{"id":3096,"date":"2025-10-17T08:37:03","date_gmt":"2025-10-17T08:37:03","guid":{"rendered":"https:\/\/igorsplayground.com\/appcheckr\/q3-2025-the-stock-market-is-the-economy\/"},"modified":"2025-10-17T08:37:03","modified_gmt":"2025-10-17T08:37:03","slug":"q3-2025-the-stock-market-is-the-economy","status":"publish","type":"post","link":"https:\/\/igorsplayground.com\/appcheckr\/q3-2025-the-stock-market-is-the-economy\/","title":{"rendered":"Q3 2025: The Stock Market Is the Economy"},"content":{"rendered":"

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Stock markets are soaring to unprecedented heights, with public companies shutting down operations to invest in Bitcoin. Consumers can place bets on nearly anything in real-time, and \u201cmeme stocks\u201d are making a comeback. Even the US government is getting in on the action by purchasing stocks. Yet, consumer sentiment is plummeting, reaching levels typically associated with recessions, nearly mirroring the depths of 2008. What\u2019s going on?<\/p>\n

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One simple explanation could be that social media and smartphones have gradually eroded our optimism, a trend accelerated by the pandemic. This has left many feeling discontented or less optimistic about their own circumstances compared to others.[1]<\/a> While this may hold some truth, I\u2019d like to propose an alternative perspective: The aggregate economy does not accurately reflect the economic realities faced by the average individual.<\/em><\/p>\n

The economy is showing signs of weakness. Job opportunities are dwindling, prices remain stubbornly high with the potential for further increases, and the looming threat of AI is casting a shadow over the white-collar workforce, threatening to render many obsolete.<\/p>\n

In contrast, the Asset<\/em> economy is thriving. The wealth-to-income ratio in the United States has surged, with the top 10% of earners accounting for nearly 50% of all consumption.[2]<\/a> Those who own assets are increasingly shaping the direction of the broader economy. We\u2019ve shifted from a paycheck economy to a portfolio economy.<\/em><\/strong><\/p>\n

Typically, risk-on environments arise from confidence in one\u2019s economic situation, often fueled by a healthy dose of FOMO (fear of missing out). However, I argue that the current risk appetite in the markets is driven more by FOFB (fear of falling behind), as asset ownership becomes crucial for financial security.<\/p>\n

This could be seen as positive news, given that stocks are at an all-time high. Recent data from Visa indicates that a $1 increase in wealth now translates to $0.35 in economic spending, a significant rise from the $0.09 estimated in 2017.[3]<\/a> Strong markets can continue to drive the aggregate economy. However, the lower-income consumer is showing signs of distress. Sub-prime auto loan delinquencies are reaching concerning levels,[4]<\/a> and for the first time in years, the average FICO[5]<\/a> score has declined. If this strain develops into a significant credit issue, it could potentially overshadow the market. More likely, the economy will follow the market’s lead in the near term.<\/p>\n

Thus, the economy is intertwined with the stock market, which in turn is closely linked to AI. AI is also directly contributing to the real economy, accounting for as much GDP growth in the first two quarters as all consumer spending combined.[6]<\/a> The AI trade is extremely<\/em> significant.<\/strong> It plays a major role in the S&P 500 and global indices. It\u2019s starting to look quite alarming<\/a>.[7]<\/a> Demand for future AI products remains largely unknown, yet massive capital is being allocated, often with long-term commitments. Historically, capital spending sprees that precede demand have not ended well, even when that demand eventually materializes, as seen during the dot-com era. Recently, financing has become increasingly creative<\/em>, with various parties engaging in circular agreements to fund growth. Reports suggest that OpenAI, the company that ignited the AI frenzy, is projected to lose around $8 billion this year, with outstanding commitments ranging from $400 to $500 billion for infrastructure in the coming years, and it doesn\u2019t expect to turn a profit until the end of the decade.<\/p>\n

What\u2019s a few billion between friends?<\/strong><\/h2>\n

\"AI<\/p>\n

It\u2019s almost certain that this AI-related spending will benefit society in the long run\u2014providing ample computing power and potentially even affordable energy if demand falls short of expectations. However, in the short term, the returns on capital appear risky.<\/p>\n

Stocks for the short run?<\/strong><\/h2>\n

What about lower interest rates? There\u2019s a compelling argument that a \u201crun it hot\u201d economy compels investors to own assets. Lower discount rates combined with strong growth and inflation create an ideal environment for asset ownership. The market reflects this, as the late surge in riskier assets during Q3 coincided with the Federal Reserve cutting short-term rates.<\/p>\n

Rate cuts fuel risk appetite<\/h2>\n

\"rate<\/p>\n

Source: Koyfin, 9\/30\/2024 through 9\/30\/2025<\/em><\/p>\n

Additionally, gold, the longest-standing inflation hedge, has been on a historic upswing, while the dollar continues to weaken, providing a tailwind for foreign assets.<\/p>\n

One area where lower rates might genuinely stimulate the economy is housing. Turnover in the housing market remains historically low. However, longer-term rates, which influence mortgages, are only loosely tied to the Federal Reserve and have not decreased significantly. Given that higher rates primarily impacted sectors sensitive to interest rates, such as housing and autos, it\u2019s unclear whether lower rates will spur substantial economic growth as the cycle reverses.<\/p>\n

So, what do you do?<\/strong><\/h2>\n

The current situation presents a dilemma. The market and economy appear risky, yet there\u2019s immense pressure to continue investing in risk assets amid a hotter monetary policy and seemingly boundless AI demand. While it may not be the most exciting answer, diversification is likely the best strategy.<\/strong><\/p>\n

Our quantitative strategies do not directly account for these fundamental circumstances. They have increasingly adopted a less favorable view of long-standing market leaders that have historically formed the core of our portfolios. The backward-looking returns of these assets may seem anomalously high, and there may be a broader range of attractive options available, particularly in foreign markets. These markets are not driven by the AI trade and thus are not beholden to its fluctuations. For developed markets, increased fiscal stimulus could enhance economic growth, while emerging markets are highly sensitive to dollar strength\u2014a weaker dollar has been a significant advantage for them. Diversification may feel unnecessary or even painful when speculation and risk appetite are high, but we believe it remains the best defense against uncertainty and risk\u2014two factors that are not in short supply.<\/p>\n

It\u2019s challenging to envision a sustainable scenario combining an increasingly financialized economy, a concentrated stock market, and a weakening labor market amid rising inflation\u2014even if the path of least resistance appears to be more of the same in the near term. This has us feeling cautious yet excited about the potential for tactical investment management, particularly the ability to diversify outside the U.S., which may offer significant value to a traditional portfolio as prevailing leadership eventually wanes.<\/p>\n

We also want to share that we\u2019ve launched a newsletter: Un-Herd<\/strong>. This monthly newsletter offers a candid look at what\u2019s on our minds\u2014from our real<\/em> opinions on hot topics to unexpected stories making the rounds. It\u2019s delivered straight to your inbox and curates what\u2019s sparking debate, intrigue, and laughter among our portfolio managers. Subscribe here<\/a> to receive our latest edition!<\/p>\n

By Brendan Ryan, CFA, partner and portfolio manager at AIM<\/em><\/p>\n

Originally published<\/a> by Algorithmic Investment Models<\/em><\/p>\n

For more news, information, and strategy, visit the ETF Strategist Content Hub<\/strong><\/a>.<\/em><\/p>\n\n

[1]<\/a> \u201cSmall pond theory\u201d \u2013 Social media has allowed every fish to swim in a giant ocean. Individuals may have been very content in their smaller ponds until they saw just how well some other fish are living (or appear to be living).<\/span><\/p>\n

[2]<\/a> Source: Bloomberg. \u201cTop 10% of Earners Drive a Growing Share of US Consumer Spending\u201d. Sept 16, 2025.<\/span><\/p>\n

[3]<\/a> https:\/\/usa.visa.com\/partner-with-us\/visa-consulting-analytics\/economic-insights\/the-sudden-increase-in-the-wealth-effect-and-its-impact-on-spending.html<\/span><\/p>\n

[4]<\/a> https:\/\/www.fitchratings.com\/structured-finance\/abs\/auto-indices#u.s.-auto-indices<\/a><\/span><\/p>\n

\"prime<\/p>\n

[5]<\/a> https:\/\/www.fico.com\/en\/resource-access\/download\/55026<\/a>. Interestingly, while top scores increased, the bottom scores decreased, resulting in a lower average but a higher median.<\/span><\/p>\n

[6]<\/a> Bloomberg data from 12\/31\/2022-6\/30\/2025. Contribution to Real GDP for Tech Equipment and Software and Personal Consumption Expenditures.<\/span><\/p>\n

\"Contributions<\/p>\n

[7]<\/a> Dot-Com D\u00e9j\u00e0 Vu: Oracle\u2019s $300 Billion AI Bet Feels Familiar: https:\/\/algomodels.com\/the-ai-party-rages-on-likes-its-1999\/<\/span><\/p>\n\n

Disclosures:<\/span><\/h2>\n

Copyright \u00a9 2025 Algorithmic Investment Models LLC. All rights reserved. All materials appearing in this commentary are protected by copyright as a collective work or compilation under U.S. copyright laws and are the property of Algorithmic Investment Models. You may not copy, reproduce, publish, use, create derivative works, transmit, sell or in any way exploit any content, in whole or in part, in this commentary without express permission from Algorithmic Investment Models.<\/span><\/p>\n

Certain information contained herein constitutes \u201cforward-looking statements,\u201d which can be identified by the use of forward-looking terminology such as \u201cmay,\u201d \u201cwill,\u201d \u201cshould,\u201d \u201cexpect,\u201d \u201canticipate,\u201d \u201cproject,\u201d \u201cestimate,\u201d \u201cintend,\u201d \u201ccontinue,\u201d or \u201cbelieve,\u201d or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events, results or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained herein may be relied upon as a guarantee, promise, assurance or a representation as to the future.<\/span><\/p>\n

This material is provided for informational purposes only and does not in any sense constitute a solicitation or offer for the purchase or sale of a specific security or other investment options, nor does it constitute investment advice for any person. The material may contain forward or backward-looking statements regarding intent, beliefs regarding current or past expectations. The views expressed are also subject to change based on market and other conditions. The information presented in this report is based on data obtained from third-party sources. Although it is believed to be accurate, no representation or warranty is made as to its accuracy or completeness.<\/span><\/p>\n

The charts and infographics contained in this blog are typically based on data obtained from third parties and are believed to be accurate. The commentary included is the opinion of the author and subject to change at any time. Any reference to specific securities or investments are for illustrative purposes only and are not intended as investment advice nor are they a recommendation to take any action. Individual securities mentioned may be held in client accounts. Past performance is no guarantee of future results.<\/span><\/p>\n

As with all investments, there are associated inherent risks including loss of principal. Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Sector and factor investments concentrate in a particular industry or investment attribute, and the investments\u2019 performance could depend heavily on the performance of that industry or attribute and be more volatile than the performance of less concentrated investment options and the market as a whole. Securities of companies with smaller market capitalizations tend to be more volatile and less liquid than larger company stocks. Foreign markets, particularly emerging markets, can be more volatile than U.S. markets due to increased political, regulatory, social, or economic uncertainties. Fixed Income investments have exposure to credit, interest rate, market, and inflation risk. Diversification does not ensure a profit or guarantee against a loss.<\/span><\/p>\n

The S&P 500 Index measures the performance of 500 large U.S. companies across various industries and is weighted by market capitalization, giving larger companies greater influence on the index.<\/span><\/p>\n

For Investment Professional use with clients, not for independent distribution.<\/span><\/p>\n

Please contact your AIM Regional Consultant for more information or to address any questions that you may have.<\/span><\/p>\n

Algorithmic Investment Models LLC (AIM)<\/span><\/p>\n

125 Newbury St., 4th Floor, Boston, MA 02116 (844-401-7699)<\/span><\/p>\n

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Stock markets are soaring to unprecedented heights, with public companies shutting down operations to invest in Bitcoin. Consumers can place bets on nearly anything in real-time, and \u201cmeme stocks\u201d are making a comeback. Even the US government is getting in on the action by purchasing stocks. Yet, consumer sentiment is plummeting, reaching levels typically associated […]<\/p>\n","protected":false},"author":1,"featured_media":3097,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[60],"tags":[],"class_list":["post-3096","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-etfs"],"_links":{"self":[{"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/posts\/3096","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/comments?post=3096"}],"version-history":[{"count":0,"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/posts\/3096\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/media\/3097"}],"wp:attachment":[{"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/media?parent=3096"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/categories?post=3096"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/tags?post=3096"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}