October 2025 Market Commentary

Markets advanced in September, resisting typical seasonal headwinds as investor sentiment improved amid mixed economic datapoints. The AI hype gained steam as the major cloud providers continued to spend billions on infrastructure. Industry voices are raising concern about a possible AI investment bubble, while the backdrop of a federal government shutdown adds another layer of uncertainty to the macro environment.

The S&P 500 Index defied its typical seasonal trend of September losses, posting gains for the fifth consecutive month.  The Emerging Markets Index extended its nine-month winning streak, delivering its strongest monthly performance in two years. Technology and Communication Services were the best performing sectors in September, notching 7% and 6% gains respectively. The Materials and Consumer Staples sectors were the worst performing sectors, declining 3% each. Bonds were up for the second consecutive month.

Investor Sentiment in the Age of AI Hype

While equity markets have delivered solid year-to-date gains, much of the recent momentum has been fueled by investor enthusiasm around artificial intelligence—an area some experts now warn may be entering bubble territory. Jeff Bezos, the Chairman and Co-Founder of Amazon, recently characterized the current surge in artificial intelligence investment as "a kind of industrial bubble" noting that while many ideas are being funded, both good and bad, AI itself is undeniably real and transformative. He emphasized that bubbles in industrial innovation can be beneficial, as they accelerate experimentation and ultimately yield lasting societal value. This perspective aligns with other tech leaders like Sam Altman (CEO of OpenAI) and Mark Zuckerberg (Chairman/CEO/Founder of Meta Platforms), who acknowledge the frothy nature of AI markets while remaining bullish on its long-term impact. For investors, this signals a need for discernment: while valuations may be extremely stretched in some areas, the foundational technologies driving AI adoption are poised to reshape industries and deliver durable returns. To understand how we arrived at this moment of exuberance and caution, it is worth revisiting the key forces that have shaped AI's rapid ascent.

Nasdaq 100: The AI Rally's Bellwether

Few stock market indices illustrate the AI-driven market narrative more vividly than the Nasdaq 100, which has emerged as the poster child for investor fervor around artificial intelligence. Year-to-date, the index has surged over 50% from its lowest level, reaching an all-time high in recent weeks. This rally has been powered by explosive gains in AI-centric stocks such as Micron Technology (+91%), Palantir (+140%), Broadcom (+120%), and Nvidia (+92%), whose second quarter revenue soared 56% year-over-year to $46.7 billion, largely driven by data center demand.

The top five companies in the market cap weighted index account for 50% of its price movements, with Nvidia alone representing a staggering 14% of the total weight. This extreme concentration underscores both the strength and fragility of the rally, as investors increasingly rely on a narrow group of tech leaders to sustain momentum. The rebound also reflects a broader shift from defensive positioning to aggressive rebalancing and short covering—where investors buy back stocks previously sold in anticipation of price declines.

The Infrastructure Behind the AI Boom: Hyperscaler Data Center Investments

And while Nvidia may be the face of the AI rally, the real horsepower behind its rise and the broader technology sector is coming from the billions being poured into data centers by the world's largest cloud providers. With special thanks to the Technology Strategy team at Robert W. Baird, whose recent client note summarized the scale and scope of hyperscaler spending, here's a breakdown of the investments fueling the boom.

In 2025, The "Big Four" cloud providers—Amazon Web Services, Microsoft Azure, Google Cloud, and Meta—are collectively spending $380 billion, up 53% year-over-year, on data center expansion. In addition, data center spending is projected to grow at an annual rate of 25% over the next five years, reflecting sustained demand for AI infrastructure and cloud capacity.

The scale is staggering. Amazon is projected to spend $96.4 billion with major expansions underway in Northern Virginia and Spain. Microsoft is expected to invest $89.9 billion, including a $3.3 billion AI campus in Wisconsin and a $1.5 billion expansion in Texas to support Azure's growing AI workloads. Google Cloud plans to spend $62.6 billion, with a focus on carbon-free AI infrastructure in Finland and Arizona. Meta is allocating $52.3 billion toward AI model training and sovereign cloud deployments, emphasizing lean operations and platform-level innovation across its services.

These investments are undeniably transformative, laying the foundation for the next era of AI-driven innovation. But amid the excitement, investors must also consider the risks, particularly whether hyperscalers can generate adequate returns on such massive capital outlays. The sheer scale of spending raises important questions about long-term profitability, competitive dynamics, and the sustainability of this infrastructure race.

Potential Risks Worth Watching: Six Black Swans Circling the Market

While the current cycle is marked by optimism and aggressive investment in AI infrastructure, the team at Baird warns that there are six major risks— "large Black Swans flying at 1,000 feet"—that have yet to land in the Wall Street pond. These risks are visible but not yet fully priced into markets, and few investors appear to be looking around the corner for signs of disillusionment reminiscent of the 2000 technology bubble.

1. Revenue Growth vs Profitability

Return on Invested Capital is not defined. The kingpin in so many large deals, OpenAI, is projected to lose $8 billion in 2025. "Believe in the dream" assumptions are driving asset appreciation. Revenue growth, not profits, is the focus, like the 2000 cycle.

2. Tariff Shock and Inventory Costs

The new tariff structure under the Trump administration is beginning to disrupt global supply chains. Higher costs associated with build outs will have to be passed on to the consumer.

3. Power Cost and Overbuild Risk

Utility rates are up 15% year-over-year. Power providers are increasingly asking for large deposits from data center developers, potentially delaying starts.

4. Consumer Blowback

Consumers are recognizing higher utility bills and jobs losses due to AI implementation. The risk is turning political, as securing approval now demands unprecedented levels of community engagement.

5. Free Cash Flow and Debt

Oracle and CoreWeave, two AI-darlings, will generate negative free cash flow for the next three years, forcing the companies to raise additional debt, weakening their creditworthiness.

6. Geopolitical

Iran's nuclear program/proxies still an issue; Israel and the broader Middle East tensions; Russia/Ukraine; China/Taiwan. And now a potential prolonged U.S. government shutdown.

Baird is just one voice on Wall Street, but it's a thoughtful one grounded in deep sector analysis and a willingness to challenge consensus. In a cycle defined by optimism and momentum, their cautionary lens offers a valuable counterbalance worth listening to.

Pricing in a Federal Government Shutdown

The U.S. federal government officially shut down at 12:01am on October 1, after Congress failed to pass funding legislation for the new fiscal year. The impasse stemmed from deep partisan divisions with Republicans pushing for a temporary funding extension without policy add-ons, while Democrats sought the inclusion of extended health care subsidies and reversal of recent Medicaid cuts. This marks the first shutdown since 2019, which lasted 35 days and cost the U.S. economy an estimated $3 billion in lost economic activity.

Over the past 50 years, we've seen 21 shutdowns, averaging about eight days each. The economic impact could be meaningful. Federal workers are furloughed, contractors are sidelined, and key services from food assistance to national parks are paused. If the shutdown drags on, it could dent consumer confidence and delay spending. It may also affect the Federal Reserve's ability to evaluate the economy and set policies.  A data blackout could delay critical reports like the monthly jobs and inflation measuring reports. While markets have largely shrugged off the shutdown so far, investors should keep an eye on Washington if political dysfunction starts to spill into fiscal or monetary policy.

Slowing Economic Growth

We recognize that even a government shutdown costing $3 billion has a negligible impact when measured against the U.S.'s annual economic output of nearly $30 trillion. Nevertheless, the shutdown occurred at a time when the labor market was softening, with multiple indicators pointing to a slowdown in hiring momentum.

In his Notes on the Week Ahead weekly newsletter, J.P. Morgan Asset Management's Chief Global Strategist David Kelly wrote that the last four months have seen average payroll job gains of just 27,000, and that the September jobs report would have shown only a relatively minor bounce-back to a 60,000 gain. (The report was not released because of the shutdown) For comparison, nonfarm payrolls averaged a monthly gain of 310,000 from April 2021 to April 2025. Furthermore, Kelly pointed out that the next few months look more challenging for employment. The 150,000 federal workers who took buyouts in the spring will come off the federal payrolls in the fourth quarter.

Wage growth has also moderated: workers changing jobs saw a 6.6% pay increase in September, the lowest in a year, while those staying put received a 4.5% bump. Concerns over labor market softness and the economic impact of the recent federal government shutdown have pushed the Fed funds futures market pricing in a 100% probability of a 25-basis point (1 basis point equals 0.01%) rate cut later this month and an 88% probability of another 25-basis point rate cut in December. However, there is a wide range of views among policymakers, with some expecting more cuts and others expecting fewer or even a rate hike in 2026. In sum, the U.S. jobs market appears to be entering a phase of deceleration, with hiring slowing, wage growth easing, and policymakers preparing to respond with monetary stimulus.

Looking Ahead

The upcoming weeks are expected to be active with the release of several important economic reports, including September's Consumer Price Index (CPI), Producer Price Index, and Retail Sales figures. Although the Federal Reserve has recently prioritized labor market stability, inflation continues to play a central role in shaping its policy decisions. September Core CPI is forecasted to rise 3.1% on a year-over-year basis, consistent with the July and August readings. Upside risks for this month's report include persistent services and shelter inflation, and global trade and geopolitical events. These factors could push inflation higher than anticipated, influencing the Federal Reserve's future policy decisions.

Retail sales serve as a vital barometer of consumer spending, which accounts for roughly two-thirds of our economic activity. The U.S. consumer has shown remarkable resilience this year, with strong spending despite economic headwinds. Retail sales figures handily exceeded expectations each of the last three months, but September's estimate calls for a meaningful slowdown. Daily consumer spending data shows falling momentum in tariff-sensitive goods and discretionary categories. From an investment perspective, slowing retail sales can pressure corporate earnings, especially in consumer discretionary sectors.

In summary, while the current environment presents notable headwinds—from negative free cash flow pressures in leading AI companies to geopolitical uncertainties and the economic fallout of a federal government shutdown—there are also reasons for guarded optimism. The U.S. economy remains resilient on a large scale, and policymakers are prepared to respond with monetary stimulus as needed. However, with softening labor market indicators and ongoing political divisions, maintaining a balanced perspective is crucial. Investors and stakeholders should remain attentive, leveraging both caution and optimism as they navigate the months ahead.

We appreciate your confidence and support and encourage you to reach out to an Old Point team member with any questions.

Market Commentary Disclosures

*Magnificent Seven: The term "Magnificent Seven" was coined by others and should not be construed as an endorsement or indicator of any stock or company's quality.

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Index Definitions

Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted average fo the 30 blue chip stocks that are generally the leaders in their industry. It has been widely followed indicator of the stock market since October 1, 1928.

NASDAQ Composite Index: The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

Russell 2000 Index: The Russell 100 Index is comprised of the smallest 2,000 companies in the Russell 1000 Index, representing approximately 8% of the Russell 3000 total market capitalization. The real-time value is calculated with a base value of 135.00 as of December 31, 1986. The end-of-day value is calculated with a base value of 100.00 as of December 19,1978.

S&P 500 Index: The S&P 500 Index is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of the available market capitalization.

MSCI Emerging Markets Index: The MSCI EM (Emerging Markets) Index is a free-float weighted equity index that captures large and mid-cap representation across Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country.

U.S. Aggregate: The Bloomberg USAgg Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (Agency fixed-rate pass-through), ABS and CMBS (agency and non-agency). (Future Ticker: I00001US)

MSCI ACWI Excluding United States Index: The MSCI AC World ex USA Index is a free-float weighted equity index. It was developed with a base value of 100 as of December 31, 1987