By: Bill Collier
“I see concentration risk everywhere I look.”
– Paul Tudor Jones
Market Statistics as of 09/30/25
The third quarter of 2025 was the strongest Q3 since 2020 with all asset classes positive and many indices having double digit returns. As you can see from the chart above, growth continues to lead value and within the growth sector, small cap (Russell 2000) outperformed large cap growth for the first time since Q3 2021. Market participants seem to remain infatuated with the Artificial Intelligence (AI) trade as many of the Magnificent 7 soared to all-time highs during the quarter, and a few new companies have recently become market darlings as well. In fact, Jim Cramer recently announced his new acronym for the latest group, PARC, which consists of Palantir, AppLovin, Robinhood and Coinbase. The gamification of the markets we have discussed in past letters continues.
Gold continued to shine the brightest as the metal gained 16.36% for the quarter and leads all asset classes year to date with a whopping 46.6% return. Gold was up 11.55% in September alone—its best month since November 2009. The leadership of gold, small cap and technology/telecom in the quarter was an unusual trio: historically (since 1989) gold has had close to zero correlation with those asset classes. Perhaps gold is warning us of the outlook for the US dollar, given the massive debt load of the US government and the high inflation we have been experiencing. One thing is certain: we as a nation cannot continue to spend more than we take in without continuing to endanger our role as the world’s reserve currency.
Within the S&P 500 index internals, the technology (+13.04%) and communication services (+11.82%) sectors were the biggest winners. Again, not surprisingly as the AI craze continued. Consumer discretionary stocks were the third best group as the sector returned (+9.36%). The utilities sector was up a big (+6.84%) as the perceived demand for AI data center power needs fueled the gains. Energy (+5.26%), followed by industrials (+4.56%), healthcare (+3.27%), financials (+2.86%), materials (+2.63%) and real estate (+1.73%) round out the positive sectors. Only the consumer staples (2.90%) sector had negative returns as the rotation out of safe havens gave way to the risk on trade.
We have written in many newsletters over the years about our focus on valuation and the close attention paid to managing our client’s money for solid risk-adjusted returns. Interestingly, Richard Bernstein of Richard Bernstein Advisors (RBA), recently wrote a research report using the “Tortoise and Hare” analogy to illustrate the eerily similar returns of utilities and the NASDAQ composite over the last 50 years. The power of lower volatility and compounding dividends allowed these “stodgy” investments to keep pace with the faster growing companies often associated with the NASDAQ. We remain cautiously optimistic about investing in top-tier companies with strong balance sheets and income statements, great management teams and industry-leading business models. The S&P 500 currently trades at 23x earnings yet the equal-weight S&P 500 trades at a more reasonable 17x earnings. There are always opportunities in the marketplace, and our job is identifying these businesses and being ready to invest in them when the price is attractive.
Just yesterday, famed hedge fund investor Paul Tudor Jones was on CNBC comparing this current market and its infatuation with AI to the dot-com bubble in 1999. His perspective suggested both opportunity and caution. He noted that unlike 1999, when the Federal Reserve was implementing rate hikes, today’s market is anticipating rate cuts. The contrast extends to fiscal policy as well. While 1999-2000 featured a budget surplus, today’s economy operates with a 6% budget deficit. While no one knows just how the markets will act, it is anyone’s guess. For full disclosure, Jones was bearish earlier this summer when the markets were all trading below several technical indicators before grinding higher to new highs as the markets climbed the proverbial wall of worry.
Jim Bianco of Bianco Research just posted that JP Morgan has identified 41 “AI-related” stocks in the S&P 500 index that make up 45% of the S&P 500. This illustrates just how top heavy the index is in AI companies and how distorted index returns may be due to this concentration. We try to stress the fact that this popular index is not as broad and diversified as people think it is. It has morphed into a concentrated technology driven index.
In fact, as the table below shows, the S&P 500 and the Nasdaq 100 (QQQ) have the same eight largest stocks. So much for diversification! It is obvious just how concentrated these indexes are in technology companies. We think it is imperative for our clients to know this and realize the inherent risk of investing in a passive index fund while believing it offers a lot of diversification. Our active styles of investing allow us to broadly diversify portfolio risk through both sector allocation and stock selection while focusing on valuation and risk adjusted returns.
We remain laser focused on the companies we invest in and are prepared to make adjustments when needed. Our primary focus is protecting our client’s capital while aiming to generate strong risk-adjusted returns that ensure peace of mind. Our investment team has a wealth of experience, having navigated numerous bear markets and corrections. We hope our expertise will provide you with a sense of security and confidence.
Portfolio Activity in the Third Quarter 2025
During the quarter, the Value strategy exited our position in Oracle (ORCL) on a strong positive market reaction to earnings but mostly due to valuation. We were fortunate to have bought shares significantly lower two years ago and felt Oracle shares were no longer characteristic of a value stock in our opinion. We also sold our position in Pfizer (PFE) on a strong earnings report that we felt gave us a good exit price. The company faces patent issues over the next few years which we felt would weigh on the stock price. We recently purchased Honeywell (HON) shares as we believe the shares offer excellent risk adjusted return potential over the next couple of years as the company splits into three separate companies (Advanced Materials, Automation and Aerospace) where we think they will be more valuable as separate entities than they are as a conglomerate. Activist investor Elliot Management has been pushing Honeywell in this direction for some time now.
There were no new purchases or sales in the international strategy during the quarter, but there was one sale and one purchase in the GARP strategy. We sold our position in CarMax after disappointing sales and earnings as the market continues to favor asset light auto sales companies like Carvana. We purchased shares in WillScott Holdings, one of the leaders in flexible, modular space and storage solutions. We feel like the company will benefit from onshoring and infrastructure renewal projects in the US as well as new industrial projects like data centers, battery plants, etc.
As always, should you wish to inquire more about our thoughts and processes, please feel free to reach out to any of us. We welcome the dialogue and consider it an honor to have your trust and confidence in managing your capital and investment needs.
*Not every client account will have these exact holdings. The actual holdings with respect to any particular client account will vary based on a number of factors including but not limited to: (i) the size of the account, (ii) investment restrictions applicable to the account, if any; and (iii) market exigencies at the time of investment.
DISCLOSURES:
This material is not financial advice or an offer to sell any product and is not a recommendation to buy or sell any particular security. Past performance is not indicative of future results. The opinions expressed are those of the Live Oak Private Wealth Management Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass.
Live Oak Private Wealth is a subsidiary of Live Oak Bank. Investment advisory services are offered through LOPW, LLC, an Independent Registered Investment Advisor. Registration does not imply a certain level of skill or training. More information about Live Oak Private Wealth, including our advisory services, fees, and objectives, can be found in our ADV Part 2A and/or Form CRS, which is available upon request.
This should not be construed as tax advice. You should always consult with your tax professional with regard to specific tax questions and obligations.