Q3 2025 Capital Markets Update: Where We Stand and What to Watch Heading Into 2026

From market concentration risk to shifting rate expectations, 2025 has been a year of inflection points. In our latest Capital Markets Update, Retirement Plan Consultants Jim Chapman and Chris Schuppe join Mike Iley to unpack what’s really driving today’s markets…and what retirement plan sponsors and fiduciaries should be watching as we move into 2026.

If you sponsor a retirement plan, steward a pension, or oversee investments with a fiduciary lens, this quarterly discussion breaks down the key forces shaping the investment landscape right now.

Highlights and Takeaways:

► Equities have powered higher, but concentration risk remains.
The S&P 500 is up 13.5% year-to-date, with mega-cap tech names continuing to dominate returns. Dividend yields are near historic lows, leaving earnings growth to do more of the heavy lifting—a setup that makes the market increasingly sensitive to earnings surprises.

► Valuations are stretched but selective opportunities exist.
Forward P/Es near 22-23x place U.S. equities in the top decile historically, similar to the late-1990s tech bubble. However, wide valuation spreads create potential for skilled active managers to add value through security selection and style diversification.

► Style and size are rebalancing.
Growth continues to lead, but value is stabilizing as investors seek quality balance sheets and steadier returns. Large caps remain dominant, yet small caps are regaining momentum thanks to easing rates and policy clarity following the “Big Beautiful Bill.”

► AI spending continues to justify higher multiples.
Corporate investment in AI infrastructure has surged, particularly within IT and financial services. As adoption accelerates, the productivity and efficiency gains could sustain premium valuations—at least in specific sectors.

► Inflation cools as rates begin to normalize.
Headline inflation has eased to the 2.5% to 3% range, allowing the Fed to begin cutting rates after an extended tightening cycle. The yield curve, inverted for nearly two years, is finally normalizing, favoring stable value funds over money markets for long-term savers.

► Global diversification looks more attractive.
A softer dollar and lower relative valuations abroad make international equities—particularly Europe, Japan, and emerging markets—appealing additions to well-balanced portfolios heading into 2026.

With markets at an inflection point, sponsors should stay disciplined: review investment menus, ensure plan participants have diversified default options, and keep an eye on how rate policy, inflation, and innovation continue reshaping the investment landscape. ‍

Watch the full Q3 2025 Capital Markets Update to see where risk is being priced…and where it isn’t.