Navigating Valuations and the AI Growth Outlook

by Michael Caplan

Oct 03 2025 00:00

"We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten." - Bill Gates

 

Earlier in the year, I had the opportunity to read three excellent books-The Worlds I See by Fei-Fei Li, The Coming Wave by Mustafa Suleyman and How the Tech Titans and Their Thinking Machines Could Warp Humanity by Amy Webb. These works reinforced a perspective that has become clear: while balance across sectors remains important, the risk/reward dynamic within artificial intelligence has shifted in favor of the companies that have embraced this new technology. Although some market commentators compare today's AI narrative to the dot-com bubble, we view that analogy as misplaced. Artificial intelligence is already demonstrating profound, practical impact. Leaders in the field have suggested it is only a matter of time before AI makes breakthroughs in areas as critical as healthcare, energy and manufacturing. Walmart's CEO, Doug McMillon, has said, "AI is going to change literally every job." Nvidia's CEO Jensen Huang is building chips with capabilities that could reshape the job market entirely. And Satya Nadella, Microsoft's CEO, said "AI is this generation's defining technology. It's as important as the PC, as the internet, as mobile." For these reasons, and many others, we see AI not as a bubble but as the next industrial revolution-one that is likely to accelerate change exponentially.

 

Following President Trump's "Liberation Day" speech, markets experienced a significant pullback of nearly 20%. During that period, many investors chose to move to cash, reflecting a natural response to heightened volatility. While the downturn was challenging in real time, we took the other side of the trade-remaining opportunistic and positioning the portfolio to capture the long-term growth theme in artificial intelligence. As a result, through disciplined positioning and patience, our portfolios are once again having a phenomenal year. By capitalizing on the rebound, we have realigned our holdings to reflect both current conditions and our expectations for the macroeconomic environment ahead. The fundamentals of AI companies remain strong, as evidenced by their Q3 earnings.

 

That said, markets have not experienced even a 3% pullback since April, and overbought technology conditions warrant caution. The Buffett indicator, which compares total stock market capitalization to GDP, currently exceeds 200% - a level historically signaling overvaluation. However, we are in an unusual environment where major tech companies-especially the "Magnificent Seven"-generate significant revenue globally, not just domestically, which inflates market capitalization relative to U.S. GDP. This global revenue exposure distorts the traditional GDP comparison making the indicator less accurate as a valuation signal today. Nevertheless, while we remain bullish over the longer term in the AI theme, markets can overshoot to the upside. You may notice that we trim positions in technology when valuations become stretched, while ensuring allocation remains responsive to shifts in opportunity. For example, we are seeing opportunities in the value sector which has lagged the broader market despite strong underlying fundamentals. Companies in areas such as financials, industrials, and consumer staples are trading at more attractive valuations, offering compelling entry points relative to their long-term earnings potential. We have begun selectively adding to these positions where the risk/reward is favorable, balancing our growth exposure in AI with high-quality, undervalued businesses that can provide stability and income. This combination allows us to pursue both innovation-driven upside and the resilience that value-oriented holdings bring to portfolios.

 

On the macroeconomic front, the Federal Reserve recently took the significant step of cutting interest rates, marking the beginning of what many anticipate could be a gradual easing cycle. Historically, such moves have had a disproportionate impact on small and mid-cap companies and interest-sensitive sectors, which have lagged in the broader market this year. Lower borrowing costs tend to stimulate growth by reducing the cost of capital for businesses, encouraging expansion and investment, while also lifting consumer demand. For these reasons, it is important for us to remain broadly diversified.

 

At the same time, monetary policy remains a delicate balancing act. The Fed is attempting to support economic growth without reigniting inflationary pressures, and markets are highly sensitive to both its decisions and its forward guidance. For investors, this means staying attentive not just to the direction of rate moves, but also to the pace at which future cuts occur and the Fed's broader assessment of economic conditions. For our portfolios, this creates opportunities to maintain a diversified approach-participating in the upside potential of growth sectors like technology and AI, while also allocating to areas such as small- and mid-cap companies that tend to benefit during periods of monetary easing.

 

Finally, we are pleased to announce that we will be expanding our team over the coming months. As our firm continues to grow, it is increasingly important to strengthen the depth and breadth of our expertise. These new hires will allow us to further scale our capabilities and ensure that our resources match the evolving needs of the clients we serve. We look forward to sharing more details about these new team members and the specialized roles they will bring in a forthcoming communication.

 

As always, thank you for your continued trust. We remain focused on disciplined, long-term strategies while taking advantage of short-term market dislocations.