The economy continues to grow at a solid rate, supported by the large artificial intelligence (AI) investment cycle, a resilient consumer, productivity gains and lower tax rates and tax law changes that have supported business investment. However, consumption has been supported by the upper income tiers, and there are signs of consumption slowing, while disposable income has not kept pace with inflation since the COVID-19 pandemic.

We expect overall economic growth to remain healthy but will continue to monitor developments in the Middle East and potential supply chain disruptions resulting from the ongoing conflict. Domestically, it remains unclear whether companies investing heavily in AI can monetize their investments and increase earnings enough to justify high valuations. While competition, including AI models emerging from China, is a growing risk, both sales and earnings from U.S. AI companies have been strong. Looking ahead, we expect AI to remain the market's driving force, given our expectation of continued earnings growth potential by AI leaders and more companies demonstrating increased efficiency through AI adoption.

In this environment, we remain moderately overweight U.S. equities and overweight large-cap stocks. Including our private equity allocations, we are roughly neutral to small-cap and mid-cap stocks. We remain underweight developed international stocks and neutral in our exposure to emerging-market stocks. Looking back, market breadth narrowed over the third quarter, with large-cap growth stocks moderately outperforming value stocks and cyclical stocks slightly outperforming more defensive stocks. While we remain overweight growth stocks, we do expect moderate broadening of the market’s performance into value stocks on the back of sustained economic growth.

The U.S. Federal Reserve raised interest rates by 0.25% in September, and we expect a further 0.25% rise before year end and possibly another 0.25% hike if inflation remains elevated. Looking ahead, we expect interest rates to remain higher than they have been in the past 25 years given solid growth, higher inflation, concerns about debt levels and sustained competition for capital from AI-related companies eager to build out additional capacity.

Treasury bond yields rose over the quarter, accelerating in September, on the back of solid economic growth, persistent inflation, concerns about the Federal budget deficit and rising U.S. debt relative to gross domestic product (GDP). However, current yield levels for Treasuries, investment-grade corporate bonds and other fixed-income instruments are very attractive for long-term holdings. As such, we remain roughly neutral in our interest-rate exposure, with a small overweight in longer-dated Treasuries given their high absolute yields and their ability to act as a hedge should equity markets sell off significantly.

Before making a change in your investment portfolio, you may wish to consult with a financial professional to determine how that may align with your long-term goals and objectives.

Media contact: Callie Briese, 612-844-7340; callie.briese@thrivent.com