Market Commentary
Markets continued their year-to-date rise in Q3, with US stocks gaining over 8% (as measured by the Russell 3000 Index) and taking calendar-year gains to over 14%. Small- cap stocks had the best quarter, up over 12%, while large caps gained roughly 8% and mid caps were up 5%. From a style perspective, growth led at the larger end of the cap spectrum, while small-cap growth and value stocks delivered nearly identical returns — with small value slightly ahead (up over 12%).
Froma sector perspective, the artificial intelligence (AI)- fueled boom in technology (13%) and communication services (12%) stocks continues, with the two sectors leading and driving much of the Russell 1000 Index’s positive return. Another meaningful positive contributor was the consumer discretionary sector, up nearly 9%. The sole sector in the red in Q3 was consumer staples, which fell -2.6%.
Q3 2025 Russell 1000 Index Sector Returns (%)
Trade, monetary policy and geopolitics remained the top headlines in Q3, even as markets seemed to shrug off any ongoing concerns and continue their rise (and rebound from late Q1’s and early Q2’s sharp downturn in the wake of President Trump’s initial tariff announcements). Despite the uncertainty stemming from these and other areas, markets plodded along in Q3, with several indices notching new all-time highs. Technology companies have continued their torrid run as sentiment around the potential for AI to radically change life as we know it remains high.
Against such a backdrop, it can be challenging to fight the urge to float with the current, — but we believe investors who do the hard work of researching and identifying high-quality companies the markets may be entirely overlooking can ultimately generate attractive long-term returns. As such, we will continue focusing on areas where we believe valuations are disconnected from underlying fundamentals and long- term growth outlooks — an approach we believe will benefit investors regardless of how events continue unfolding in the quarters and years ahead.
Performance Discussion
Our portfolio trailed the Russell 1000 Value Index in Q3. Relative weakness was concentrated among our financials and information technology holdings. Conversely, our materials holdings outperformed, providing a relative tailwind to performance in the quarter.
Among our top individual contributors in Q3 were Martin Marietta Materials (MLM) and Sysco Corporation (SYY). Heavy building materials supplier Martin Marietta is taking steps to optimize its portfolio of product offerings — including the upcoming divestiture of its Midlothian cement plant to Quikrete. As infrastructure and non-residential — and possibly housing — construction seem poised to improve in the period ahead, Martin Marietta should benefit from its competitive positioning as one of the US’s largest aggregates producers and distributors.
Sysco Corporation, a food products distributor, saw incrementally positive sales performance through the summer months as the company seems to be benefiting from internal initiatives — which, if similar progress continues in the quarters ahead, would be a welcome development.
Other top Q3 contributors included General Motors (GM), Labcorp (LH) and ConocoPhillips (COP). Automobile manufacturer General Motors benefited from improving tariff-related clarity as well as lower interest rates, which could spur customer demand in coming quarters. Shares of leading diagnostic lab Labcorp rose as it benefits from strong utilization across the health care industry. Further, the pharma industry’s better- than-expected new drug discovery pipeline has reduced concerns about Labcorp’s central lab business. Oil and gas producer ConocoPhillips is benefiting from synergies from its Marathon integration sooner than expected and announced it would divest Anadarko assets in the period ahead — signs the company is executing on its plan to cut costs, sell assets and expand its liquid natural gas (LNG) business.
Among our bottom Q3 individual contributors were Texas Instruments (TXN) and Colgate-Palmolive (CL). Shares of semiconductor manufacturer Texas Instruments declined as demand in its core industrial and automotive end markets recovered slower than expected. However, we maintain our conviction in the company’s competitive advantages in manufacturing, product breadth and direct distribution, and we anticipate these headwinds will be short term.
Consumer goods company Colgate Palmolive faced consumer weakness — which has broadly pressured the consumer packaged-goods space — and inventory destocking in the quarter, particularly at online retailers, which in turn pressured shares. High quality defensive businesses such as Colgate also seem to be very out of favor.
Other bottom Q3 contributors included American International Group (AIG), SBA Communications (SBAC) and Salesforce (CRM). Shares of property and casualty insurance company AIG were pressured alongside many industry peers as the benefit from pricing in excess of loss costs — and that insurers have benefited from over the past few years — is possibly waning. SBA Communications, a leading owner and operator of wireless communications infrastructure, continues to see slow 5G deployment following its initial build-out. Guidance from customer relationship management (CRM) software company Salesforce seems to imply a weaker outlook later in the fiscal year; however, we believe this is likely conservatism on the part of management.
Portfolio Activity
Though markets have continued rising throughout the year, we have continued finding individual companies whose prices we believe are not reflective of their long-term growth outlooks. Accordingly, we initiated two new positions in Q3, including Walt Disney (DIS) and Zoetis (ZTS).
Diversified media and entertainment company Walt Disney has some particularly attractive assets, including its streaming and parks and experiences businesses, which offer attractive earnings growth potential. These businesses have been fueled partly by much-improved theatrical performance, and we anticipate growth in those areas will likely overpower more lackluster results in Disney’s sports and linear pay TV segments. We capitalized on what we consider an attractive valuation to initiate a position.
Zoetis is a leader in the animal health market with leading products for companion animals (PETS) and livestock. The company has a broad portfolio with multiple growth drivers and a strong pipeline to address several undertreated pet conditions. Concerns about one of its arthritis drugs used in dogs have pressured the share price recently, allowing us to establish a position below our estimate of intrinsic value.
We funded these purchases in part with the proceeds from the sale of biopharmaceutical company Pfizer (PFE), athletic apparel manufacturer lululemon (LULU) and software company SS&C Technologies (SSNC) as we viewed other opportunities as more compelling.
Market Outlook
Further complicating the macroeconomic picture is the state of the consumer, which is hard to clearly discern. It seems there is a growing divide between those at the top end of the income spectrum who are holding up remarkably well and whose spending levels are either steady or increasing and those in the middle or at the bottom — a share of the population among whom jobs have become increasingly scarce and who are feeling inflation’s pinch meaningfully. Given consumers’ significant contribution to GDP, overall softening in their spending could pose a risk to the double- digit corporate earnings growth projections expected in 2026.
The selloff in late Q1 and early Q2 started to create some attractive investment opportunities. However, the window to capitalize on those was short given the market’s subsequent rebound. Equity markets are back to above-average valuation levels, making it difficult to expect returns that match historical averages over the next five years. Our primary focus is always on achieving value-added results for our existing clients, and we believe we can achieve better- than-market returns over the next five years through active portfolio management.
Amid what could potentially be a bubble (only hindsight will tell), sentiment around AI is driving remarkable equity market returns year to date. In many of these cases, we believe sentiment is at least partially disconnected from reality given AI’s potential is yet to be fully borne out. Not only are investors rewarding companies with even minimal potential exposure to AI, but they are disproportionately punishing companies whose business models may be at any risk from AI disruption or whose businesses are not sufficiently (or at all) exposed to AI — said another way, AI seems to be all many investors care about.
This environment can produce interesting opportunities for discerning investors to unearth companies with attractive business models that markets are either currently ignoring altogether or disproportionately punishing. Over the long term, we believe such high-quality companies could offer solid returns to patient investors.
On the other hand, investors’ narrow focus on one major theme is impacting sector and index performance and, in our view, embedding a significant amount of optimism in share prices. Such an investing backdrop can be a challenging one, especially if you are inclined to swim against the tide — which we generally are. However, we are not contrarian for its own sake; rather, we find it hard to justify the valuations of some top-performing companies when much remains to be seen about whether — and how — AI will impact businesses in the future.
Since Inception Period and Annualized Total Returns (%)
Calendar Year Returns (%)
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
