Research Sector Update: Encouraged by numerous secular growth trends

The stock market rallied in the third quarter on strong corporate earnings and relatively stable U.S. economic growth. Investors moved away from their worst-case fears about U.S. trade policy, which boosted the performance of risk assets.

The Fed started to lower policy rates during the quarter, which may reduce funding costs while providing a tailwind for market sectors such as residential construction. Additionally, we have been encouraged by positive economic news outside of the U.S., especially in Europe, which may offer opportunities for companies with international exposure.

As we look ahead, we will continue to monitor shifting macro and policy currents and their impact on companies.

Technology: AI remains a powerful source of investment opportunities

Denny Fish and Jonathan Cofsky

What happened: Tech stocks were notable performers in the third quarter as continued strong capital spending on AI provided an earnings tailwind for leading hardware, semiconductor, and semiconductor equipment companies. We also saw increased usage of AI applications, particularly for companies with leading large language models (LLMs). At the same time, investor concerns over an AI-related competitive disruption pressured shares of application software companies.

Looking ahead: The emergence of AI has been a major driver of technology stocks over the past three years, as investors scrambled to gain exposure to this generational opportunity. We see AI as a multi-decade secular trend that has the potential to be more transformative than mobile and cloud.

At the same time, we recognize we could see ebbs and flows in AI capital investment. Industry growth may face bottlenecks, such as the availability of power and the pace of data center development, that could impact how quickly new AI capacity can be added. For this reason, we expect AI demand to far outpace supply.

Additionally, we believe the market has entered the second stage of the AI investment cycle as advancements in LLMs and updated business strategies have enabled investors to better assess the prospects of individual market segments and companies. We expect continued strong growth potential for companies in the AI semiconductor supply and support chains, as well as for hyperscalers and developers of infrastructure software that can help enterprises structure their data for AI.

Energy & Utilities: Powering AI’s expansion

Noah Barrett

What happened: Energy and Utilities stocks lagged the broader MSCI ACWI Index in the third quarter. However, energy stocks outperformed crude oil prices, which declined on concerns about market oversupply heading into a period of seasonal demand weakness.

Looking ahead: We believe energy companies are well equipped to weather a period of lower prices until supply/demand fundamentals improve. Notably, we believe companies with high-quality, long-duration assets are underappreciated by the market. We expect companies with decades of low-cost investment opportunities to be relative winners through the cycle.

We believe utilities stocks could receive increased attention from investors given the tremendous power requirements of AI. We see no signs that AI-related capital investment or data center buildout is abating, and we believe the AI complex will remain a large consumer of electricity. In our view, this demand, combined with the ongoing electrification of the broader economy, makes a strong case for investing in utilities, especially companies with exposure to unregulated power markets. While regulated utilities have less direct exposure to these trends, we see the potential for multiple expansion for these stocks given the expected strength and duration of the power growth theme.

Communication Services: AI and digital disruption are powerful themes

Josh Cummings

What happened: The Communication Services sector delivered strong performance in the third quarter, outpacing the broader MSCI ACWI Index. Google parent company Alphabet was a standout performer in the sector as the stock rebounded on reduced fears about disruptions to the Search business and the company’s positioning for an AI future. Netflix was a relative laggard in the quarter following a run of very strong earnings growth and share price gains. Meta Platforms was also a relative underperformer as concerns around its growing capital spending overshadowed strong growth in advertising revenues.

Looking ahead: In the near-term, we will continue to monitor economic fundamentals, such as slowing job growth and the potential inflationary impact of tariffs, which could impact cyclical market segments such as the advertising ecosystem. We remain upbeat on the long-term outlook for the communications services sector. We are especially excited about opportunities around AI, which we believe has the potential to be even more pervasive and value-generating than the market now expects. Within the communication services sector, we anticipate continued consolidation around the largest digitally native platforms that are best equipped to attract both content (supply) and users (demand).

Industrials: Focusing on stable growers and self-help stories

David Chung

What happened: Industrials stocks extended their strong year-to-date performance but underperformed the broader market in the third quarter. Despite this underperformance, we saw no significant deterioration in company outlooks or fundamentals. Indeed, recent data indicated that industrial activity remained relatively stable despite concerns about tariffs.

Looking ahead: We expect investors to be on the lookout for any indications of a cyclical recovery, especially if lower interest rates provide a tailwind for consumer and business spending. We remain alert for signs of strengthening industrial activity while we monitor developments around tariffs, geopolitical stability, and consumer and business confidence.

For our part, we continue to prioritize companies exposed to secular themes such as commercial aerospace and electrification. While valuation multiples for such companies have seen some expansion, we remain excited about strong revenue growth potential that may flow through to higher margins and profits. Given lingering economic uncertainty, we also favor companies that are making operational improvements or are exposed to unique catalysts that may drive stable profit growth even in uncertain times.

Financials: Cyclical and secular global trends creating opportunities

John Jordan

What happened: Financials stocks participated in the broad third-quarter rally, supported by signs of resilient economic growth and consumer spending. We also saw improved capital markets performance and an increase in initial public offerings.

Looking ahead: In our view, the global financial services sector continues to offer a rich landscape in which to deploy our deep fundamental research. We have continued to see favorable cyclical trends across many areas of the global financial markets. These include relatively low levels of credit losses and delinquencies and attractive pricing for property and casualty insurance. Interest rates also remain well above zero in most major markets.

We are also excited about secular trends such as growth in electronic payments and have seen opportunities for businesses leveraging proprietary data and advanced technologies like AI. Furthermore, we have seen opportunity in several European banks that we believe may benefit from significant capital return, an improved regulatory backdrop, and potential industry consolidation.

Consumer: Bottom-up stock selection remains key to navigating uncertainty

Josh Cummings

What happened: Consumer discretionary stocks outperformed the broader MSCI ACWI Index in the third quarter. Consumer spending growth remained relatively stable as real wages continued to expand for most households. Against this backdrop, we saw standout share price performance by companies such as home furnishings retailer Wayfair, automotive parts seller O’Reilly Automotive, and discount retailer TJX Companies.

Looking ahead: We have been encouraged by resilient consumer spending, especially among higher income households. At the same time, we remain cautious about slowing employment growth and the potential impact of shifting U.S. trade policies on inflation and consumer budgets. Given these crosscurrents,  we are focused on companies with high-quality business models, strong balance sheets, and resilient earnings growth. We have also found opportunities with companies benefiting from secular growth themes such as digitization and AI.

Healthcare: Industry remains committed to innovation

Andy Acker

What happened: The healthcare sector has faced an unusual amount of policy uncertainty in 2025, but we saw several positive developments in the third quarter. Drugmakers received greater clarity on tariffs and a steady pace of drug approvals. Biotechnology companies benefited from clinical progress and increased deal activity, including several multibillion-dollar acquisitions.

Looking ahead: We believe healthcare stocks continue to trade at relatively attractive price-to-earnings ratios, even following the recent rally. We are also excited about a number of developments we could see in coming quarters. In the biotech space, we anticipate a rapid pace of data readouts in major treatment areas, including cancers and neurological diseases, as well as in specialty areas such as myotonic dystrophy and achondroplasia. Above all, we have continued to see a strong industry commitment to innovation that we believe could set the stage for long-term earnings growth and share price gains.

IMPORTANT INFORMATION

Consumer discretionary industries can be significantly affected by the performance of the overall economy, interest rates, competition, consumer confidence and spending, and changes in demographics and consumer tastes.

Consumer staples industries can be significantly affected by demographics and product trends, competitive pricing, food fads, marketing campaigns, environmental factors, and government regulation, the performance of the overall economy, interest rates, and consumer confidence.

Energy industries can be significantly affected by fluctuations in energy prices and supply and demand of fuels, conservation, the success of exploration projects, and tax and other government regulations.

Financials industries can be significantly affected by extensive government regulation, subject to relatively rapid change due to increasingly blurred distinctions between service segments, and significantly affected by availability and cost of capital funds, changes in interest rates, the rate of corporate and consumer debt defaults, and price competition.

Health care industries are subject to government regulation and reimbursement rates, as well as government approval of products and services, which could have a significant effect on price and availability, and can be significantly affected by rapid obsolescence and patent expirations.

Technology industries can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants, and general economic conditions. A concentrated investment in a single industry could be more volatile than the performance of less concentrated investments and the market as a whole.