SCHNEIDER INSURANCE UPDATE
Quarterly Market Wrap – October 2025
At the Edge of a Cycle: AI Euphoria Meets Economic Reality
Despite concerns of an AI bubble, major market indexes have once again risen to near all-time highs. Yet beneath the surface, troubling economic signals continue to build—and they appear to be gradually accelerating rather than fading.
Welcome to our quarterly market wrap, where we step back to review what we see happening economically and what it could mean for investors.
The TL;DR: End of a Cycle
The short version for those who prefer to avoid the technicals: we appear to be approaching the end of an economic growth cycle. This cycle has been extended—perhaps artificially—by a surge in AI-driven spending. And while the AI craze may actually result in substantially higher profitability in some areas, it will undoubtedly cause major turmoil in others. Accordingly, the need for professional management of your money has never been greater.
Cycles Colliding: Growth, Technology, and Demographics
History reminds us that booms don’t last forever. This time, however, the normal economic cycle is colliding with a massive technological cycle—AI, automation and soon robotics — that will reshape industries whether we’re ready or not.
Add to that the demographic cycle: aging baby boomers and pre-retirees are set to play a larger role in market flows, shifting how money enters (and exits) equities.
Markets, remember, are forward-looking. Rising stock prices are essentially bets on future corporate growth. Over the past several years, those bets have centred heavily on technology, creating a feedback loop that has driven the valuation of technology firms to what many analysts consider to be unsustainable levels.
The Rise (and Risk) of the “Magnificent Seven”
The so-called “Mag 7” technology giants have grown from a modest share of the S&P 500 a decade ago to commanding roughly 34% of the index today. This dominance has forced pension funds, index funds, and other passive investors to keep buying these names, further inflating prices.
Consider OpenAI: It’s now the most valuable private company in history. Yet it’s not profitable, with only roughly $12 billion in revenue. As billions more are needed annually just to cover costs, it’s not hard to see why many view this as a bubble, especially given that Chinese competitors like DeepSeek and Alibaba continue to release free or near-free open-source alternatives.
Costs Starting to Drive Inflation, Increasing Risk of Recession
Inflationary pressures are rising both from tariffs but also energy costs.
We’re seeing a slow, destructive inflationary cycle: capital chases returns in AI stocks, which pushes up energy use and costs, which in turn erodes consumer discretionary spending and thus profitability elsewhere in the market. Discretionary budgets shrink month after month as housing starts falter, job numbers weakening, and auto defaults are rising.
It’s equally important to remember that it is consumers who drive 70% of GDP. They are increasingly strained. The result? Roughly 10% of consumers are now driving half of GDP. If and when their spending slows, the impact will reverberate.
Government Debt and Funding Strains
As we’ve pointed out in the last few updates, the U.S. government now faces roughly $6.5 trillion in rollover debt by year-end. Traditional buyers—China, Japan, Saudi Arabia—are hesitant, wary of the weakening dollar and shaky balance sheets. So the U.S. government is buying its own debt – which on the surface looks wise as it is retiring longer-term term more expensive debt with shorter-term lower lower-priced treasuries. This forces more reliance on short-term debt, increasing long-term risk should the U.S. dollar fall too far.
Even with interest-rate cuts, long-dated bond yields remain elevated. Mortgage rates, tied to the 10-year Treasury, stay stubbornly high. Banks, far from loosening credit, are actually tightening in many cases. With the recent bankruptcies of two major auto parts/financing firms, credit is likely to continue to tighten. So, in other words, the credit environment is overall worsening just as consumers need relief.
Wall Street vs. Main Street
There’s little question that things are deteriorating economically little by little, so it would be reasonable enough to wonder why investors aren’t running for the exits? Famed investment manager Peter Lynch once said…
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
It’s a reminder that Wall Street is not Main Street. Stock prices may remain buoyed for years while demand destruction quietly unfolds. Companies are already ramping up automation to cut costs, which in many cases should boost profits in the short term – at the expense of laid-off workers who will eventually have less to spend. However, in the short run, AI may drive significant profits to the bottom line.
The same can also be said for inflation. While it inflates prices, which hurt consumers, it also has historically driven asset prices higher.
Remember, historically significant technological changes have always created significant angst within traditional workforces. Over time, however, the changes have undisputedly led to greater prosperity for almost everyone.
So What Investors Should Do
So what does this mean for investors? With massive changes on the horizon from AI it’s clear that there will be some significant winners, but also major losers. It’s likely that broad index exposure won’t be enough. We believe we’re entering a cycle of stock-picking—of identifying companies with exponential growth and/or defensible business models with true competitive moats.
That’s where professional management matters most. Portfolio managers have increasingly started to diversify into non-traditional asset classes. Many have also begun the process of trimming exposure to overpriced tech, rotating into dividend-producing companies with more sustainable business models, and adding value-oriented positions that have historically performed better in downturns.
While nothing is immune to massive marketing swings, our portfolios lean more conservatively by design, with a focus on capital preservation. Rotation is part of every natural market cycle, and today it is essential.
The Road Ahead
No one can time the exact moment when a bubble deflates. But history teaches us three lessons:
- Bubbles never last.
- Winners emerge from change.
- Inflation drives prices of both consumer goods and assets over time.
New giants will rise. The challenge—and opportunity—will be finding them early.
So expect volatility. Rely on your professional managers to navigate it with the goal of protecting your capital while gradually positioning your portfolio for the next cycle of growth.
As always, if you have questions or concerns and want to discuss your situation, we’re here.
Mark, Sean, Cass, Nancy, Simone
