The third quarter brought continued strength across asset classes, with many of the themes we have been watching throughout the year extending into the fall. A notable development has been the shifting posture of the Federal Reserve. After years of what often felt like a singular focus on bringing inflation down, policymakers are now placing greater weight on the softening labor market. While inflation remains above target, Fed officials have acknowledged that risks to employment are beginning to play a larger role in policy discussions. This represents a subtle but meaningful evolution in how the Fed is approaching its dual mandate and its corresponding impact on financial markets.
Another important dynamic has been the sustained wave of investment into artificial intelligence. Spending on data centers, cloud infrastructure, and AI applications has become a significant contributor to overall economic activity. Thus far, the largest technology companies have been able to fund these buildouts primarily from cash flow, which has kept leverage contained. This stands in contrast to smaller competitors, who have been more reliant on borrowing and fundraising in the space. From our perspective, the ability of these hyperscale companies to invest without overextending balance sheets has been a healthy backdrop for capital markets. We would, however, become more cautious should the cycle shift toward greater reliance on debt-funded expansion.
Despite these supportive forces, we remain mindful of the broader backdrop. Equity valuations sit above historical averages, leaving less margin for error if growth slows or policy uncertainty reemerges. Inflation progress has been steady but uneven, which suggests that while the Fed may now be tilting toward easing, it is likely to do so gradually and with caution. As we move into the final stretch of the year, we believe the combination of resilient growth, a more balanced Fed, and transformative investment in AI provides reasons for optimism. At the same time, we continue to expect periods of volatility, which we view as a natural part of the investment landscape.
Information in this commentary is gleaned from third-party sources, and while believed to be reliable, is not independently verified. This content is not intended to be tax, legal, investment, or fiduciary advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this material may not be suitable for all investors. Bernardo Wealth Planning recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. Past performance does not guarantee future results.