The Thing About Averages

The Thing About Averages

A Q3 2025 Update

As we head into late fall and baseball playoffs, I’m reminded of a baseball euphemism: It’s not how you start, it’s how you finish. After the market’s rocky April, the so-called “Trump Tantrum” that saw the S&P 500 plummet nearly 20% off its high, who would have predicted we would end Q3 up almost 15% for the year? Government shutdown? Tariff negotiations still ongoing? Inflation still above average? Rising unemployment? Interest-rate uncertainty? Bah! Markets, as ever, refuse to behave in neat, clean, predictable ways. But that’s the thing about averages…

As you can see from the table below, the benchmark S&P 500 is up just over 14% on the year, trailing the tech heavy Nasdaq by a few percentage points, and the international indexes by about 10%.

The Thing About Averages

The tricky thing about averages is that they smooth out both the highs and the lows. If you have experienced above-average returns, eventually you will face below-average returns to balance them out (and vice versa).

The long-term average return for the S&P 500, with dividends reinvested, is about 10% (when you look at the span of time from 1990 to today). Given that the average annual compounded return for the past 3, 5, and 10 years has been above the long-term average, it’s reasonable to expect that “average” will reassert itself through some future underperformance. The ten-year return of the S&P 500 is approximately 15%, meaning we are above the long-term trend line. It is even more exaggerated over the 3 and 5 year time frame.

The challenge lies in that word “eventually”. No one knows when it will arrive. If we did, it would be perfectly rational for everyone to time the market. The thing is, about 99.999% of us would fail. History reminds us again and again: even the best investors can’t consistently predict short-term changes in the market.

So we stay focused on what we can control - our goals, our allocation, and our discipline. Our financial plans are built around conservative assumptions; periods of above (and below) average performance are just the noise between milestones.

Turning Averages into Action

That said, two themes are driving client conversations this quarter:

Rebalancing. Some asset classes have outpaced other. Technology and International have both sprinted ahead of other sectors. We are trimming aggressively where we can without tax implications, and more prudently when factoring in taxes.
Taking wins thoughtfully. If your portfolio has appreciated meaningfully this year, we are suggesting to clients that they take some of those gains off the table. Set aside or pre-fund that 2026 trip or big expense. Realizing gains for life goals beats waiting for perfect timing.

Earnings

Clients often ask, “What makes the stock market go up?” The simplest answer: earnings growth.

U.S. companies having consistently grown profits over time, and accordingly stock prices have followed earnings over time. A chart of the S&P 500 versus its earnings per share shows the same story: the red line (price) and the blue line (earnings) move in tandem.

For those that pay attention to the short run, there is an “earnings season” every three months as companies release their quarterly numbers.

Taking a longer view is sometimes helpful, with this graph showing 100 years of earnings. A close examination of this graph might show that we are slightly ahead of the long-term trend line, but the overall trend is unmistakable. Over the century of data in this graph, that line has gone, on average, up and to the right. You don’t have to be right every day, you just have to be right on average.

Do you have the Gold Bug?

Gold has been on an absolute tear this year, up roughly 46% as of September 30. However, if we take a long view, gold has trailed the S&P 500 for most of the past decade. The recent spike coincided with this year’s new round of tariffs, suggesting a short-term reaction more than a structural shift.

Until we see confirmation otherwise, we are treating gold’s surge as a momentary detour, not a new normal.

International

Diversification finally got its day in the sun. Both developed and emerging-market indexes have outperformed the S&P 500 by about ten points year-to-date (as shown in the first table).

To that I say: “it’s about time, and proof that diversification works”. International markets have lagged for years but continue to show attractive valuations, especially relative to the US. The thing about diversification is that it works… on average.

Fed Rate Outlook

Last month, the Federal Reserve cut the Fed Funds Rate by 0.25%. This was widely expected but not without controversy. In general, historically the Fed’s voting members are aligned in these decisions, which is understandable for a “data-driven” institution. That has been shifting of late, with a number of differing opinions about the correct course of action on interest rates. On the data front, inflation remains stubbornly above the target rate of 2%, and early job-market softness prompted Chair Powell to admit that in terms of interest rate decisions going forward “the path forward is uncertain.”

There is also the question of Fed independence. My personal take is that we, as investors, are better off with an independent Fed than we are with one that has short-term political motivations driving the decision-making process. Please keep politics out of my interest rate!

Government Shutdown

My college-age daughter recently texted me: “The government is shut down? That's terrifying, right?" I don't think she actually knew about the shutdown until it was mentioned in one of her classes. Unfortunately, there's no putting that genie back in the bottle!

Through a few reassuring texts, I explained that shutdowns, while unnerving, are hardly unprecedented. Since 1970, there have been 21, roughly one every three years. The last and longest was in 2019. The 2025 vintage stems (at least from this observer's perspective) from genuine differences in policy and priorities. The good news is that historically, markets have tended to shrug off the impact of these shutdowns once funding resumes.

A Quick Note on Cybersecurity

October is Cybersecurity Awareness Month, and the timing feels apt. The FBI's 2024 Internet Crime Report documented over $16 billion in reported losses, which is up 33% year-over-year. Note that these are only the "reported" cases, and it is safe to assume that these incidents are widely underreported.

The average person assumes, "It won't happen to me." Until it does.

Please be cautious with unsolicited texts or calls. Scammers are remarkably sophisticated, and getting better at it all the time. One client recently told me that they nearly delivered $9,000 in cash to a scammer. The sense of urgency, one of the biggest red flags in a scam, caught this person off guard. It was only a last-minute pause to double-check the request that exposed this as a scam. Please be vigilant!

If something feels off, pause and verify before you act. If the requester imposes a sense of urgency, treat it as a red flag.

Conclusion

This quarter offered plenty of noise: political, economic, and emotional. Yet the long-term story hasn't changed. Here's the thing about averages: over time, patient investors win by staying invested, not by timing the turns.

We are in the midst of our every-six-month "cadence" meetings with clients. While that works for most people, if you are nervous, want to talk something through, or if "life happens" between those check-ins, reach out anytime.

On average, the best outcomes come from staying invested for the long run.

Best,

Chris Duke
October 15, 2025

DISCLOSURES

This is being provided for informational purposes only and should not be construed as a recommendation to buy or sell any specific securities. Past performance is no guarantee of future results, and all investing involves risk. Index returns shown are not reflective of actual performance nor reflect fees and expenses applicable to investing. One cannot invest directly in an index. The views expressed are those of Chris Duke and do not necessarily reflect the views of Mutual Advisors, LLC, or any of its affiliates

Investment advisory services are offered through Mutual Advisors, LLC, DBA Context Wealth, an SEC-registered investment adviser.