Market Thoughts: Not dead yet!

There’s a lot being written about the ‘K-shaped’ U.S. expansion, which implies the top income demographic is driving spending and the lowest wealth demographic is marginally contributing. I write this recognizing the lowest income demographic remains under considerable economic pressure. Consumption is important to get a handle on as it represents about 68% of nominal U.S. GDP.

Greater wealth begets higher spending. According to the Bureau of Labor Statistics, the top 10% of earners drive just under 25% of consumption. The bottom 10%, just under 5%. The top 30% demographic drives about half of consumer spending. The lower 30% demographic accounts for about 15%.

The interesting thing about recent headlines? Looking back ten years, consumption patterns really haven’t changed much. The ‘K-shaped’ economy is structural. I don’t say that as a positive observation, it’s a reflection on historical spending patterns.

A blink and shrug seem the response by investors not only to a re-escalation of simmering trade tensions between the U.S. and China, but the collapse of auto supplier First Brands Group and auto lender Tricolor Holdings. Those situations involve allegations of accounting gimmickry. They also serve as forewarning of late cycle shadow bank lending done in haste.

Lending deals done with liberal diligence and “lite” covenants may prove increasingly wobbly. What was embraced as a nod to ‘never mind’ in the race to grab yield may offer additional pain points, barring the exhaustion of refinancing that’s kept the merry-go-round spinning.

Nothing we’re seeing is today alarming. My observation is a remark about markets we’re keeping a close eye on for possible cracks. I’d make the same observation about over-leveraged small and mid-cap companies. Also, subprime borrowers.

With the Fed in easing mode and growth resilient, markets can afford to shrug off imminent concern of an economic break. Economists continue to revise growth forecasts higher into next year. I expect we’ll see a modest decline in fourth-quarter targets because of the government shutdown.

Banks are reliable canaries in the coal mine for the economy. Third quarter earnings for big banks continue to signal strength. Loan loss reserves aren’t meaningfully being raised; some banks are releasing reserves as delinquencies retrace.

The consumer is in good standing. Spending is strong. The largest banks have yet to point to a significant decline in credit quality. We may see additional pain points from regional banks ahead. That will be a focal point for investors on earnings calls.

The largest U.S. banks have reported earnings, exceeding consensus forecasts. They showed noteworthy strength in capital market activity, with the IPO market re-engaging. Debt capital market activity remains robust. Investors have hope deregulation follows. Fed rate cuts should bolster earnings.

Jay Powell signaled a rate cut in October. December is potentially in play. The Fed’s focus is on the downside risks to employment. Investors are leaning into the easing narrative, risk assets embracing it.

Powell mentioned the Fed’s intent to stop quantitative tightening (QT) in the coming months. QT was put in place to reduce the size of assets the Fed had accumulated on its balance sheet. Rather than reinvesting proceeds from maturing securities, the Fed allowed assets to run off.

The Fed intends to predominantly hold U.S. Treasuries going forward. As the Fed cuts policy rates, balance sheet reinvestment will provide support to Treasury bonds, in addition to rate cuts. The Fed advancing a dovish policy narrative.

At risk of an awkward non sequitur… I took my family to see “Not Dead Yet! – John Cleese and the Holy Grail at 50” at New York’s The Town Hall this week. I grew up in London. Monty Python is a comedy staple for me. My wife charitably reminds me my sense of humor is rarely ‘appreciated.’ That’s on me, not John Cleese and friends.

As I sat down to write this week’s note, Python’s Holy Grail seemed a fair well to draw upon for inspiration. Investors finding themselves on a crusade of sorts to push markets higher.

The maxim of Holy Grail? If you don’t give up, how can you possibly lose? There’s a bad joke in there. The question is on who? Bulls or perennial bears.

Time will tell as the quest advances. Markets are fully valued. That’s as much the case for credit as it is equity markets. Manage risk-taking accordingly.

The current bull market mantra? Not dead yet!

Unless explicitly stated otherwise, all data is sourced from Bloomberg, Finance LP, as of 10/16/25.

Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors