The third quarter of 2025 saw a continuation of the bullish trend that began earlier in the year, with global financial markets posting strong gains. These returns were primarily fueled by the sustained excitement surrounding Artificial Intelligence (AI), solid corporate earnings, and the widely anticipated resumption of interest rate cuts by the U.S. Federal Reserve (Fed).
Equity Markets: New Records and Sector Concentration
U.S. stocks surged, driving indices to new record highs despite growing concerns over historically high valuations and some weak underlying economic data, such as lower-than-previously-reported job creation.
S&P 500: The broad market index rose approximately 7% for the quarter and finished September up 3.53%, bringing its year-to-date return to 13.72%.
Nasdaq: The tech-heavy Nasdaq continued its leadership role, soaring to a year-to-date gain of 17.3%. Information Technology and Communication Services remained the top-performing sectors, driven by relentless AI investment.
Dow Jones: The Dow Jones Industrial Average set a new record high during the quarter, closing September up 1.87%, resulting in a year-to-date return of 9.06%.
Broader Participation: Encouragingly, the gains were not limited to megacap stocks; the Russell 2000 (small-cap stocks) returned 9.3% for the year and briefly reached new highs, indicating improved market breadth and a recovery in risk appetite.
Bonds and Central Bank Actions
The major monetary event of the quarter was the long-awaited policy pivot in the U.S. and Europe, driven by easing, though still elevated, inflation.
U.S. Federal Reserve (Fed): The Fed implemented a 25 basis-point rate cut at its September meeting, lowering the upper limit of the federal funds target rate to 4.25%. This was the first cut in 2025, following a prolonged period of holding rates steady. The move was generally anticipated and further fueled equity gains.
Bank of England (BoE): The BoE was more aggressive, cutting its Bank Rate to 4.0% in Q3, citing progress in reducing inflationary pressures.
European Central Bank (ECB): The ECB, facing similar global trends, was seen as reluctant to cut rates further but was under pressure to do so.
Bonds: The bond market showed mixed results. The overall Bloomberg Global Aggregate Bond Index ended the quarter up 0.6% as U.S. Treasuries rallied and credit spreads tightened. Short-term bonds remain an important stabilizer for portfolios amid the uncertainty surrounding fiscal policy and the U.S. government shutdown, a concern that emerged late in the quarter.
Commodities: Gold Shines as Oil Drags
Commodities presented a stark divergence in performance across the energy and precious metals sectors.
Gold: Gold had a truly exceptional quarter, continuing its strong annual performance. Gold prices rallied and climbed to over $3,850 per ounce. The precious metal reached another record high in Q3 and is experiencing its best annual gain since 1979, driven by its safe-haven appeal, central bank purchasing, and a weakening U.S. dollar.
Oil: Oil prices were under pressure and ended the quarter down 0.8%. Expectations of a market surplus due to an increase in production from OPEC and weak demand weighed against elevated geopolitical tensions.
Special Situations: The AI Infrastructure Arms Race Silly Season
The defining feature of the quarter was the unprecedented scale of commitment to AI infrastructure, highlighted by two massive, interconnected deals that are extremely concerning for those of us that remember these types of related party transaction in the last legs of the 1990's internet bubble:
NVIDIA & OpenAI: NVIDIA announced a letter of intent to invest up to $100 billion in OpenAI, linked directly to the purchase AMD deployment of at least 10 gigawatts (GW) of NVIDIA-powered supercomputing systems. This is designed to secure NVIDIA as the preferred partner for OpenAI’s future model development while guaranteeing a long-term revenue stream for the chipmaker. The crux of this deal is that NVIDIA will give money to OpenAI so that OpenAI can turn around and buy NVIDIA chips with it.
OpenAI & AMD: Complementing this, OpenAI entered into a major deal with AMD, committing to deploy 6 GW of AMD chips. The financing structure is unique, with OpenAI granting AMD a 10% equity stake, via warrants with a strike price of 1 cent, in exchange for over $60 billion in chips. This move allows OpenAI to diversify its hardware supply away from a single vendor and strengthens AMD's position in the AI inference market. So think about this. Usually when a company sells their product to another company they get something in return, most of the time money. In this case AND is GIVING OpenAI 10% of the company in exchange for selling them $60B in chips. And here is the funny part. As of this morning, with a potential dilution of 10% on due to this deal, AMD stock is UP 27%!
These transactions underscore the industry's insatiable demand for capital and the circular nature of the whole AI ecosystem. For example, what happens if capital available for AI starts to drop or runs dry and OpenAI, which at a $500B valuation is projected to have only $12.5B in 2025 revenue, net $8B in 2025 cash burn, and more than double that cash burn to $17B in 2026, is unable to come up with the funds to buy the NVIDIA chips it committed to per the terms of their deal? Will NVIDIA, who now has equity in OpenAI, take them to court and tip them into bankruptcy? And if they do, does bankrupting your biggest client that you own a piece of make sense? Also, NVIDIA owns a piece of OpenAI which owns a piece of AMD. So now NVIDIA owns a piece of AMD. Anyone else getting dizzy..?
Investment Outlook and Philosophy
The quarter delivered strong performance, particularly in growth-oriented equities, validating our diversified approach which captures these global gains. However, the historic valuation levels, driven by the concentration in AI stocks, should prompt caution. The high exposure of U.S. households to stocks (45.4% of assets) also means greater systemic risk.
As an engineer of wealth, I remain committed to our long-term investment time horizon and avoid being drawn into the speculative froth of hype-driven rallies. I continue to advocate for broad diversification, using international equities and fixed income to buffer against potential U.S. market volatility. I view the current high valuations as a signal to stay disciplined and focus on quality and risk-adjusted returns, not chasing the short-term momentum.
The third quarter of 2025 saw a continuation of the bullish trend that began earlier in the year, with global financial markets posting strong gains. These returns were primarily fueled by the sustained excitement surrounding Artificial Intelligence (AI), solid corporate earnings, and the widely anticipated resumption of interest rate cuts by the U.S. Federal Reserve (Fed).
Equity Markets: New Records and Sector Concentration
U.S. stocks surged, driving indices to new record highs despite growing concerns over historically high valuations and some weak underlying economic data, such as lower-than-previously-reported job creation.
Bonds and Central Bank Actions
The major monetary event of the quarter was the long-awaited policy pivot in the U.S. and Europe, driven by easing, though still elevated, inflation.
Commodities: Gold Shines as Oil Drags
Commodities presented a stark divergence in performance across the energy and precious metals sectors.
Special Situations: The AI Infrastructure Arms Race Silly Season
The defining feature of the quarter was the unprecedented scale of commitment to AI infrastructure, highlighted by two massive, interconnected deals that are extremely concerning for those of us that remember these types of related party transaction in the last legs of the 1990's internet bubble:
These transactions underscore the industry's insatiable demand for capital and the circular nature of the whole AI ecosystem. For example, what happens if capital available for AI starts to drop or runs dry and OpenAI, which at a $500B valuation is projected to have only $12.5B in 2025 revenue, net $8B in 2025 cash burn, and more than double that cash burn to $17B in 2026, is unable to come up with the funds to buy the NVIDIA chips it committed to per the terms of their deal? Will NVIDIA, who now has equity in OpenAI, take them to court and tip them into bankruptcy? And if they do, does bankrupting your biggest client that you own a piece of make sense? Also, NVIDIA owns a piece of OpenAI which owns a piece of AMD. So now NVIDIA owns a piece of AMD. Anyone else getting dizzy..?
Investment Outlook and Philosophy
The quarter delivered strong performance, particularly in growth-oriented equities, validating our diversified approach which captures these global gains. However, the historic valuation levels, driven by the concentration in AI stocks, should prompt caution. The high exposure of U.S. households to stocks (45.4% of assets) also means greater systemic risk.
As an engineer of wealth, I remain committed to our long-term investment time horizon and avoid being drawn into the speculative froth of hype-driven rallies. I continue to advocate for broad diversification, using international equities and fixed income to buffer against potential U.S. market volatility. I view the current high valuations as a signal to stay disciplined and focus on quality and risk-adjusted returns, not chasing the short-term momentum.
Sumit Kumar, Greenwich CT