The Quick-Hits
- • Wealthy Americans are spending more, driving stocks and the economy
- • AI spending bonanza continues – concerns over “circular deal theory”
- • Stocks continue to soar, but consumer sentiment nears a decade low
- • Several more rate cuts are likely for the U.S., GDP is being forecast to fall sharply
- • Gold is seeing its best year since 1979 – the Materials sector is seeing its best since 1993
Macro
“Let Them Eat Cake”, the famous phrase commonly attributed to Marie Antoinette, Queen of France during the French Revolution of the late 1700s, is often quoted as a way to illustrate elitist ignorance and indifference towards the struggles of ordinary people in times of hardship, while underscoring the vast gulf of wealth inequality between rich and poor. While the United States today is certainly not the France of 1789, many will find resonance in this sentiment. No doubt wealth inequality has been growing for many years, but the current U.S. administration’s policies only serve to exacerbate the issue. Tech leaders who made a pilgrimage to Washington were awarded favourable treatment (low tax rates, skirting around tariffs, stripping away of regulation). Friends and political donors have been awarded businesses on the cheap without a competitive bid process (U.S. TikTok). Tax cuts were instituted that overwhelmingly benefit higher-income earners, paid for by cuts to healthcare coverage for lower-income families…I could go on.
But, so what? The purpose of opening this month’s commentary as such was not simply to provide a platform to virtue signal. No, it’s to segue into the fact that “rich” America seems to be driving the economy and the stock market, masking concerning undercurrents and various risk factors.
In a recent interview, Moody’s Analytics Chief Economist Mark Zandi discussed findings showing that the top 10% of income earners in the U.S. account for 50% of consumer spending, while the top 3% account for 25%¹. Now, let’s break things down a bit, following sequential logic.
After the tariff-front-running-import-driven negative U.S. GDP growth in Q1, second-quarter GDP was recently revised upward to 3.8%. This upward revision was driven by stronger-than-expected consumer spending, which was driven by wealthy Americans spending money. Why are they spending more? Because of the “wealth effect”, a phenomenon by which people spend more money as they “feel” more wealthy based on the rising value of their assets, stocks in particular. Why is the wealth effect at work today? Because stock markets continue to make new highs. Stocks go up, the wealthy spend more, GDP goes up, stocks go up…and so on.
So, we’re seemingly in a paradigm today where the stock market is driving the economy, a noticeable reversal from the more normal course scenario, where economic growth drives stock market performance. When it’s the stock market driving the economy, history has shown it usually doesn’t end well (examples include the stock market crash of 1929, the dot-com bubble as well as the housing and credit bubble that led to the global financial crisis).
What about the rest of the population? How are they feeling? Well, the University of Michigan Consumer Sentiment Index, a broad gauge of how the general U.S. population feels about their personal finances and the economy, declined by 5% in September and now sits near its decade low. Think about the divergence here between the stock market, which continues to rise, and the downward trend of consumer sentiment since COVID. You might expect that rising stock markets lead to rising consumer sentiment, but the “break” in correlation here likely serves to reinforce the fact that most Americans actually don’t participate much, or at all, in the stock market. So, while the wealthy are doing just fine, the vast majority of the population appears to be facing challenges. In fact, the survey explicitly mentions that consumer sentiment fell broadly across age, income and education groups except for sentiment steadiness shown among wealthier stockholders and improved views from Democrats, while Independents and Republicans declined.
Source: Guardian Capital based on data from University of Michigan, Index of Consumer Sentiment, Surveys of Consumers, accessed on October 6, 2025. https://www.sca.isr.umich.edu/charts.html
Now that we’ve established that the economy is being driven by wealthy Americans pushing the stock market higher, it stands to reason that a stock market correction could lead to economic weakness and a potential recession. Those of the gambling persuasion might be willing to stake a bet that the most probable catalyst of a correction in the markets most likely would stem from Artificial Intelligence (AI) and Big Tech. After all, with the top 10 names in the S&P 500 Index constituting about 40% of the market, and almost all of them being involved in AI or at least AIadjacent, it’s logical to assume that even slight disappointments in and around AI earnings or productivity gains could trigger a sell-off with meaningful global market reverberations.
There has been much concern of late in the financial media stemming from the staggering financial commitments being made by OpenAI, for example, to various stakeholders, as it looks to build out AI infrastructure. OpenAI has committed literally hundreds of billions of dollars to the likes of Oracle, NVIDIA, CoreWeave and Broadcom – financial commitments constituting many, many multiples of its current revenue, meaning OpenAI will need to start generating astronomical revenues to both cover these commitments and deliver returns for investors. Furthermore, a troubling aspect that seems reminiscent of the dot-com era is the growing prevalence of related-party transactions, or as some have dubbed it, “circular deal theory.”
Look at recent “circular” deal announcements. NVIDIA is set to invest $100 billion in OpenAI, and OpenAI will then turn around and buy NVIDIA chips. Microsoft is investing in OpenAI, which is then turning around and buying compute power from Microsoft. Amazon is investing in Anthropic, which is then buying compute power from Amazon. Google is investing in Anthropic, which is then buying compute power from Google. Round and round and round we go, where it stops, nobody knows. But, if and when the music does stop, and the scale of how self-referential the space has become is made more clear, things could get ugly.
But what might a correction look like? No one can really know, but in that same interview with Moody’s Mark Zandi, he mentioned that he sees stocks as being richly valued. Shocker, I know! But what’s interesting is that this valuation, basically a price-to-earnings multiple for the entire market, is now showing we’re at levels not seen since the dot-com era and well outside the “normal distribution” of stock multiples.
References to the dot-com era can be dangerous or even misleading, but with the onset of new technologies, companies may get carried away with spending, and the slide into potential financial mismanagement can get more slippery. Investors, at this point, do seem to be drawing likenesses back to the rise of the internet and, it seems, are trying to determine who in the AI world will be Amazon, Yahoo or AOL. It’s probably far too early to tell. Perhaps an interesting thought experiment, though, is to flip things upside down. Rather than piling into singular names hoping they’ll win the AI arms race, perhaps a more constructive approach would be to consider legacy areas that will be most disrupted. Consider what Warren Buffett said about the onset of the automobile industry:
“What you really should have done in 1905 or so, when you saw what was going to happen with the auto, is you should have gone short horses. There were 20 million horses in 1900, and there are about 4 million now. So it’s easy to figure out the losers; the loser is the horse. But the winner is the auto overall. 2000 companies (carmakers) just about failed.”
– Warren Buffett, speaking to University of Georgia students in 2001
I don’t have the definitive answer as to what the horse of today is. Still, as large-language models (LLMs) become increasingly commoditized, it certainly does feel like AI overall (and consumers) will be the winner, while many AI-adjacent firms will struggle to differentiate their offerings.
Equity
Equity markets had another great month in September, with China and Emerging Markets more broadly leading the way. China has continued its strong rally, which began earlier this year, based on its own technology and AI boom. However, investors there are beginning to worry, as well, about stretched valuations and record-high margin financing.
Here at home, the S&P/TSX Composite Index was up 5.4% in September and widened its lead over the S&P 500 Index to over 9% year-to-date. For the second consecutive month in Canada, the Materials sector delivered high double-digit returns, up almost 19% as the commodity market boom continues. The top three performing stocks all came from within the Materials sector: Ero Copper Corp (+43%), Iamgold Corp (+41%) and Seabridge Gold Inc. (+40%). The sector is up almost 80% so far this year, marking the best calendar year since 1993.
Source: Guardian Capital LP based on data from Morningstar Direct, as of September 30, 2025
In the U.S., the market was up 3.7%, led by the Information Technology and Communication Services sectors. The top three performers in the Communication Services sector were all recently involved in merger announcements: Warner Bros. Discovery Inc (+68%), Paramount Skydance Corp (+29%) and Electronic Arts (+17%). While Warner Bros. Discovery was the best overall performer within the S&P 500 Index last month, the Tech sector had broader and larger gains amongst its constituent companies with Western Digital (+50%), Seagate Technology Holdings (+41%) and Micron Technology (+41%) leading the way, followed closely by Intel Corp with another incredible month, up another 38% after rising 23% in August.
Growth stocks were the stylistic favourite in September, up 4.6%, followed by Quality and Value, while Dividends were largely unloved, up just 0.5% amidst the “risk-on” sentiment. This was a complete reversal from last month, where Growth names took a breather while Dividends led the way. Gold, as you may have surmised from the performance of the Canadian equity market, continued its historic run. Looking at a price chart shows an absolute parabolic lift over the past couple of years. It just broke through US$4,000/ounce at the time of writing as fears of the impending U.S. government shutdown loomed, coupled with interest rate cut expectations, concerns of sustained inflation and a persistent weakening of the U.S. dollar. With regards to currency, our Canadian dollar declined by 1.3% vs. the U.S. dollar (USD), closing the month at US$0.7181. That being said, however, USD has declined this year vs. many global currencies, a trend that seems likely to continue. Much of the developed world has already cut interest rates considerably and could be much closer to an end to their easing cycles, while the U.S. has lagged in that regard. The U.S. has kept rates elevated in the face of inflation concerns, but the winds of change appear to be blowing for more accommodative cuts to combat weaker economic prospects.
As reported by Bloomberg, Deutsche Bank recently stated that 80% of foreign inflows into U.S. equity ETFs and 50% of flows into government bond ETFs over the past three months were currency hedged². It’s worth noting that investors are factoring in President Trump’s desire for a weaker U.S. dollar as a way to boost exports and stimulate domestic manufacturing; however, the weaker dollar has yet to give the U.S. more balanced trade flows.
Fixed Income
With regards to fixed income, longer duration exposure was beneficial as longer-dated bond yields declined on the back of weakening economic data, particularly stagnant job growth, coupled with further rate cut expectations and political uncertainty surrounding a government shutdown. Despite high yield spreads tightening by 10 bps over the month, the benefit of credit was superseded by duration exposure.
Both the Bank of Canada (BoC) and the U.S. Federal Reserve (Fed) cut rates by 0.25% in September. The market is currently pricing in one more (~0.25%) cut in Canada and two more (~0.50%) cuts by the Fed by year’s end. According to updated figures published by the Organisation for Economic Co-operation and Development (OECD) in September³, they expect U.S. policy interest rates to be trimmed to a range of 3.25-3.50% by the spring 2026 (equating to three more cuts, or 0.75% below today’s levels). As for GDP, the OECD expects U.S. growth will fall sharply from 2.8% in 2024 to 1.8% this year, before ebbing further to 1.5% in 2026, driven by higher tariffs, lower immigration and a reduced Federal workforce. Canada, by comparison, is expected to grow, but from a much lower starting point. Our domestic economy is expected to grow 1.1% this year, followed by 1.2% in 2026, up from 1.0% in 2024. Meanwhile, both nations lag global estimates, as the G20 is projected to grow by 3.2% this year and 2.9% next year.
John Pagliacci
Vice President, Investment Programs and National Accounts | Guardian Capital LP
John Pagliacci is Vice President, Investment Programs and National Accounts for Guardian Capital LP. He contributes to strategic planning for the Canadian retail asset management business, including product strategy and development, overall sales enablement initiatives and serving as a brand ambassador.
David Onyett-Jeffries
Vice President, Economics & Multi Asset Solutions | Guardian Capital LP
David Onyett-Jeffries is Vice President, Economics & Multi Asset Solutions, at Guardian Capital LP (GCLP). He provides macroeconomic guidance to GCLP and its affiliates. Additionally, he is a portfolio manager of GCLP’s multi-asset portfolios and funds and works closely with GCLP’s Directed Outcomes team.
¹ Vox Media, Prof G Markets podcast, Retail Sales Rise on Strength of the Rich & Senate Confirms Stephen Miran to the Fed, September 17, 2025, https://podcasts.apple.com/ca/podcast/retail-sales-rise-on-strength-of-the-rich/id1744631325?i=1000727170327
² Bloomberg, Markets, Investors cut dollar exposure at record pace, Deutsche Bank says, September 15, 2025, https://www.bloomberg.com/news/articles/2025–0915/investors–cut–dollar–exposure–at–record–pace–deutsche–bank–says
³ OECD, OECD Economic Outlook, Interim Report September 2025, Finding the Right Balance in Uncertain Times, October 6, 2025, https://www.oecd.org/en/publications/2025/09/oecd–economic–outlook–interim–report–september–2025_ae3d418b.htm l
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Published: October 9, 2025
