October 2025 Market Outlook
Executive Summary
Markets dropped sharply after President Trump’s new tariffs on China, exposing the fragility of today’s high-valuation environment. Despite strong summer gains, equity prices are outpacing earnings, with the S&P 500’s CAPE ratio nearing historically extreme levels. Economic risks are rising, especially in the labor market, where hiring has slowed significantly. Consumer sentiment is weakening, posing potential risks to future growth.
CCR remains cautiously bullish but emphasizes the importance of diversification, particularly for investors heavily concentrated in tech or A.I.-related stocks. Broader market participation and strong performance from sectors like Industrials and Utilities support a more balanced approach.
Bottom line: With valuations stretched and economic headwinds growing, now is a prudent time to review your portfolio and ensure it aligns with your long-term goals.
Outlook
“In brittle markets, ossified by valuations only a utopian could be enthused about, it doesn’t take much to send stocks down hard and fast. Say…a tweet from the President?”
— CCR Wealth Management, July 2025 Outlook
The quote above seems to have aged well as on Friday the 10th of October, President Donald Trump bellowed over social media that an extra 100% tariff on Chinese imports would be levied along with export controls on “critical software”, among other measures. These measures are said to be in retaliation for China’s recent expansion of export controls on a broad range of so-called “Rare Earth metals” and magnets. So, despite a relatively serene summer, the Trade War appears to be alive and well.
As in April, investors overly enamored of high valuations in the tech sector were among the hardest hit. On cue, the S&P dropped 2.71% on this news, while the NASDAQ 100 was down 3.47%, and the “Mag-7” conglomerate was down 3.78%. We have had unusually calm sailing in recent months. September is historically the worse month for stocks—on average—and yet even with the looming shutdown of the US government, the S&P 500 managed a 3.53% gain, the Nasdaq 100 rose almost 7%, and US small caps (Russell 2000 index) broke through a four-year resistance to rise 3.11%.
Yet stocks are rising at a pace faster than earnings are growing, which puts us back into the game of “musical chairs”, where the music can be stopped—and usually is—by any exogenous event, just like a Presidential social media missive. The above look at the S&P 500’s P/E ratio over the last three years or so shows a “fully valued” market. When adjusting the simple P/E ratio (Price/Earnings) to smooth out temporary fluctuations in earnings, we replace the single-year earnings denominator with an inflation-adjusted average of the last 10 years of earnings, and we have the CAPE Ratio (Cyclically Adjusted P/E ratio), made well-known by Robert Schiller. Taking in a bit more data (30 years or so), and we illustrate that the S&P 500’s CAPE valuation is approaching “rarified air”.
Our career fully spans this 30-year period, and our experience has been that nothing really great happens after index P/Es thrust into the highest quintiles of their valuation histories. But we hasten to remind readers of two things: first, while this sounds like a “prediction”—it is not. We are not in the prediction business. High P/Es can and have gone through periods of remaining elevated for years. The second thing is, as we have often pointed out before, that elevated P/E’s do not cause corrections. While correction occurrences (and even bear markets) have a high correlation with previously elevated P/Es, it is not a causal relationship.
So, what is an investor to do?
Ultimately, that answer depends on who you are, of course. And from an investment standpoint, who you are informs your investment objective, and your strategy. Being overly simplistic here—but we would expect our younger cohort of clients with longer time horizons to retirement to look forward to the roller-coaster ride that could be ahead. Maximizing longer term performance entails minimizing concerns about the downdrafts, no matter how violent they may potentially be.
For everyone else, our “antidote” remains diversification. This chart now makes its third appearance in as many Outlooks. We will retire it before long but obviously the repetition signals our estimation of its importance—not least for its statistical relevance.
In short, for the last 52 years, CAPE ratios above 30 (we are nearly 40 now) when core bond yields were above 5% (as they were earlier in the year) have shown there is a high probability of the ensuing five-year return comparable favoring bonds over stocks. Denial is not just a river in Egypt. It involves short-term past observations (the last three months, ytd, etc.) projected onto longer-term expectations (the next five years, ten years, etc.). Statistics are statistics. They deal in probabilities, and there is never a 100% probability of anything, except death (and taxes).
Our comments are merely aimed at investors with exceptionally high exposures to the A.I. trade whose asset allocations may not align with their investment objectives. There is a tendency to engage in “mental accounting” when observing portfolios which may include high capital gains exposure. Mental accounting is, in short, a subconscious trick our minds play for one reason or another—but in this scenario—to avoid paying the tax which will accompany finally reaping a reward. Apart from behavioral tendencies like Mental Accounting, it may also be a form of cognitive dissonance, which ignores the historical market returns from, say, February 2000 through January 2010 (S&P 500 return: 0%), or February 2000 through October 2014 (Nasdaq Composite return: 0%). Review the chart above for a refresher on what the CAPE ratio was in February 2000.
Diversification:
“Diversification” gets a bad rap in the minds of many investors—at least subconsciously. In a world where equity upside has been extra-ordinary (even if narrowly defined), “compromise”, as it relates to diversification, has been discounted as “opportunity cost”. Of course, in instances of significant market displacement, this cost is clearly a bargain—but such revelations only occur in hindsight.
Allow us to reiterate that diversification has actually been paying off to the upside in this market. We see this in a variety of evidence present in our own model portfolios.
The nearby chart is not a chart of price. It is a chart depicting correlations among stocks within the S&P 500. At 9%--nearly a decade low, we see a much greater dispersion of returns within US large cap companies in this index than we did just 12-24 months ago. 12-24 months ago, our Outlooks were (perhaps boringly) lamenting the lack of breadth in an index which was on fire. You owned 7 stocks and made a killing—or you owned the other 493 stock and made…next to nothing.
The implications of this wider dispersion of returns can be boiled down to a larger opportunity set for investors and investment managers. Through mid-October, sectors outperforming the broader market include Industrials, Basic Materials, Utilities, Communication Services, and, of course, Technology. So, while we do not get excited about stocks valuations—we will at least concede that market breadth remains healthier than in years past.
Other themes we highlighted in July remain in-tact and continue to demand more investor attention. One of these is the continued outperformance of non-US equities, which now stretches back to well over a year now.
Another continued diversification bonus this year remains the performance of gold, along with other precious or rare metals like silver, uranium, copper and palladium. But gold gets all the press. Our view on gold is anchored to the yellow metal’s relationship with the dollar rather than to any perceived “uncertainty”—as we have heard some investors refer to the market, or economic conditions. Perceived “uncertainty” hasn’t prevented investors from bidding up equity valuations to historic ranges, and credit yield-spreads over Treasuries remain pinned to historic lows. Gold generally has a negative correlation with the dollar, and long-running expectations of rate cuts in the US (resumed last month after a lengthy pause) have, in part, pressured the dollar lower. We think gold will likely remain a solid investment asset as globally, central banks ramped up their gold reserves shortly after the war in Ukraine began, and this buying trend remains strong. Add to this the more speculative demand for gold in the ETF markets, continued rate cuts here in the US, and we have yet another example of diversification adding positive “alpha” to portfolios in the near term. Take note, though, that currencies are “mean-reverting”, meaning that their value tends to roll above and below a long-term average value—but still remain anchored to that value. Given the dollar’s recent weakness, a future strengthening will most likely take some of the luster out of gold—eventually.
Economics:
In July we listed “pros” and “cons” in our examination of the markets. One “con” was the persistence of weak labor market data, and it persists to this day. In fact, back in January we mentioned that we were at odds with the Fed’s view (voiced about a year ago) that the labor market “is still at very solid levels”. Jerome Powel has certainly pivoted from this rosy assessment as just last month he cited the labor market as softening, with a “marked slowdown” in both supply and demand. He said, “downside risks to employment have risen” and characterized current conditions as a “low-fire, low-hire” environment.
We think this environment has actually been around for some time—a hint that the Fed may be a bit late with their resumption of rate cuts. One of the “pros” we cited in July was a lack then of much in the way of perceivable tariff impacts on consumer prices. Tiffany Wilding, economist and Managing Director at PIMCO, theorizes (with more data than was available in July) that tariff costs that have not been passed on to consumers may have been absorbed by the labor market. In short—that companies have absorbed tariff price increases but have also significantly curbed hiring-- conditions which have had an outsized impact on entry-level employment opportunities for younger, recent graduates seeking entry to the labor force.
While there is a school of thought (or hope?) that the US has simply entered an “air pocket” economically, and specifically with respect to jobs, RenMac’s Neil Dutta is less optimistic, and has had conviction all year that the US housing market is in recession, and that his will bleed into residential construction employment—further pressuring the labor market.
Our economic focus on labor stems from the importance of consumption to US economic health. True—there have been layoffs, and some bankruptcies, but no “red flag” events threatening to rapidly drive-up unemployment in the near term. But a “malaise” among consumers, given the stagnant job market, could negatively impact GDP in the coming quarters. After all, no matter how many hundreds of billions of dollars are spent by Silicon Valley A.I. masters (which primarily accrue to other Silicon Valley A.I. masters), consumer spending still accounts for ~70% of US GDP. We have, in recent months, seen a softening of consumer attitudes in the monthly University of Michigan Consumer Sentiment Survey (the dotted line in the nearby graph), which has an excellent record foretelling longer-term trend.
While in July we felt that risks and rewards (pros and cons) were more or less offsetting, we believe risks—at least to equities—in this market have risen. Slowing economic metrics, especially in labor markets, serves as a spotlight on an extremely expensive large-cap equity market. “Irrational exuberance”, as Alan Greenspan would say, by investors over the billions of dollars being exchanged between large tech companies may be difficult to maintain in an economy which is slowing down faster than many thought at the beginning of the year. Global markets have not been in lockstep with the US in recent years and maximizing portfolio diversification within and across asset classes continues to make the most sense to us at this point. In short, CCR Wealth Management is still cautiously bullish—but we remind investors that now would be a good time to “mind your diversification”.
Disclosures:
The views stated in this commentary are not necessarily the opinion of Cetera Advisors LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. The MSCI ACWI ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries (excluding the US) and 24 Emerging Markets (EM) countries*. With 1,965 constituents, the index covers approximately 85% of the global equity opportunity set outside the US.
The S&P GSCI Gold Index, a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark tracking the COMEX gold future.
The ICE U.S. Dollar Index (DXY) is a benchmark that measures the value of the U.S. dollar relative to a basket of six major world currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. It is calculated and maintained by ICE Data Indices, LLC and reflects the performance of the U.S. dollar against this weighted currency basket.
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