Investment Commentary: Q3 2025

The Community Foundation’s Commingled Fund posted a quarterly net return of 3.3% in the third quarter. Global financial markets remained resilient in Q3, navigating a complex and evolving macroeconomic backdrop.

In the U.S., signs of stabilization emerged following a volatile first half of the year. Real GDP growth is expected to rebound, supported by steady consumer spending and a resurgence in domestic investment (particularly AI-related investments). While the labor market softened, evidenced by slower job creation and a modest rise in unemployment, the Federal Reserve initiated a rate-cutting cycle, signaling a pivot toward monetary easing to support growth.

Inflation, however, remains a persistent headwind. Core CPI and PCE inflation continue to run above the Fed’s 2% target, driven by sticky services prices and renewed pressure in core goods. Although tariffs have yet to be fully passed through to consumer prices, forward-looking surveys suggest that businesses are preparing to raise prices to offset higher import costs. This dynamic complicates the Fed’s rate-cutting path, as it must balance inflation containment with the need to support weakening labor markets.

Fixed income markets responded constructively to the Fed’s pivot. Intermediate-duration bonds posted gains as short-term yields declined and investment-grade credit offered real yields above inflation. The yield curve steepened modestly, and credit spreads remained tight. Private credit continued to attract capital, offering a yield premium and stronger covenants relative to public markets. Within the cash and fixed income allocation, the CFGNH portfolio continues to hold a portfolio of high-credit quality bonds and limited interest rate risk (average portfolio duration around 5.0 years).

Equities posted strong gains in Q3, led by both U.S. large- and small-cap segments. However, valuations climbed to historically elevated levels, particularly among large-cap growth stocks. Market concentration intensified, with the top 10 S&P 500 constituents being a primary contributor to returns. Much of this strength was fueled by structural growth narratives, most notably the accelerating adoption of artificial intelligence. Companies positioned at the intersection of digital infrastructure and automation, including semiconductor manufacturers, power generation firms, and Hyperscalers like Microsoft, continued to benefit from surging demand for AI capabilities. This dynamic has reinforced investor appetite for platform enablers of AI, even as valuations stretch. Still, underlying quality metrics such as profitability, balance sheet resilience, and earnings durability offer some justification for premium multiples. Due to a combination of investing alongside managers with strong valuation discipline and a philosophical preference for global diversification, we have a modest exposure to AI but remain underweight the theme relative to the broader market. Despite CFGNH’s underweight exposure to the theme, manager selection has been positive, and the collective equity allocation has outperformed the MSCI All Country World Index by +1.2% over the trailing 12 months.

A key contributor to the strength of The Foundation's equity allocation is the performance of non-US equities. Continuing a theme that has prevailed over the past 12 months, international equities outperformed U.S. markets in Q3. Japan benefited from corporate governance reforms and policy tailwinds, while emerging markets rallied on improving economic momentum and investor optimism. A weaker U.S. dollar further enhanced international returns for dollar-based investors.

We look forward to speaking with you soon.

*The Corporation is a Connecticut registered investment adviser and part of The Community Foundation for Greater New Haven.

Learn more about The Community Foundation's investments.