payroll reports may be delayed and add increased volatility when there could be some factor rotation as investors complete the quarterly rebalancing process.

Several Fed officials are also scheduled to make public comments this week, with market-relevant comments most likely to come from Federal Reserve Bank of Cleveland President Beth Hammack on Monday, Federal Reserve Bank of Dallas President Lorie Logan on Thursday, and Fed Board of Governors Vice Chair Philip Jefferson on Friday.

Outside of the United States, the Caixin China General Services Purchasing Managers Index (PMI) and consumption data from the Golden Week holiday will be in focus, as well as the U.K. Consumer Prices Index and S&P Global UK Manufacturing PMI. The German Consumer Price Index and Eurozone Harmonised Index of Consumer Prices are also due.

¹ Matt Orton, CFA, is Chief Market Strategist at Raymond James Investment Management. Joey Del Guercio, CFA, is Research Associate for Market Strategy at Raymond James Investment Management.

² Unless otherwise indicated, all data cited is sourced from Bloomberg as of Sep. 26, 2025.

Risk Information:
Investing involves risk, including risk of loss.

Diversification does not ensure a profit or guarantee against loss.

Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.

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The views and opinions expressed are not necessarily those of the broker/dealer or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.

Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.

Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.

International investing presents specific risks, such as currency fluctuations, differences in financial accounting standards, and potential political and economic instability. These risks are further accentuated in emerging market countries where risks can also include possible economic dependency on revenues from particular commodities or on international aid or development assistance, currency transfer restrictions, and liquidity risks related to lower trading volumes.

Definitions
ADP National Employment Report — A monthly report from the ADP Research Institute^® in close collaboration with Moody’s Analytics. The ADP^® National Employment Report™ provides a monthly snapshot of U.S. nonfarm private sector Employment based on actual transactional data.

Algorithmic trading — a method of executing trades using computer programs and algorithms. These algorithms are designed to make trading decisions based on predefined parameters, such as technical indicators, market conditions, and historical data. The primary goal of algorithmic trading is to maximize profits while minimizing risk and reducing transaction costs.

Artificial intelligence (AI) — Technology that enables computers and machines to simulate human learning, comprehension, problem solving, decision making, creativity and autonomy. AI 2.0 refers to companies in industries that are poised to benefit from the growth of AI because they provide either the components, services, or power needed to run AI servers.

Ballast — In finance, ballast can refer to characteristics, factors or trading strategies that mitigate volatility or provide stability to a security or group of securities. The phrase, “the benchmark is not the ballast,” refers to risk of believing that the universe of securities within a single index provide the level of stability that investors might seek from subgroups of securities within the index.

Basis points (bps) — Measurements used in discussions of interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%.

Beta — A measure of the volatility or systemic risk of a security, group of securities, or portfolio compared with another security, group of securities, portfolio, or the market as a whole.

Bifurcation / bifurcated consumer base — A trend in consumer spending patterns created by two distinct segments of consumers: A more affluent and free-spending group, and a less affluent and more cost-conscious group.

Caixin China General Services Purchasing Managers Index (PMI) — A report compiled by IHS Markit that tracks sales, employment, inventories, and prices in China’s services industry. It is based on data compiled from monthly replies to questionnaires sent to purchasing executives in more than 400 companies. Survey responses reflect the change, if any, in the current month compared to the previous month based on data collected mid-month. A reading above 50 indicates expansion, while anything below that points to contraction.

Capital expenditures/capex — Monies used by a company to buy, improve, or maintain physical assets such as real estate, facilities, technology, or equipment, and may include new projects or investments.

Capitulation — A general abandonment of an investment position by investors who sell en masse in reaction to changes in market sentiment or dynamics. The resulting marked drop in asset prices is watched as a potential end of a market decline, since those who held on to their shares during the capitulation are not expected to sell afterward.

Commodity trading advisor (CTA) — An investment professional or firm that provides client-specific advice on buying and selling futures contracts.

Concentration — The extent to which investments in a portfolio, group of portfolios, industry, sector, index, or particular geography or clustered in groups that share specific factors or other characteristics.

Consolidation — A term used in technical analysis to describe when stocks reverse previous gains (or losses) to stay within well-defined trading levels.

Convexity — A measure of the curvature, or the degree of the curve, in the relationship between bond prices and bond yields. Convexity demonstrates how the duration of a bond changes as the interest rate changes. Portfolio managers will use convexity as a risk-management tool, to measure and manage the portfolio’s exposure to interest rate risk.

Cyclical — trends and changes in market conditions that occur as the economy passes through the business cycle’s stages of expansion, peak, recession, and recovery.

Dot plot — a U.S. Federal Reserve chart summarizing the Federal Open Market Committee’s (FOMC) outlook for the federal funds rate. Each dot represents the interest rate forecasted by one of the 12 members of the committee.

Eurozone Harmonised Index of Consumer Prices — A composite measure of inflation in the Eurozone based on changes in prices paid by consumers in the European Union for items in a basket of common goods. The index tracks the prices of goods such as coffee, tobacco, meat, fruit, household appliances, cars, pharmaceuticals, electricity, clothing, and many other widely used products.

Exchange-traded fund (ETF) — A type of security that tracks a market index, sector, commodity, or other assets, but which can be bought or sold on a stock exchange the same way a regular stock or other security can. An ETF can be structured to track a wide variety of securities, including stocks, bonds, individual commodities, diverse aggregations of securities, and specific investment strategies.

Factor investing — An approach to investing that selects securities based on characteristics associated with higher returns. These characteristics, or factors, can be macroeconomic factors or style factors. Macroeconomic factors are focused on broad risks across asset classes and include the rate of inflation: growth in gross domestic product; and the unemployment rate. Style factors include differences in growth versus value stocks; market capitalization, and industry sector. Factor performance refers to a focus on performance of securities within a particular factor or between groups of different kinds of factors.

Fade — An investment strategy of ignoring or trading against a prevailing trend in the market.

Federal Open Market Committee (FOMC) — Consists of 12 members: the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. The FOMC holds eight regularly scheduled meetings per year at which it reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth. The FOMC observes a blackout period, which begins at midnight of the second Saturday before each meeting. During the blackout periods, committee members do not make public comments about macroeconomic developments or monetary policy issues.

German Consumer Price Index — A monthly report on Germany’s inflation rate released by the Federal Statistical Office and based on prices paid for a wide range of goods and services including energy, food, and rents.

Gross domestic product (GDP) — The total value of goods and services provided in an economy during a specified period, often one quarter or one year.

Hawkish, dovish, and centrist — terms used to describe the monetary policy preferences of central bankers and others. Hawks prioritize controlling inflation and may favor raising interest rates to reduce it or keep it in check. Doves tend to support maintaining lower interest rates, often in support of stimulating job growth and the economy more generally. Centrists tend to occupy the middle of the continuum between tight (hawkish) and loose (dovish) monetary policy.

Hyperscalers — The largest cloud computing providers that can provide massive amounts of computing resources and storage at enterprise scale.

Institute for Supply Management (ISM) manufacturing Purchasing Managers’ Index (PMI) — A measure of the prevailing direction of economic trends in the manufacturing sector. It consists of an index summarizing whether market conditions as reported in a monthly survey of supply chain managers are expanding, staying the same, or contracting.

Job Openings and Labor Turnover Survey (JOLTS) — A program that produces monthly data on job openings, hires, and separations compiled by the U.S. Bureau of Labor Statistics. The survey’s job openings rates consider month-to-month changes in the number of job openings reported on both a state and national level.

Macroeconomic — The branch of economics that focuses on seeking to understand the interactions between the markets, businesses, governments, and consumers that make up an entire economy.

Momentum — Momentum investing strategies aim to capitalize on the continuance of existing market trends. It involves taking long positions on financial instruments with prices trending up and short positions on instruments with prices trending down.

Moving average — A technical analysis tool that smooths out stock price data by creating a constantly updated average price, often over a specified period of time, such as 15, 30, 50, 100, or 200 days.

One Big Beautiful Bill Act — An act passed and signed into law in July 2025 that raised the U.S. debt ceiling by $5 trillion, made permanent tax cuts created by the Tax Cuts and Jobs Act of 2017, and changed a wide range of other aspects of federal tax policy, made changes to health insurance legislation, phased out or reduced credits for clean energy production or use, and removed tax benefits for illegal immigrants, among other things.

Payroll report, officially known as the Employment Situation Summary — A monthly U.S. Bureau of Labor Statistics (BLS) report tracking nonfarm payroll employment and the national unemployment rate, with data on changes in average hourly earnings, and job trends in public and private sectors of employment. The report is based on surveys of households and employers.

Positioning — Assessments of whether professional investors are, on the whole, bullish or bearish on a particular security, industry, sector, market capitalization or other area of the market, as reflected by the extent to which they are invested in the area of the market in question.

Pullback — A temporary pause or drop in the price of a security that previously had been rising.

Quantum computing — a cutting-edge realm of computer science, leveraging quantum theory to revolutionize how complex computational problems are tackled.

Rebalancing — The adjustment of the mix of asset allocations to match the levels, guidelines, or risk tolerances prescribed by a portfolio’s investment plan.

Risk-on — Market sentiment that is typically fueled by a strong growth environment in which good news supports a bullish outlook and investor expectations of favorable risk/reward ratios.

Risk parity — an approach to investment management which focuses on allocation of risk, usually defined as volatility, rather than allocation of capital.

S&P Global / CIPS Flash UK Composite PMI^® — Compiled by S&P Global from responses to questionnaires sent to survey panels of around 650 manufacturers and 650 service providers, stratified by detailed sector and company workforce size, based on contributions to gross domestic product.

Tail risk — a form of portfolio risk associated with the increased possibility that an investment will move more than three standard deviations from the mean in a normal distribution. Left tail risks refer to unusually large losses. Right tail risks refer to unusually large gains.

Technicals — Indicators of historic market data, including price and volume statistics, to which analysts apply a wide variety of mathematical formulas in their study of larger market patterns.

U.K. Consumer Prices Index — A measure of consumer price inflation in the United Kingdom based a wide range of household spending, including on food, alcoholic beverages and tobacco, clothing and shoes, housing and utilities, health, transportation, communication, recreation, education, restaurants and hotels, and miscellaneous goods and services.

Volatility-targeting funds — these funds employ strategies to actively adjust their investment portfolios to maintain specific, predetermined levels of risk over time. They generally increase their exposure to riskier assets or increase leverage during periods of low volatility, and they shift to safer assets or reduce leverage in times of high volatility.

Whipsaws — rapid trend reversals or price movements in securities.

Yield curve — a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity. A steepening yield curve results from a widening in the difference between short- and long-term interest rates. A steepening curve often reflects an expectation of stronger economic activity, rising inflation, and rising interest rates.

Indices
Nasdaq 100^® Index — a stock market index made up of 103 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock market. It is a modified capitalization-weighted index.

S&P 500 Index — measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividends reinvested. The S&P 500 represents approximately 75% of the investable U.S. equity market.

The S&P 500^® Equal Weight Index is the equal-weight version of the S&P 500. It includes the same constituents as the capitalization-weighted S&P 500, but each company in the S&P 500 Equal Weight Index is allocated a fixed weight, or 0.2% of the index total at each quarterly rebalance.

811932 Exp. 1/29/2026