Be Ready, Kerr – Christian’s Q4 Market Commentary

In a 1997 Finals huddle, with the game on the line, everyone assumed the last shot would go to the greatest scorer on the floor. Instead, Michael Jordan told Steve Kerr to “be ready” – and the role player hit the winner. This year’s market has felt like that huddle: for a long stretch, we said a healthier bull market needed more than the usual superstars. Now the “role players” are taking (and making) big shots – non-Magnificent 7 stocks, international, and emerging markets.

Where the Fed’s Huddle Stands

Inflation is still above target, but not running away. The Fed’s preferred  gauge, core PCE, is rising about 2.9% year over year (August), while core CPI is running near 3.1% – both well above the 2% goal, but not accelerating sharply.

Tariffs haven’t ignited a new spike yet. Companies have signaled they may delay or phase in tariff pass-throughs, which helps explain why inflation hasn’t jumped on impact—at least so far. We’re watching this closely into year-end.

Labor is cooling. The unemployment rate recently ticked up to around 4.3%, job openings keep drifting lower, ADP (Automatic Data Processing- they put out the national employment report each month) reported a small decline in private payrolls for September, and planned hiring intentions hit their lowest since 2009 – all signs of a softer labor market.

Our base case: the Fed cuts two more times this year to insure against labor softness without declaring victory on inflation. Futures markets have leaned that way in recent weeks. The dilemma gets harder if inflation re-accelerates in early 2026 while the job market is already weakening.

Breadth Is Finally Hitting Shots

For much of 2023–24, a handful of mega-caps carried the score. But breadth has broadened: earlier this year, none of the “Magnificent 7” ranked among the S&P 500’s top-50 performers (a striking snapshot of the rotation), and leadership lists have repeatedly featured non-mega-cap winners. That’s the bench contributing.

Earnings are doing real work. S&P 500 earnings grew ~12% in Q2 and are expected to keep growing (consensus ~8% for Q3), so this isn’t all multiple expansion (when price goes up more than earnings). Fundamentals are helping the rally hold together.

Valuations: Stars Are Expensive, the Bench Is Cheaper

• Large US stocks: The Shiller CAPE ratio for the S&P 500 (which assesses the stock market’s pricing by adjusting past earnings for inflation over a decade) sits near cycle highs, historically associated with modest forward returns if everything else is equal. (CAPE = price divided by a 10-year inflation-adjusted average of earnings.) 
• International: Non-US equities trade at a ~24% forward P/E (price-to-earnings) discount to US equities – near a 21st-century extreme – with several markets posting strong YTD runs and even notching record highs lately. (Translation: cheaper prices for the same dollar of earnings.)
• Small caps: After a long drought, investors have rotated toward cheaper small caps; recent months saw notable small-cap outperformance as valuations attracted buyers.

Macro Path: Still a Bull, But Expect a Soft Stretch

We remain in a bull market, but we expect slower US GDP growth in the coming quarters versus the spring rebound, and we see a decent chance of a healthy pullback as the Fed navigates its trade-offs and as tariff effects filter through.

Two watch items for the next leg:

1. AI spending: Capex (capital expenditure- funds companies spend on major, long-term assets like property or technology) remains massive and supportive, but if investors don’t see clear ROI soon – especially among industrials riding the data-center build-out – the narrative could turn quickly and pressure high flyers.
2. Rates narrative: We think rates drift lower near term (labor softening, Fed easing), but if inflation chatter reignites, yields can go back up again. We’re long duration for now, but we’re prepared to pivot shorter if the inflation narrative flips.

Positioning

• Equities: Stay core US but lean into the “Kerr line-up” – quality small caps and international developed – where valuations are more forgiving and participation is broadening.
• Fixed income: Favor intermediate/long duration as the base case, with flexibility to shorten if inflation data or tariff pass-throughs pick up meaningfully.
• Risk management: Expect more two-way trading into year-end; let earnings be your compass and avoid over-paying for the stars when the bench is producing.

Closing: The Kerr Principle

The best teams win when everyone can score. This year, the market’s winners haven’t just been the usual headliners; the role players – international stocks, the “rest” of the S&P 500, and parts of small-cap land – have stepped up. We’re still in a bull market, but the Fed’s changing dynamic argues for a bit more caution and a willingness to pass the ball to where the value is. In other words: be ready, Kerr.

Christian