Key Wealth Investment Brief

Key Takeaways:

How will the economy perform next year?

We believe investors should watch what consumers do, not what they say. Consumer spending remains solid as rising retirement assets and higher home prices are lifting consumer net worth, creating a wealth effect. Consumer confidence is weakening, but overall spending and net worth remain robust, according to data from Evercore ISI.

Artificial intelligence (AI)-related spending, including investment in data centers and infrastructure, has exploded in recent years and continues to support economic growth. Much of this new capital spending has been financed with debt, in contrast with prior years, when most AI spending was funded from cash flow. Debt-funded spending needs to be managed more carefully than spending funded from cash flow, but debt is not always a less favorable funding structure.

Operational use of AI is still modest, but paid subscriptions are higher, according to Ramp, citing Census Bureau data. In other words, companies are exploring AI tools even if they’re not integrated into their processes yet.

Conversely, 50% of Americans say they are more concerned than excited about the increased use of AI, while only 10% say they are more excited than concerned, according to a recent Pew survey. This sentiment appears to have deteriorated in 2023, which followed the launch of ChatGPT in 2022. Consumer sentiment around AI may need to improve to justify the massive planned future AI infrastructure spending.

Bottom line – how to invest now.

Key Wealth is hosting our National Client Call on Wednesday, December 3, 2025, where we will discuss our 2026 Market and Economic Outlook. We will cover Three Forces of Disruption (concurrent and interconnected):

1) The rise of nationalism and state capitalism, and the related retreat from globalization

2) Advancements in artificial intelligence: the promises, the challenges, and the unknowns

3) The democratization of private markets and changes in market structure

Key Wealth’s investment philosophy is premised on committing capital to areas that are starved for funding and avoiding areas where capital is abundant. AI remains the dominant theme in the economy. As money pours into AI-themed investments, we continue to recommend a diversified approach.

Since Labor Day, we have been advising investors to revisit equity exposures and rebalance where appropriate. This view still holds as the labor market continues to cool, AI exuberance heats up, and credit markets exhibit some shakiness. Widely used indices remain concentrated, potentially leaving investors over-exposed to concentration risk. Diversification remains an attractive strategy, in our view.

Equity Takeaways:

Stocks fell in early Monday trading after rising sharply late last week. The S&P 500 fell approximately 0.7%, to 6801, while the tech-heavy Nasdaq fell approximately 1.1%. Small caps fell approximately 0.6%. International shares were generally lower.

Sentiment has come off the boil over the past few weeks, setting up the markets for a bounce-back rally. Markets had become too bullish a few months ago, and that condition has been worked off. We believe the setup is favorable for a year-end rally.

The AI trade has separated into two camps over the past few weeks and months. The rising tide lifts all boats narrative has changed. On one side are the OpenAI-related names, and on the other side are the names in the Gemini ecosystem. The recent version of Gemini was received very favorably, which has put some pressure on stocks associated with OpenAI (creator of ChatGPT, a competing AI model).

Fixed Income Takeaways:

Treasury yields rose 4–7 basis points in early Monday trading after falling last week. In early Monday trading, 2-year Treasuries were yielding 3.53%, 5-year Treasuries 3.66%, 10-year Treasuries 4.09%, and 30-year Treasuries 4.75%.

President Trump recently stated that he has made his choice to lead the Federal Reserve (Fed), although nothing is official. Kevin Hassett has become the clear favorite to become the next Fed chair, according to Kalshi.

Initial market reaction to Trump’s announcement was positive, as Hassett is expected to continue the Fed’s current rate-cutting cycle. The Fed is widely expected to cut the federal funds rate by another 25 basis points (0.25%) in December. The current federal funds rate is the target range of 3.75% to 4.00%.

Key Takeaways:

Stocks were volatile last week. Bonds rose slightly last week, providing some diversification.

In a choppy week of trading, the S&P 500 fell approximately 2.2% last week, with small caps faring slightly better, dropping 0.8%. International shares fell 3-5%. Gold, copper, and oil also fell, while bonds and the dollar both rose slightly.

Since the start of November, we’ve seen sector rotation beneath the surface of the stock market. Health care and energy have been the two best performing sectors over that timeframe, while consumer discretionary and technology have been the two worst performing sectors. On a year-to-date (YTD) basis, technology remains the best performing sector, so it remains to be seen if the recent rotation is a blip or a true reversal.

Diversification remains paramount. The S&P 500 has become more concentrated in recent years, increasing the potential for volatility. Diversification across sectors, size and geography creates more resilient portfolios, in our view.

The September nonfarm payroll report was finally released last week after a delay due to the government shutdown. The report was stronger than expected, creating more confusion about future Federal Reserve (Fed) policy.

The September nonfarm payroll report showed an increase of 119,000 jobs, the largest rise since April, vs. consensus estimates for a rise of 51,000. The unemployment rate ticked higher, to 4.4%. Wage growth continues to soften. This report was an improvement over recent months and seems to have stabilized concerns about the slowing jobs market.

The Atlanta Fed’s GDPNow estimate for Q3:2025 real GDP rose to more than 4.0% based on the recent batch of data releases. The economy seems to be holding steady, even if the labor market continues its slow cooling.

The Fed remains divided and recent data has done little to clear the picture. Inflation hawks are more worried about inflation vs. growth and prefer to hold rates steady in December. The doves highlight the cooling labor market as justification to cut rates further in December. The current fed funds rate target range is 3.75% to 4.00%.

Five voters have signaled they do not want to cut interest rates in December, while another five have signaled rate cuts are appropriate. Two voters’ opinions are unknown. The Fed’s decision will be announced on December 10.

Bottom line – how to invest now.

Key Wealth’s investment philosophy is premised on committing capital to areas that are starved for funds and avoiding areas where capital is abundant. Artificial Intelligence (AI) remains the dominant theme in the economy. As money pours into AI-themed investments, we continue to recommend a diversified approach.

Since Labor Day, we have been advising investors to revisit equity exposures and rebalance where appropriate. This view still holds as the labor market continues to cool, AI exuberance heats up, and credit markets exhibit some shakiness. Widely-used indices remain concentrated, potentially leaving investors over-exposed to concentration risk. Diversification remains an attractive strategy, in our view.

Equity Takeaways:

Stocks rose in early Monday trading. The S&P 500 rose approximately 0.9%, to 6662. The tech-heavy Nasdaq rose approximately 1.7%, while small caps rose approximately 0.6%. International shares were mixed.

Despite a bounce back rally on Friday, the S&P 500 remains below its 50-day moving average of 6711. The next major support level is the rising 65-day low of 6360. It would not surprise us to see the S&P 500 test its rising 65-day low.

Overall, we believe the market remains in an uptrend as corporate earnings continue to power higher. The forward earnings estimates for the S&P 500 continue to rise. If earnings continue rising, the intermediate- to long-term outlook for the stock market remains favorable.

For context, with 95% of companies reporting, Q3:2025 S&P 500 earnings growth was 13.4%, vs. initial

expectations for 7.9% growth according to FactSet. Revenue growth also exceeded expectations. Approximately 83% of companies beat earnings estimates in the third quarter vs. the long-term average of 76%, according to FactSet.

The VIX futures curve briefly inverted last week, with 1-month implied volatility trading at a premium to 3-month implied volatility. VIX futures curve inversion is a sign of panic. By Friday’s close, the volatility curve had normalized, and the stock market was increasing.

To form an interim price low, the S&P 500 will often undergo a washout where 20-day lows will exceed 50% of issues traded. Recent data shows approximately 24% of issues at a 20-day low – we have not seen a true washout.

The US dollar has been strengthening in recent weeks. A materially higher dollar would be a headwind to equities.

Fixed-Income Takeaways:

Late last week, NY Fed President, John Williams, signaled that he is in favor of a December rate cut, which caused a rally in Treasuries. Short-term yields, which are more sensitive to Fed policy, fell slightly more than long-term yields. Two-year Treasury yields fell approximately 10 basis points on the week, while 10-year Treasury yields fell 9 basis points.

Williams’ comments caused market participants to increase the odds of a December cut. Early on Monday, market participants were pricing approximately a 70% chance of a 25-basis-point rate cut in December, according to Bloomberg data. The current fed funds rate target range is 3.75% to 4.00%.

In early Monday trading, Treasury yields were stable. 2-year Treasuries were yielding 3.52%, 5-year Treasuries 3.62%, 10-year Treasuries 4.05%, and 30-year Treasuries 4.69%.

Credit spreads remain narrow on an absolute basis but have been drifting wider in recent weeks. AI-related companies have increased their borrowing in recent months to help fund the AI infrastructure buildout. Overall leverage at most large AI-related companies remains relatively low but is expected to increase (and bears watching).

Within private credit, investors should carefully examine the liquidity terms, valuation metrics, and redemption policies of any semi-liquid investment. Key Wealth’s Investment Center places strong emphasis on this type of analysis

Key Takeaways:

Both the economy and the stock market are becoming increasingly “K-shaped.”

Through last Friday, November 14, 2025, the S&P 500 has risen 15.8% year-to-date (YTD). The bulk of those returns have been concentrated in companies associated with artificial intelligence (AI), according to data from Bianco Research. The rest of the market has lagged on a relative basis. Even as the stock market has risen, consumer confidence remains low (as measured by the University of Michigan survey).

The divergence between high stock prices and low consumer confidence suggests that many households are feeling left behind. The term “K-shaped economy” is representative of this separation between the “haves” and the “have-nots.”

Since ChatGPT emerged in late 2022, the S&P 500 has increased by approximately $25.9 trillion in value, with approximately 73% of that gain generated by 41 stocks related to AI, according to Bianco Research. Companies associated with AI infrastructure have been the biggest winners, according to Goldman Sachs.

Mentions of the word “afford” on social media have risen sharply since the summer, according to Bianco Research. The Trump administration is aware of this dynamic and has floated ideas such as tariff rebate checks [inflationary?], 50-year mortgages [ill-advised?], portable mortgages [impractical?], and lowering tariffs on certain items [confusing?].

With divergences emerging in both the stock market and the real economy, the trends that worked best over the past three years (when ChatGPT first emerged) may not work best over the next three years. Key Wealth continues to believe that diversification remains the best strategy for the current environment.

The Federal Reserve (Fed) is growing increasingly divided over the path of monetary policy.

There is approximately a 50% chance that the Fed will cut interest rates at their upcoming December meeting, according to Kalshi, down from more than 90% in October. Even if the Fed does cut rates, it is possible that up to three Federal Open Market Committee (FOMC) members could dissent.

The last time this level of dissent existed on the FOMC was nearly 40 years ago. On one side are the inflation hawks, who remain worried that inflation remains above the Committee’s long-term target of 2.0%. On the other side are the doves, who want to cut rates further to stimulate the economy and labor market. The current fed funds rate is the target range of 3.75% to 4.00%.

Bottom line – how to invest now.

Key Wealth’s investment philosophy is premised on committing capital to areas that are starved for funds and avoiding areas where capital is abundant. AI remains the dominant theme in the economy. As money pours into AI-themed investments, we continue to recommend a diversified approach.

Since Labor Day, we have been advising investors to revisit equity exposures and rebalance where appropriate. This view still holds as the labor market continues to cool, AI exuberance heats up, and credit markets exhibit some shakiness. Widely-used indices remain concentrated, potentially leaving investors over-exposed to concentration risk. Diversification remains an attractive strategy, in our view.

Equity Takeaways:

Stocks were mixed in early Monday trading. The S&P 500 was essentially flat at 6733, while the tech-heavy Nasdaq rose approximately 0.1%. Small caps fell approximately 0.4%. International shares were generally lower.

The S&P 500 re-tested its recent lows last week before rebounding slightly to close above its 50-day moving average. Further weakness would open the door to a 3-5% correction in the coming weeks. Typically, November is a strong seasonal month, but the stock market has not been following traditional seasonal patterns this year.

The S&P 500 will likely end this year with approximately $310 in forward earnings expectations for 2026, according to data from Bloomberg. This is a positive surprise relative to estimates from earlier this year, and as long as earnings growth remains solid, the outlook for the stock market will remain positive over the intermediate- to long-term.

One note of caution – cyclical sectors of the market are weakening relative to defensives. Market participants might be getting more cautious regarding a possible Fed policy error, or further potential weakening in the economy. Defensive sectors include sectors like consumer staples and health care, while cyclicals include areas like industrials and materials.

The health care sector has strengthened relative to the technology sector in recent weeks. Earlier in the year, technology was the belle of the ball; but that trend has changed, implying that market participants are becoming more cautious.

We continue to recommend gold as part of a diversified real asset allocation. Global central bank demand for gold rose sharply post-2020, and ETF flows turned positive in early 2024, according to data from Bloomberg, VanEck, and the World Gold Council. Volatility has picked up in recent weeks, but we still like gold as a long-term diversifier.

Fixed-Income Takeaways:

Treasury yields shifted approximately 5 basis points higher across the curve last week as investors began to doubt that the Fed will cut rates in December. The odds for a December rate cut were seen as very high in October, but as of November 16, they were about 50/50.

Looking forward, market participants expect the fed funds rate to end next year (2026) in the low 3.00% area. The current fed funds rate is the target range of 3.75% to 4.00%.

In early Monday trading, yields were relatively stable, with 2-year Treasuries yielding 3.61%, 5-year Treasuries 3.72%, 10-year Treasuries 4.13%, and 30-year Treasuries 4.73%.

Three Treasury auctions occurred last week. The US Treasury auctioned 3-year notes, 10-year notes, and 30-year bonds. Each auction went relatively well, showing that demand for US government debt remains robust.

As the government reopens and more data becomes available, Treasury market volatility could increase. In addition, if the Trump administration’s tariff policy is struck down by the Supreme Court, the government may be forced to issue additional debt to cover lost revenue, which could put some upward pressure on Treasury yields.

Key Takeaways:

Three themes took center stage last week, all suggesting that volatility may increase.

First, Trump’s tax and broader authority to usurp Congress was called into question. Last week, oral arguments were heard in the US Supreme Court over Trump’s ability to impose tariffs under the International Emergency Economic Powers Act (IEEPA). Based on the line of questioning, markets are leaning towards these tariffs being struck down, with uncertain market impact.

Second, the economic data fog thickened further which may cause the Federal Reserve (Fed) to pause their rate cutting cycle. Private-sector job cuts are rising, according to the Challenger Report; but other sources of data, such as the ADP private employment report, paint a more benign picture of the labor market. The labor market is doing okay but is not out of the clear.

Third, the artificial intelligence (AI) build-out may have entered a new (riskier) phase. Capital spending is being increasingly funded with debt instead of cash flow, according to data from WSJ.com. AI themes are linked to almost 50% of the S&P 500’s index weight, according to Bianco Research, so any volatility in AI-related stocks would have a significant impact on the broader market.

The US government shutdown appears to be near an ending.

In the Senate, eight Democrats joined with Republicans based on a compromise framework that would fund the government through January 30, 2026. The compromise provides full-year appropriations for several areas, including Agriculture (including SNAP), Veterans Affairs, FDA, and military construction.

Any federal mass firings initiated during the shutdown would be reversed, and any pending mass firings would be frozen until January 30, 2026. The compromise also confirms that back pay would be provided to all federal workers and guarantees Senate Democrats a vote on a bill of their choosing regarding Affordable Care Act enhanced subsidies in December.

Passage of the framework is not guaranteed but seems likely. The risk of another shutdown at the end of January is low but possible. This compromise could raise the odds of a Fed rate cut in December as more data would become available; but data-dependency may re-emerge as the Fed’s mantra, and on that point, it appears as if the September labor report would be released shortly after the shutdown ends, however, whether the reports for October and November are released are much more uncertain.

Bottom line – how to invest now.

Key Wealth’s investment philosophy is premised on committing capital to areas that are starved for funds and avoiding areas where capital is abundant. AI remains the dominant theme in the economy. As money pours into AI-themed investments, we continue to recommend a diversified approach.

Since Labor Day, we have been advising investors to revisit equity exposures and rebalance where appropriate. This view still holds as the labor market continues to cool, AI exuberance heats up, and credit markets exhibit some shakiness. Widely-used indices remain concentrated, potentially leaving investors over-exposed to concentration risk. Diversification remains an attractive strategy, in our view.

Equity Takeaways:

Stocks rose in early Monday trading on news of a potential end to the government shutdown. The S&P 500 rose approximately 1.1%, to 6804. The tech-heavy Nasdaq rose approximately 1.9%, while small caps rose approximately 0.8%. International shares were generally higher.

The S&P 500 is in the midst of a shallow pullback which does not look nefarious to us, for now. Two important support levels are 6500 and 6343, the latter of which is the rising 65-day low. The market remains in an uptrend and appears to be working off an overbought condition.

Momentum in the S&P 500 is fading. As of last Friday, new 20-day highs were down to approximately 8%. Fewer issues are making new 20-day highs. Spikes higher in this measure typically indicate strong breadth, and vice versa.

Implied volatility (VIX) crested at just above 20.0 last week and dipped to around 18.0 in early Monday trading, near its long-term average of 19.5. Volatility did not spike higher in the recent pullback; the move has been orderly, which is normal behavior within an uptrend.

Earnings remain strong. With approximately 91% of S&P 500 companies reporting, 82% have exceeded earnings forecasts according to FactSet, above the 10-year average of 75%. Market reaction has been muted, suggesting valuations have become extended in the short run.

The US dollar is bumping up against overhead resistance after rallying slightly over the past few months. We expect the recent dollar rally to fade back into its recent trading range, which could be positive for gold.

Gold has pulled back sharply off a parabolic rally but remains in an uptrend. Gold remains a hedge against uncertainty. Central banks have been accumulating gold, according to data from Goldman Sachs and the World Gold Council. We continue to recommend gold as part of a diversified real asset allocation.

Fixed-Income Takeaways:

Treasury yields were essentially flat last week with short-term yields falling 1-2 basis points and long-term yields rising several basis points. The 2-year / 10-year Treasury curve remains in a well-defined range.

In early Monday trading, 2-year Treasuries were yielding 3.57%, 5-year Treasuries 3.69%, 10-year Treasuries 4.10%, and 30-year Treasuries 4.70%.

Market participants are currently pricing approximately a 65% chance of a 25-basis-point rate cut in December. Fed governors appear divided on the risks of inflation versus the risk of a slowing labor market. The current fed funds rate is the target range of 3.75% to 4.00%.

Both investment-grade (IG) and high-yield credit spreads have been moving wider in recent weeks. CCC-rated bonds are underperforming higher-rated issues. Bond investors are positioning themselves more defensively than equity investors. We continue to favor high-quality corporate bonds within client portfolios.

Key Takeaways

China and the US reached a truce on trade, even as the US government shutdown rolls on.

The longer the shutdown continues, the more the pain builds. Paychecks are being missed, federal food aid is in question, and airport disruptions are increasing. In addition, market participants are dealing with a lack of official government data, which is creating a fog around the state of the economy.

Despite the lack of an official trade deal with China, last week’s relaxation in tensions may be “good enough for now” as far as markets are concerned. The US reduced the tariff rate on Chinese imports from 57% to 47%, and China will resume buying US soybeans. In return, China temporarily delayed its export controls on rare-earth minerals. Discussions will continue with topics like semiconductors, Tik-Tok, supply chains, and Taiwan; and while an apparent truce between the two largest economies was seemingly achieved, long-term and more deeply rooted tensions remain.

Immigration policy may emerge as a bigger economic risk than tariffs.

The number of new jobs needed to create a “balanced” labor market (one that doesn’t create wage inflation) has collapsed, according to recent research from the Federal Reserve Bank of Dallas. At the same time, net immigration is plummeting while the birth/replacement rate is in decline.

Labor growth is a key driver of economic growth and our country’s demographic profile. The US must either find a new source of labor or achieve substantially higher productivity to maintain its long-term growth.

The Federal Reserve (Fed) cut the fed funds rate by 25 basis points (0.25%) last week, to a range of 3.75% to 4.00%, as expected. Many Fed members remain worried about inflation, so an additional cut in December is not certain.

During his press conference, Fed Chair Powell stated that “A further reduction in the policy rate at the December meeting is not a forgone conclusion—far from it.” He also stated that a lack of government data is affecting the Fed: “when you can’t see far ahead, you slow down.”

The meeting saw two dissenters, one of whom preferred a 50-basis-point rate cut, and another who preferred no cut. Opinions about the forward outlook are divided within the Fed.

A pause at the Fed’s next meeting in December may be the base case in the absence of government data. The odds of a rate cut in December fell from approximately 92% to approximately 63% after the Fed meeting, according to the CME FedWatch tool as of November 2.

Revenue and earnings for Q3:2025 have generally been better than expected, but concerns about margins and elevated capital expenditures have dampened the reception. Market valuations remain high.

With approximately 64% of the S&P 500 having reported, Q3:2025 revenue growth has clocked in at 7.9% year-over-year versus expectations for 6.3% growth, according to FactSet. Earnings have grown 10.7% year-over-year versus expectations for 7.9% growth, according to FactSet.

FactSet also notes that 83% of reporting companies have exceeded analyst forecasts, above the 10-year average of 75%. Companies that have missed earnings have seen their stocks sell off more than usual, while positive surprises are being rewarded less than usual.

The forward price/earnings (P/E) ratio for the S&P 500 is 23.1x. The last time the forward P/E ratio was above 23.0x was September 2, 2020, according to data from FactSet. The peak P/E ratio for the past 30 years was 24.4x. High starting valuations generally lead to lower long-term returns, but timing is uncertain.

Bottom line – how to invest now.

A resilient economy, slowly cooling inflation, and an accommodative Fed has led to a very good year for markets. Underneath the surface, high-quality stocks have been significantly underperforming low-quality stocks. High-quality companies generally have stronger balance sheets, more consistent earnings, and higher returns on capital than their low-quality peers.

Over long periods, high-quality stocks tend to outperform low-quality stocks, according to data from Kaliash Capital Research. Key Wealth favors quality companies within many of our recommended equity strategies. Investors should be patient and should not chase low-quality stocks.

With the rise of artificial intelligence (AI), Bianco Research calculated that 41 companies in the S&P 500 were linked to AI, including the enablers and key suppliers. These companies, in the aggregate, now represent nearly 50% of the S&P 500 Index’s market capitalization. Thus, investors who are invested in the world’s most popular equity index have 50% of their portfolio invested in one theme. We believe investors need to be aware of this dynamic and consider diversifying where practical.

Investors should think and act long-term; most investors can’t, won’t or don’t. Diversification is paramount. Investors should consider non-traditional strategies to increase diversification where appropriate.

Equity Takeaways:

Stocks were mixed in early Monday trading. The S&P 500 was essentially flat at 6839. The tech-heavy Nasdaq rose approximately 0.4%, while small caps fell approximately 0.8%. International shares were mixed.

The S&P 500 remains in an uptrend while solidly above its 50-day moving average. As we enter the best seasonal period of the year, we see the market as well set up for a rally into year-end.

The cumulative NYSE Advance-Decline line is an important breadth indicator. This measure continues to make new highs right along with the S&P 500 index, confirming the strength of the rally. We are seeing broad-based participation to the upside.

High-beta (often lower quality) stocks have had a great run off the April lows, but this group has become extended on a relative basis. A rotation away from high-beta stocks into other sectors may occur as we approach the end of the year.

Fixed-Income Takeaways:

After last week’s Fed meeting, long-term Treasury yields moved higher relative to short-end yields in a bear steepener. Long-term yields are more impacted by the outlook for growth and inflation, while short-term yields are very sensitive to Fed policy.

In early Monday trading, 2-year Treasuries were yielding 3.59%, 5-year Treasuries 3.71%, 10-year Treasuries 4.10%, and 30-year Treasuries 4.68%.

The gap between the 2-year Treasury yield and the fed funds rate has begun to narrow, implying market participants expect fewer future rate cuts. Typically, the 2-year Treasury yield will lead the fed funds rate. Currently the 2-year yield is about 40 basis points below the fed funds rate. Earlier this year, the gap was almost 100 basis points.

The Fed also announced that Quantitative Tightening (QT) will end on December 1, 2025. With the end of QT, the Fed will once again reinvest the proceeds of maturing securities on its balance sheet, a move which should improve liquidity within the banking system. The end of QT should also support further Treasury curve steepening.

Business Development Company (BDC) equities have sold off recently, likely due to dividend sustainability concerns stemming from falling portfolio yields (due to lower interest rates and tighter spreads). In contrast, BDC-issued bonds have held up well, and overall default rates have been falling this year. Private credit performance remains broadly stable despite several recent high-profile bankruptcies (First Brands, Tricolor).