This quarter, our team met with portfolio managers and strategists from J.P. Morgan, Fidelity Investments, Victory, PIMCO, and BlackRock. As always, we want to share a few takeaways as we review positioning across your portfolios heading into year-end. As the leaves fall here in the Northeast, markets have spent the season doing some housekeeping and volatility has picked up. 

There is one theme that was clear this quarter: markets are requiring some restraint. Whether it is a technology company spending billions on AI related investments or the U.S. government borrowing to fund deficit spending, investors want to see results, and they want to be paid appropriately for the risks they are taking. 

Equities 

Last quarter, we wrote that companies simply announcing bigger AI spending plans was no longer enough to get their stock to go up based on hype or future revenue projections. This quarterly earnings season, that theme has become even more apparent. We have officially entered the “show me, don’t tell me” phase of the A.I. buildout. A good story about the future no longer cuts it. Investors want proof that all this spending will translate into profits, and they want management teams to show some restraint.  

The largest technology companies continue to invest heavily in data centers, chips, and the infrastructure needed to support AI. These businesses have historically been asset-light, cash-generating machines. Today, they are much more capital intensive as they focus on building out A.I. infrastructure, with significant amounts of cash committed toward projects that may take years to generate a return of any kind.  

The market is starting to notice. Companies are being judged less on how much they are spending or what they promise AI will eventually deliver, and more on the returns they can generate from those investments. We view this as healthy for the stock market. History has repeatedly shown that fundamentals, valuation, discipline, and diversification lead to good outcomes in the long run. As we look ahead to the Anthropic initial public offering, it will provide a useful barometer of where investor sentiment is heading into year-end. The third quarter saw a constant push and pull between narratives driving optimism, and the actual numbers driving skepticism. 

Fixed Income 

The bond market has been choppy, largely because of the two main drivers everyone learns about in Economics 101: supply and demand. The U.S. government no longer has the market for high-quality borrowing to itself. The same companies we highlighted above are now major players in the bond market, borrowing to fund their AI buildouts. They are competing for capital with the U.S. Treasury, which continues to issue significant amounts of debt to finance government spending.  

Add persistent budget deficits, a growing national debt, and a rising interest expense, and there is plenty of competition for investor dollars. When there is more borrowing chasing the same pool of capital, lenders can demand more in return. Couple that with stubborn inflation and an uncertain rate path for the Federal Reserve as a result, and it is easy to see why the bond market has experienced some volatility. 

Here is the good news: savers are finally being paid and not punished. High-quality bonds offer meaningful income again, providing investors with an opportunity to generate returns without having to reach as far down the risk spectrum as they did when rates rose. A world where money costs something is healthier than one where it is free. Near-zero rates fueled speculation, propped up weak businesses, and punished savers. Higher rates force every borrower, corporate or government, to justify each dollar they allocate. 

Conclusion 

The common thread this quarter is accountability. Whether a technology giant is asking shareholders to fund significant investments, or a government is asking bondholders to finance its spending, the market wants signs of restraint and a fair price before it hands over capital. 

That can be uncomfortable, showing up as sharp drops in popular stocks and volatility in a supposedly boring bond market. But over time, healthy markets underwrite the quality of ideas and the execution behind them, not headlines or press releases. Ideas that produce real profits and are rooted in competent capital allocation will get funded. Those that cannot stand on their own will get exposed. 

Our approach is unchanged: focus on fundamentals, stay diversified, match investments to their time horizons, and never just pay any price for a good story. 

Disclosure: It is important to remember that investments in securities involve risk, including the potential loss of principal invested. Past performance is no guarantee of future results. Diversification does not guarantee a profit or protect against loss in a declining financial market. Alliance also does not make any representations as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party mentioned in this communication and takes no responsibility. Federal taxes; states may differ. This is not intended to be individual tax advice. Please consult your tax professional. Alliance Wealth Advisors, LLC is independently owned and operated. Additional disclosures can be found by visiting alliancewealthadvisors.com/legal-disclosures.