Author: William Winkeler

  • Understanding Initial Public Offerings (IPOs): What Investors Should Know

    As Chief Investment Officer at Confluence Financial Partners, Bill Winkeler, CFA, CFP® oversees the firm’s investment strategy and market research. Below, he explores the opportunities and risks associated with Initial Public Offerings (IPOs).

    An Initial Public Offering (IPO) occurs when a private company offers shares of its stock to the public for the first time and begins trading on a public stock exchange. IPOs often generate significant media attention, particularly when well-known or high-growth companies enter the public markets. While the excitement surrounding an IPO can be compelling, it is important for investors to understand both the opportunities and risks involved.

    What Makes IPOs Attractive?

    Investors are often drawn to IPOs because they can provide an opportunity to invest in a company during the early stages of its public market journey. Successful IPOs can experience strong demand and significant price appreciation, particularly when the company has a compelling growth story, strong financial performance, or operates in a rapidly expanding industry. In fact, according to research from IPO expert Jay Ritter of the University of Florida, the average U.S. IPO generated a first-day gain of approximately 19% from its offering price to its closing price, highlighting the potential for strong initial investor enthusiasm.1

    Potential Risks of IPO Investing

    While IPOs can offer upside potential, they also carry unique risks:

    • Limited Public Track Record: Newly public companies often have less publicly available financial and operating history than established public companies. The SEC notes that newly public companies may have limited operating histories and publicly available information, which can make evaluating risks and future prospects more challenging for investors.4
    • Price Volatility: IPO share prices can fluctuate significantly during the first days, weeks, and months of trading. These risks can have a meaningful impact on long-term investment outcomes.

    Research from IPO expert Jay Ritter of the University of Florida found that investors who purchased IPOs at the end of their first day of trading historically earned returns that were approximately 21% lower than a value-weighted market index over the subsequent three years, underscoring the importance of careful due diligence and maintaining a disciplined, diversified investment approach.2

    • Valuation Uncertainty: Determining a company’s fair value can be challenging, particularly for rapidly growing businesses.
    • Lock-Up Expirations: Early investors and company insiders are often restricted from selling shares for a period after the IPO. When these restrictions expire, increased selling activity may impact the stock price.
    • Concentration Risk: Investing heavily in a single IPO can create unnecessary portfolio risk.

    Who Are IPOs Suitable For?

    IPO investments may be more appropriate for investors who:

    • Have a high tolerance for risk and volatility.
    • Maintain a diversified investment portfolio.
    • Have a long-term investment horizon.
    • Understand that IPO performance can be unpredictable.

    IPOs are typically less suitable for investors whose primary objectives are capital preservation, income generation, or minimizing short-term market fluctuations.

    Common IPO Misconceptions

    “If I can get shares in an IPO, I’ll automatically make money.”

    There is no guarantee that an IPO’s share price will rise after it begins trading. While some IPOs perform well, others may trade below their offering price.

    “Popular companies always make successful investments.”

    A well-known brand or strong media attention does not necessarily translate into attractive long-term investment returns.

    “Getting access to an IPO means I’m investing before everyone else.”

    By the time a company reaches the IPO stage, it has often already received substantial investment from founders, venture capital firms, private equity firms, and other early investors.

    “All IPOs are available to all investors.”

    Access to IPO shares is often limited. Many offerings allocate shares to institutional investors and select brokerage clients, and demand frequently exceeds available supply. In fact, institutional investors typically receive the majority of IPO allocations, with historical institutional-to-retail allocation splits often around 90/10. As a result, individual investors may have limited access to IPO shares or receive only a small portion of their requested allocation.3

    The Bottom Line

    IPOs can be an exciting component of the capital markets and may offer attractive growth opportunities. However, they should be evaluated with the same discipline applied to any investment decision. Investors should carefully consider the company’s fundamentals, valuation, risk profile, and how the investment fits within their broader financial planning and long-term objectives.

    As with any investment, a well-diversified portfolio and a disciplined investment management strategy can help investors pursue long-term financial goals.

    Important Note: Access to IPOs may be subject to brokerage, custodian, regulatory, or employer restrictions. Investors are encouraged to review any applicable policies and eligibility requirements before seeking to participate in an offering. Investing in IPOs involves significant risk, including potential loss of principal, limited operating history, and price volatility. IPO shares may not be available to all investors, and allocation is not guaranteed.

    About the Author

    Bill Winkeler, CFA, CFP® serves as Chief Investment Officer at Confluence Financial Partners, where he oversees the firm’s investment philosophy, portfolio construction, market research, and investment strategy. With extensive experience in financial markets and wealth management, Bill shares general commentary on investment topics for informational purposes only and not as personalized investment advice to support investor education.

    Sources

    1. Jay Ritter, University of Florida (cited by The Wall Street Journal, 2026): https://site.warrington.ufl.edu/ritter/ipo-data/
    2. Jay Ritter IPO research: https://site.warrington.ufl.edu/ritter/ipo-data/
    3. Fidelity IPO Share Allocation Process: https://www.fidelity.com/learning-center/trading-investing/trading/ipo-share-allocation-process
    4. SEC Investor Bulletin: Investing in an IPO: https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-17

    Any views expressed are those of the author as of the date published and are subject to change without notice. Nothing herein constitutes a recommendation to buy or sell any security or to adopt any investment strategy. Confluence Wealth Services, Inc. d/b/a Confluence Financial Partners is a SEC-registered investment adviser. Registration of an investment adviser does not imply any level of skill or training. The content on this page is provided as general information only and should not be construed as an offering of advisory services or a recommendation to buy or sell any security or financial instrument by Confluence Wealth Services, Inc. Investing involves risk; clients may experience a profit or a loss. Please refer to our Form ADV Part 2A and Form CRS for further information regarding our investment services and their corresponding risks. Additional information about Confluence Wealth Services, Inc. is available on the Investment Adviser Public Disclosure (IAPD) website at: www.adviserinfo.sec.gov.

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    William Winkeler

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  • May 2026 Market Recap

    Month in Review

    • Markets around the world continued to rally from the late March lows, as oil prices fell sharply amidst optimism of a long-term ceasefire in Iran and earnings expectations continued to increase.  
    • The S&P 500 Index rose +5.26% in May (S&P 500 TR Index), driven by large AI-related companies. The market capitalization index rose nearly double the equal weighted index, highlighting the trend of increasing concentration in the market (+2.68%, S&P 500 Equal Weighted TR Index).
    • Large cap growth stocks outpaced all other markets in May (+7.20%, Russell 1000 Growth TR Index), benefiting from significant exposure to Technology stocks: Technology sector alone represents 53% of the Russell 1000 Growth Index.
    • Bond market dealt with competing forces in May: investors continued to reduce the likelihood of rate cuts in 2026, but oil prices had their largest monthly decline since early 2020. The result was a mild monthly gain for the bond market, with the Bloomberg US Agg Bond TR Index rising +0.31% in May.

    Market Concentration Back to Highs

    Technology and AI-related companies powered the S&P 500 higher in May, extending the rally that began in late March. Technology stocks have led the way, with the Nasdaq Composite Index rising +8.43% in May, which is also shifting the composition of the overall equity market.

    After declining from record levels of concentration, the S&P 500 has once again become extremely concentrated: the top 10 companies in the index represent 40.6% of the market capitalization. While this is below the near 50-year record set in 2025, this is a sharp reversal from recent broadening of leadership (the top 10 companies represented 37.9% of the market as recently as March 31, 2026). What is driving this shift? Earnings.

    First quarter earnings showed the strength of AI-related spend, with earnings estimates surprising to the upside at a level rarely seen outside of post-recessionary recoveries. Analysts expected AI Hyperscalers to invest over $800bn in AI-related capex in the next 12-months; an important factor driving overall earnings growth higher. These companies are also amongst the larger companies in the market, and responsible for the sharp increase in concentration since late March.

    Source: Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management. As of May 29, 2026

    What’s on Deck for June?

    Kevin Warsh was sworn in as the next Chairman of the Federal Reserve and will begin to oversee the FOMC in June. His tenure starts at a time of increasing dispersion of views amongst Federal Reserve members and a shifting investor outlook toward interest rate policy.  

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    William Winkeler

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  • April 2026 Market Recap

    Month in Review

    • Equity markets across the globe rebounded sharply in April, defying expectations of a longer drawdown given the oil shock supply. Corporate earnings remain supportive of stock prices.
    • Technology, large cap growth, and small cap stocks led the rebound higher, with the Russell 1000 Growth TR Index rising +11.90% in April. Value stocks largely kept pace, with the Russell 1000 Value TR Index rising +8.16% for the month.
    • Small cap stocks rose +12.21% (Russell 2000 TR Index) in April, benefitting from stronger-than-expected economic fundamentals given their higher sensitivity to economic growth.  
    • Long-term Treasury yields rose during April, with the 30-year Treasury touching 5% towards the end of the month. This kept a lid on core bonds, with the Bloomberg US Aggregate Bond TR Index rising +0.11% in April.

    What Powered the Recovery in April?

    The S&P 500’s +10.49% total return in April was the second best April for the S&P 500 going back to 1950. This outcome was somewhat surprising to investors given the potential headwinds from roughly 20% of the world’s oil supply being offline. Putting aside the forward-looking nature of financial markets, a key catalyst was the fundamental support that strengthened in March and April. Corporate earnings have defied expectations of a decline and actually saw accelerated growth since the conflict in Iran started.

    Historically, in any given year, estimate for corporate earnings decline over time. This year has seen the opposite happen: estimates for 2026 earnings and 2027 earnings for the S&P 500 have increased since the conflict began in late February. As of 4/30/2026, first quarter S&P 500 earnings are on track for 16% growth year/year, the sixth consecutive quarter of double-digit earnings growth. Now the full year 2026 earnings estimates are tracking to low double-digit growth- a key factor supporting the rapid recovery in April.

    What’s on Deck for May?

    • Kevin Warsh is set to be the next Chairman of the Federal Reserve as Jerome Powell’s term as Chairman ends. Thus far, Powell has indicated he will stay on as a Governor, an unusual outcome relative to recent history.
    • Investors will closely watch for resolution with the Iranian conflict. Globally, oil reserves started 2026 at high levels but are being drawn down rapidly as supply of oil remains largely restricted from the region.

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    William Winkeler

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  • First Quarter 2026 Market Recap

    First Quarter 2026 Market Recap

    Geopolitical Headwinds in 2026

    • Escalating tensions in the Middle East sent energy prices sharply higher during the quarter, with US gasoline rising above $4.00/gallon nationally for the first time since 2022.
    • Rising energy prices during the quarter put the Federal Reserve’s rate cuts on hold for the near-term, with investors now pricing in zero interest rate cuts in 2026.
    • During the quarter, almost all major stock markets fell between 8% and 10% from their 2026 high levels, due in large part to the rise in energy prices and lower likelihood of interest rate cuts.
    • Underlying fundamentals were still strong heading into the start of the conflict in Iran, despite weakness in AI-related equities and private credit.

    What Happened in the First Quarter?

    Equity markets started 2026 on a strong note, with broad equity market leadership and participation. That changed in late February, with the start of the conflict with Iran, causing energy prices to rise sharply higher. This introduced volatility into the broad equity and fixed income markets, with most major equity markets experiencing a correction from their high levels in January (correction is a decline greater than 10%). However, some equity markets fared better during the first quarter: large cap value (Russell 1000 Value TR Index, +2.10%) and small cap stocks (Russell 2000 TR Index, +0.89%) captured less downside than large cap growth (Russell 1000 Growth TR Index, -9.78%), for example. International equities, which started 2026 on a strong note, suffered from a strengthening US dollar and higher energy prices, pushing the markets lower in March and mildly lower for the quarter (MSCI ACWI Ex-USA NR USD Index, -0.71% for the first quarter)

    The market’s expectations of the oil supply disruption have not reduced corporate earnings expectations yet- earnings estimates have actually risen through quarter-end. This resulted in stocks becoming cheaper this month: S&P 500 is down -5% in March, but with 2026 earnings expectations increasing, has taken the forward P/E ratio to roughly 19x forward earnings (peaked over 23x in October 2025).

    Sources: Morningstar, Average S&P 500 Stock = S&P 500 Equal Weighted TR Index, US Large Caps = S&P 500 TR Index, US Small Cap = Russell 2000 TR Index, Developed International = MSCI EAFE NR Index, Emerging Markets = MSCI Emerging Markets NR Index, Core Bonds = Bloomberg US Agg Bond TR Index, US Large Growth = Russell 1000 Growth TR Index, US Large Value = Russell 1000 Value TR Index

    The bond market experienced a month of positive correlation to the stock market in March: core bonds decline with equities, albeit to a lesser degree (Bloomberg Barclays Agg Bond TR Index fell -1.76% in March, taking 1Q2026 to -0.05%). This was primarily because of the short-term increase in inflation expectations due to rising energy costs, which reduce the probability of interest rate cuts in 2026. As of 3/31/2026, futures markets were pricing zero interest rate cuts from the Federal Reserve, a sharp change from the start of 2026. Also, within fixed income, private credit investments continue to come under pressure from significant investor redemptions, as investors become cautious on the asset class after years of significant asset growth.

    Other diversifying asset classes also struggled. After a strong 12-18 months, gold prices declined in March (Spot gold prices declined -10.85% during the month). Cryptocurrencies faired modestly better in March but are still experiencing a challenging period: Bitcoin rose +3.38%% in March, but is still down -22.55% in 2026.

    Equity Markets & Energy Shocks

    The current supply disruption of oil (and natural gas) is the most significant in history, with nearly 20% of the world’s daily oil supply being removed from the market. This has pushed energy prices sharply higher: the price of Brent crude oil rose over 55% higher March, the largest monthly percentage increase in its history. Naturally, the relationship between equity markets and energy shocks has come into focus in 2026.

    It is important to note that this relationship has evolved somewhat over time: for example, the United States is the largest single country producer of oil and natural gas today (22% share), an increase from the energy shocks of the 1970’s. Energy sensitivity at the consumer level is also lower today compared to 50 years ago: energy expenditures as a share of disposable income was roughly 5.9%, compared to the 1984 peak of 10% of disposable income.

    Sources: Capital Group, U.S. Energy Information Administration. Data includes petroleum and other liquids such as biodiesel, ethanol, liquids produced from coal, gas, and oil shale, Orimulsion, blending components, and other hydrocarbons. Latest data available is 2024 as of February 28, 2026. 

    Looking at seven oil shocks since 1990 (not counting the present), the S&P 500 has typically traded lower following the start of the rise in oil prices. However, one year after the disruptions, the S&P 500 has averaged a 12% return. The greater question is whether the supply shock is severe enough to push the economy into a recession (similar to the 1970s episode), which could result in greater downside for the S&P 500. Prompt resolution to the significant supply shock is paramount to equities following the underlying fundamental strength they had to start 2026.

    What’s Ahead for the Second Quarter?

    Investors will be closely monitoring for any potential resolution of the oil supply shock; prolonged remove of supply risks pushing energy prices even higher. The higher energy prices have moved short-term inflation expectations higher, which is expected to keep the Federal Reserve from cutting rates in the Second Quarter and beyond. Mid-term elections are also inching closer, which historically has been a source of short-term volatility for equity markets.

    Relative weakness in Technology and AI will also be closely watched by investors: expected AI-related capital expenditures in 2026 nearly reached a massive $700bn but may be showing signs of having peaked. Related to this is the on-going pressure in the private credit space, which grew significantly in size over the last five years.

    Overall earnings are still expected to be strong – nearly 13% earnings growth expected for 1Q2026 (which will be released during the second quarter). Earnings have bucked the energy shock to date, likely reflecting expectations of a prompt resolution.

    *Past performance is not indicative of future results. The S & P 500 Index is a broad, unmanaged index of 500 of the largest US publicly traded companies and does not reflect the impact of fees, taxes or expenses. Any investment in the S&P 500 or similar indices, like the Russell 1000 and Russell 2000, involves risk, including the potential loss of principal and they do not reflect the costs of investing in an actual portfolio. Investors should consider their individual risk, tolerance, investment objectives, and consult with a financial professional before making investment decisions.

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    William Winkeler

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  • Market Recap: February 2026

    Month in Review

    • Value and international equity markets continued their strength in February, extending the strong start to 2026 for diversified portfolios.
    • The S&P 500 TR Index declined -0.76% for the month, with technology and growth stocks again weighing on the index. Large cap growth stocks declined -3.36% in the month of February, taking 2026 returns to -4.82% (Russell 1000 Growth TR Index)
    • Equities outside of large cap growth again showed strength. Within the large cap space, value rose +2.59% in February (Russell 1000 Value TR Index), small caps rose +0.80% (Russell 2000 TR Index), and international equities led major equity indices at +5.02% during the month (MSCI ACWI Ex-USA NR USD Index)
    • Bond markets benefitted from a decline in interest rates across the yield curve, driving the core bond index to a strong +1.64% monthly gain (Bloomberg Barclays US Aggregate Bond TR Index)

    Stock Market & Geopolitical Events

    One of the more well-known investing adages is the “stock market climbs a wall of worry”, which is particularly appropriate for times of geopolitical conflict such as the present.

    Acknowledging the human impact of geopolitical events, history shows that the impact to equity markets tends to be short-lived. Looking at the period since the S&P 500 was incepted, excluding the present conflict in Iran, the S&P 500 has declined an average of -5.3% over 11 trading days following the start of major geopolitical events (shown in the table below).

    Historically following the initial sell-off, investors digest the fundamental impact to the stock market (which tends to not be long-lasting in nature), and the stock market exhibits some symmetry – recovering the initial loss in an average of 12 trading days. While conflicts like the present can exhibit immense human cost, history shows that the stock market will continue to climb the wall of worry.

    S&P 500 Selloffs Around Geopolitical Events

    What’s on Deck for March?

    • The Federal Reserve meets on March 18th, but as of the time of writing, investors are pricing in a 97% probability of no interest rate cuts. Current pricing indicates expectations of two 0.25% rate cuts in 2026.  
    • Following earnings season, expectations for capital expenditures on AI technologies reached new extremes. The five “Hyperscalers” (Amazon, Alphabet, Meta, Microsoft, Oracle) have guided roughly $700bn of capex in the next 12 months. If realized, this would be one of the larger investment outlays relative to GDP in modern history (~2% of GDP). Investors are paying close attention to efficacy of this record investment.

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    William Winkeler

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  • Market Recap: January 2026

    Month in Review

    • Diversification was the name of the game in January, with value stocks, small cap stocks, and international stocks leading markets higher, as the S&P 500 finished January up +1.45% (S&P 500 TR Index)
    • Weakness in Technology stocks continued for the second straight month, causing the large cap growth stock index to fall -1.51% in January (Russell 1000 Growth TR Index). In contrast, large cap value stocks started 2026 strongly, with the Russell 1000 Value TR Index rising +4.56% in January.
    • Small caps and international stocks continued their strength as well, with the small caps rising +5.35% (Russell 2000 TR Index) and international stocks rising +5.98% (MSCI ACWI Ex-USA NR USD Index) in January.
    • Bond markets were nearly unchanged during the month (+0.11%, Bloomberg Barclays US Aggregate Bond TR Index), as investors balanced the steady decline in inflation with the nomination of a new Federal Reserve leader.

    US Dollar Continues to Weaken

    The US dollar continued to decline versus major currencies in 2026, falling roughly -2% in January. The decline in 2026 follows-up a decline of 9.4% in 2025, which was the worst calendar year for the dollar since 2017. There are many potential causes to the decline over the past 13 months, such as: changes in interest rates, starting valuation of the dollar, and changes to the fiscal outlook for the United States. The decline also has tangible impact on stock and bond markets, particularly coming off of a bull market for the dollar that lasted from March 2008 to September 2022.

    For stock markets globally, the effect of the decline is two-fold. For US-based companies, especially large cap stocks in indices such as the S&P 500, a weakening dollar does boost earnings growth for these companies (unlike the US economy, S&P 500 Index generates 30% of sales from overseas).

    For international equity markets, it has been a boon for US-based investors. US-based investors owning international stocks have three sources of return: share price + dividend yield + currency impact. The depreciation of the dollar added almost 8% to the return of the international stock market for US-based investors in 2025 (+32.39% in 2025, MSCI ACWI Ex-USA NR USD Index). This continued in January with a roughly 1.4% boost via currency (+5.98% in January, MSCI ACWI Ex-USA NR USD Index). Continued weakening of the US dollar could be a positive factor for US investors that own international stocks. For commodities and currency alternatives, dollar weakness has been a mixed bag: gold shined (+9.31% in January, S&P GSCI Gold Spot Index), while Bitcoin struggled (-4.29% in January, S&P Bitcoin USD).

    Source: Bloomberg, FactSet, J.P. Morgan Asset Management; Currencies in the DXY Index are: British pound, Canadian dollar, euro, Japanese yen, Swedish krona and Swiss franc.

    What’s on Deck for February?

    • Earnings seasons covering the fourth quarter of 2025 continues in February, with the majority of the Index’s market capitalization reporting in late January and early February. AI-related investment and consumer strength will be the key themes watched by investors.
    • The Federal Reserve Open Market Committee (FOMC) held interest rates constant in January. Kevin Warsh was nominated to serve as the next Chairman of the Federal Reserve – he will begin the confirmation process.

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    William Winkeler

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  • Fourth Quarter 2025 Market Recap

    Markets Power Higher Through Noise

    • The longest government shutdown in history, slowing job creation, and concern over sustainability of AI investment did not slow down equity markets in the Fourth Quarter.
    • Record concentration in the S&P 500 in the US, driven in large part by the enormous spending on AI, caused some volatility during the quarter. Market concentration will likely be closely watched by investors in 2026.
    • Ultimately, stock and bond markets finished 2025 on a high note, particularly for diversified investors: international equity markets posted strongest relative results to the US in over 30 years.
    • Strong finish and year was supported by fundamentals: higher earnings growth internationally, and strong earnings in the US that allowed the market to “grow” into historically expensive valuations.

    What Happened in the Fourth Quarter and 2025?

    The Fourth Quarter of 2025 finished on a strong note, with all major equity markets finishing in positive territory. This is despite an increase in volatility in October and November, following the longest government shutdown in US history, and investor concern around the sustainability of the massive investment in Artificial Intelligence. The government shutdown resulted in some economic data being suspended, but alternative measures showed that the economy was creating fewer jobs during the fourth quarter. In the stock market, strong earnings were the name of the game throughout 2025- outside the US, there was a strong embrace of fiscal stimulus, which powered earnings growth higher in Europe and Japan. The stronger-than-expected earnings growth, along with a weakening US dollar, resulted in international equity markets having their best relative results to the US since 1993 (via MSCI World Ex-US Index and S&P 500 Index). In the US, the S&P 500 started the year historically expensive and stayed that way throughout 2025, ultimately producing a third consecutive year of double-digit gains (historically rare occurrence). The S&P 500’s valuation largely stayed constant during 2025, reflecting strong growth in earnings that was responsible for nearly all of the index’s 2025 results. The growth-driven market did result in the trailing dividend yield on the S&P 500 Index hitting its lowest point since 2000 (1.20%), in contrast to higher yielding international equity markets.

    Sources: Morningstar, Average S&P 500 Stock = S&P 500 Equal Weighted TR Index, US Large Caps = S&P 500 TR Index, US Small Cap = Russell 2000 TR Index, Developed International = MSCI EAFE NR Index, Emerging Markets = MSCI Emerging Markets NR Index, Core Bonds = Bloomberg US Agg Bond TR Index, US Large Growth = Russell 1000 Growth TR Index, US Large Value = Russell 1000 Value TR Index

    The bond market was a benefactor of falling inflation and interest rate cuts from the Federal Reserve, resulting in the bond market (Bloomberg US Agg Bond Index) having its strongest calendar year since 2020, finishing comfortably above cash for the year. Short-term interest rates have fallen faster than long-term interest rates (“steepening yield curve”), as the Fed delivered three rate cuts in 2025 (following three cuts in 2024). Investment grade and high yield bonds also had a strong quarter and year, with spreads falling to low levels as the economy continued to grow. The outlook for additional rate cuts shifted during the quarter, with a roughly 60% chance of a 0.25% rate cut in March 2026 priced by the market (as of 1/1/2026).

    All About Artificial Intelligence

    The investment in Artificial Intelligence technologies is on track to be the largest investment in US infrastructure in 100 years. The magnitude of investment had an impact on both the economy and stock market in 2025. For example, the chart below illustrates capital expenditures by the Technology sector as a percentage of US gross domestic product (GDP). It compares the current investment in AI technologies to other major infrastructure investment cycles historically – the current is significantly higher than the amount invested in Interstate highways and the Apollo Space Project, for example.

    Source JPMorgan,: Manhattan District History, BEA, Planetary Society, Eno Center for Transportation, San Francisco Fed, Hoover archives, Baruch, GoldenGate.org, New York Times

    This had a tangible impact on economic data: investment in AI data centers was responsible for almost all of the economic growth in the first six months of 2025, more than consumer spending which is 2/3 of long-term GDP growth!

    As discussed in previous editions of Market Pulse, the massive investment from Technology companies has also had a profound impact on equity market results and composition. In the United States, this has meant an increasingly concentrated equity market (over 40% of the S&P 500’s value is in ten companies), and a continuation of the outperformance of larger companies versus smaller companies. For example, the S&P 500 has outperformed the S&P 500 Equal Weight Index (average stock) by 34% over the past 3 years, the widest 3-year performance gap in history. US large cap stocks also outperformed small cap stocks in 2025, marking the 5th consecutive year of large cap outperformance. Investors expect there to be benefit to other companies within the stock market, forecasting a narrowing gap of earnings growth between the 10 largest companies and the rest of the stock market.

    What’s Ahead for the First Quarter?

    Investors will be watching for early clues in the tug-of-war going on between slowing job growth and expectations of a reaccelerating economy through the stimulus from the One Big Beautiful Bill Act (OBBA). The latter is expected to produce higher-than-average Federal tax refunds, which should be a boost to consumer spending. On the other side, expectations are for job growth to slow to under 50,000 new jobs per month, one sign the economy is slowing down. Inflation is a key reason the market is only expecting one 0.25% rate cut in the first quarter: core inflation is falling but remains stubbornly above the Federal Reserve’s target level of inflation. The equity market is coming off another year of strong results: the S&P 500 had double digit returns for three consecutive years for just the 9th time since 1928. Investors will look for signs of broadening participation from smaller companies, and improvement in earnings growth outside the mega-cap Technology companies.

    Past performance is not indicative of future results. The S & P 500 Index is a broad, unmanaged index of 500 of the largest US publicly traded companies and does not reflect the impact of fees, taxes or expenses. Any investment in the S&P 500 or similar indices, like the Russell 1000 and Russell 2000, involves risk, including the potential loss of principal and they do not reflect the costs of investing in an actual portfolio. Investors should consider their individual risk, tolerance, investment objectives, and consult with a financial professional before making investment decisions.

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    William Winkeler

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  • November 2025 Market Recap | Confluence Financial Partners

    A review of November’s markets, including AI hyperscaler volatility, bond trends, and what to watch at the December Fed meeting.

    November 2025 Market in Review: AI investment, Bond Performance, and Equity Markets

    Month in Review

    • The shifting economic outlook and renewed attention to the magnitude of artificial intelligence (AI) investment made for a volatile month for equity markets.
    • US large caps managed to finish the month slightly in “the black” (S&P 500 TR Index; +0.25% in November), despite Technology stocks falling -4.3% during November (S&P 500 Information Technology Sector Index).
    • The weakness in Technology stocks weighed on large cap growth stocks, which fell -1.81% during the month (Russell 1000 Growth TR Index), while large cap value stocks rose +2.66% in November (Russell 1000 Value TR Index).
    • The shifting interest rate outlook was a tailwind to major bond markets, with the Bloomberg Barclays Aggregate Bond TR Index rising +0.62% during the month, taking 2025 returns to +7.46%.  

    AI Hyperscalers Pullback

    AI-related companies, including the so-called AI-“Hyperscalers”, sparked an increase in volatility and a pullback of -5% at one point for US large cap stocks in November. While pullbacks of this magnitude are very common, investors appear to be paying close attention to the rapid increase, and shifting make-up, of the capital expenditures on artificial intelligence technologies.

    Magnificent 7 stocks, and particularly the smaller sub-set of Hyperscalers, are broadly defined as the market leaders in AI investment technologies. They have also powered the S&P 500 Index higher, as they become an increasingly large percentage of the index. To-date, these companies have had above-market earnings growth and reached an expected $500bn of capital expenditures in the next 12-months, having previously done so without significant use of debt and borrowing. That changed starting in September.

    Since September, the Hyperscalers have issued nearly $90 billion of investment-grade bonds, more than they had sold over the previous 40 months. Investors are watching the shift from cash-flow funded to debt funded capital expenditures closely. It is important to note that earnings for these companies have largely kept up with share prices to-date; a difference from 1999-2000 when share prices rose rapidly ahead of earnings growth. However, given the highest concentration in over 50-years in the S&P 500 Index, investors continue to watch developments in artificial intelligence closely.

    What’s on Deck for December?

    • The Federal Reserve Open Market Committee (FOMC) meets December 9-10 where they will announce any changes to policy. At time of writing, financial markets are pricing a roughly 85% chance of a 0.25% interest rate cut.  
    • Investors continue to digest economic data following the end of the government shutdown. Some data releases over that period will not be released on a permanent basis.

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    William Winkeler

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  • Market Recap: Q3 2025

    A Review of Investment Trends and Insights

    Record Concentration

    • Federal Reserve reduced interest rates for the first time since 2024 following weakening labor market data.
    • Declining interest rates helped drive US small cap stocks and bond markets higher during the quarter.
    • Investment in artificial intelligence drove the S&P 500 to record concentration levels as leadership narrowed in the Third Quarter.

    What Happened in the Third Quarter?

    The first interest rate cut since the end of 2024 and why it happened were important events in the Third Quarter of 2025. The Federal Reserve had been consistent with their messaging – interest rate cuts would largely be determined by any weakness in the labor market. During the quarter, there became signs the labor market was slowing down. There were large revisions to previous estimates of job creation, showing that the economy had created fewer jobs than first assumed. With inflation still comfortably above their 2% target, Federal Reserve officials were still comfortable reducing the Federal Funds Rate by 0.25% in September, reflecting the slowing jobs market. During the lead-up to the interest rate cut, equity markets were led by interest-rate sensitive markets such as small caps, which had strong results during the quarter (Russell 2000 TR Index rose +12.39%). Bond markets also benefitted from the decrease in interest rates, with the Bloomberg Barclays US Aggregate Bond TR Index rising +2.03% during the quarter. Leadership within the S&P 500 Index narrowed again during the quarter, as the largest companies (and most exposed to artificial intelligence investments) drove the index higher – detailed more below.

    Index Diversification in the Spotlight One defining characteristic of the past three-to-five years in the US equity markets is the increasing concentration in the S&P 500.  The degree to which the S&P 500 has narrowed has led to many investors asking “is an S&P 500 Index investment still diversified?”. By any measure – the S&P 500 Index is more concentrated in the largest companies than any other time since at least the mid-1960’s.

    The top 10 companies in the S&P 500 make up 40% of the index market capitalization- meaning for every $1 invested in the S&P 500 Index, $0.40 goes into 10 companies. This compares to an average top 10 concentration closer to 23% over the past 30 years. Similar measures reflect the magnitude of concentration: Nvidia became the first 8% or greater position since IBM in 1969, Top 5 companies reached almost 28% of the index (highest since at least 1966).

    The “why” of index concentration is also an important question- JPMorgan and Berkshire Hathaway are the only two Top 10 members that aren’t technology/technology-related companies. The significant capital expenditures related to artificial intelligence has shaped market composition: Magnificent 7 companies have doubled their annual capital expenditures since 2023. Investors will continue to be focused on the return-on-investment of this record investment, as well as the benefit to the other 490+ companies in the equity market.

    Impact of US Dollar Trends

    After falling almost -11% in posting its worst first half of a year since 1973, the US dollar rallied mildly during the Third Quarter. The weakness in the dollar has been a tailwind for international assets, such as international equities in investor portfolios. Converging growth rates and interest rate differentials globally, along with the high starting value of the US dollar heading into this year, leaves the possibility for an extended period of weakness, similar to 2002-2008. This period was also the last time international equities outpaced US equities for an extended period of time. Outside of currency trends, unlike the S&P 500 the international markets have a much lower degree of concentration in the largest companies: MSCI EAFE Index has roughly 12.7% of its market capitalization in the Top 10 holdings.

    What’s Ahead for the Fourth Quarter?

    Monetary policy is squarely in investors’ focus heading into the Fourth Quarter of 2025, with two subjects in focus. First, the path of interest rate cuts: what is the likely hood of additional interest rate cuts in 2025? With weakening in job market data in September, investors were assigning a high likelihood of rate cuts (0.25%) during the October and December Federal Reserve Open Market Committee meetings. This would mean an additional 0.50% reduction in short-term interest rates by the end of 2025, which would lower the yield on cash/cash-related investments (i.e. money market investments). Second, the composition of the Federal Reserve is also in focus, via both terms ending and attempts to replace members prior to the end of their respective term. This will have a significant impact on additional interest rate cuts heading into 2026.

    Markets in Review

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    William Winkeler

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  • Federal Reserve Cut Rates – Now What?

    As expected, the Federal Reserve reduced the Federal Funds rate by 0.25% today, the first rate cut since December 2024. What can investors expect going forward following the reduction in short-term interest rates? First off, some of the impact is “priced in” in advance of the actual rate cut, as investors and financial markets are forward-looking. That being said, there are some general reactions to expect:

    Short-Term Savings and Liabilities

    • There will be a very tangible effect here – the yield or interest on short-term savings vehicles such as money market funds will drop relatively quickly to reflect the lower rate from the Federal Reserve.
    • Floating-rate loans (i.e. home equity lines of credit, securities-based loans, credit card loans) are often based on Secured Overnight Financing Rate (SOFR) (replaced LIBOR), which tracks Federal Funds rate closely. There should be a reduction in the interest on floating rate loans.

    Mortgage Rates

    • Fixed rate mortgages are the dominant structure in the United States, and the impact of lower Federal Funds rate can be limited on 15-year and 30-year mortgages.
    • These types of fixed mortgages are based off the yield of longer-term Treasuries, plus a risk spread associated with underwriting and issuing the mortgages.
    • Longer-term Treasuries reflect expectations for future economic growth and inflation and are not set by the Federal Reserve.
    • This is also an example of investors pricing-in future events: 30-year mortgage rates hit their lowest level of the year before the interest rate cut was announced.

    Stock and Bond Investments

    • The impact on the stock market can vary- certain sectors and size companies have a greater sensitivity to short-term interest rates. The catalyst for the rate cut is more important for the stock and bond markets- i.e. are the rate cuts due to an impending recession?
    • For example, small cap stocks use significantly greater floating rate financing compared to large cap stocks. Falling short-term interest rates are expected to boost small cap stock earnings. This is one reason why small cap stocks have outperformed large cap stocks in the US since June 30th.
    • Bond investments will generally benefit from the interest rate cuts but like fixed mortgages, the exact impact is more nuanced. When prevailing interest rates fall, the value of existing bonds increases in value. The benefit for bond investments will be reduced if longer-term yields stay higher or increase, similar to what happened after the rate cuts in 2024.

    Rate cuts bring both opportunities and challenges, and staying informed and proactive can help you navigate the shifts with confidence. Since every situation is unique, we’d be glad to review how these changes may affect your goals—let’s start the conversation.

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    William Winkeler

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