Why Are Investors Buying Both AI Stocks and Gold?
KEY POINTS:
Global stocks reached new highs in the third quarter as moderating inflation, resilient economic growth, and central bank rate cuts lifted sentiment. Bonds also advanced as interest rates moved lower. Looking ahead, steady earnings, policy support, and productivity gains should support continued but more moderate stock market advances amid relatively high valuations.
The U.S. economy remained resilient even as the labor market cooled, with solid consumer spending and business investment offsetting weaker hiring. Abroad, growth steadied as rate cuts and fiscal measures supported activity. Looking ahead, lower interest rates and easing financial conditions should help sustain a moderate pace of expansion through 2026.
Investor enthusiasm for artificial intelligence and concern over rising deficits have driven demand for both technology stocks and perceived stores of value such as gold. These contrasting trends highlight confidence in innovation alongside caution toward fiscal and geopolitical risks. We share how investors can stay grounded amid these competing market trends.
In today's environment, portfolio diversification and balance remain key to capturing opportunity while managing risk. Diversified exposure to innovation—across sectors, geographic regions, and select private investments—paired with income-producing and inflation-sensitive assets such as infrastructure and real estate can help investors stay well positioned for continued growth while mitigating downside risk.
MARKET REVIEW
U.S. STOCKS REACHED NEW HIGHS
Global stock markets advanced in the third quarter as investors welcomed moderating inflation, a resilient economy, and central bank rate cuts—including the Federal Reserve's first of the year. In the U.S., the broad stock market reached new highs, supported by continued earnings strength in the technology and communication services sectors. Large technology companies, such as Apple, Alphabet, and Nvidia, again led gains, while small-cap stocks entered positive territory for the year and outperformed large-caps in the third quarter, as lower interest rates and improving sentiment boosted more economically sensitive areas. Most major sectors ended higher, with consumer staple stocks the notable laggard.
INTERNATIONAL MARKETS ADVANCED, LED BY EMERGING ECONOMIES
Abroad, stock markets also delivered positive results but, in aggregate, trailed the U.S. market. Emerging markets were the notable exception, outpacing U.S. stocks on the strength of gains in China, Taiwan, and Brazil. Developed markets, mainly in Europe, also advanced amid easing recession fears and ongoing fiscal support. The U.S. dollar appreciated during the quarter—partially reversing its sharp decline in the first half of the year—which detracted from international stock returns for U.S.-based investors.
BONDS GAINED AS RATES MOVED LOWER
Bond markets also posted solid gains as interest rates declined and investors showed a greater appetite for risk. Prices for U.S. Treasury, corporate, and municipal bonds all moved higher following the Fed's September rate cut, which marked the start of an expected easing cycle. Corporate bonds generally performed best as confidence improved amid a favorable business environment. Global bond markets also advanced, supported by policy easing from the Bank of England and expectations for additional rate cuts from other central banks.
MARKET OUTLOOK
STOCKS POISED TO ADVANCE ON EARNINGS AND PRODUCTIVITY GAINS
Stocks are poised to extend their gains into year-end, supported by steady earnings, moderating inflation, and an increasingly supportive policy backdrop. The Federal Reserve's rate cuts, along with easing by other central banks, should sustain confidence and broaden market participation beyond the largest technology companies. Lower borrowing costs and improving sentiment may continue to lift smaller-cap and more cyclical areas of the market, while the adoption of artificial intelligence across industries is expected to reinforce productivity and earnings growth more broadly.
Stock market advances are likely to moderate as investors weigh slower global growth, persistent tariff effects, and elevated valuations. Even so, corporate fundamentals remain strong, with rising productivity and stable input costs expected to support margins into 2026. The combination of resilient profits, AI-driven efficiency gains, and both monetary and fiscal tailwinds suggests a generally favorable backdrop for stocks in the year ahead.
BONDS LIKELY TO GAIN FROM EASING MONETARY CONDITIONS
The bond market outlook remains constructive as monetary policy shifts from restraint to support. Following the Fed's initial rate cut in September, yields are expected to remain relatively high by recent standards, with additional easing likely to push them modestly lower. Slowing inflation, steady credit conditions, and a gradually cooling labor market should help sustain healthy bond performance through the end of 2025.
Corporate balance sheets are expected to remain solid, keeping default risk low and borrowing conditions favorable. Globally, central banks are likely to maintain or expand policy support, creating supportive conditions for both government and corporate bonds. With inflation trending lower and fiscal stimulus expected to extend into early 2026, the environment points to stable to improving returns across most segments of the bond market.
ECONOMIC REVIEW
U.S. ECONOMY SHOWED RESILIENCE AMID A COOLING LABOR MARKET
The U.S. economy remained resilient in the third quarter, with growth and spending data continuing to surpass expectations despite clear signs of labor market moderation. Revised figures showed stronger second-quarter GDP growth, while forecasts for the second half of the year were revised upward on the back of steady consumer spending and robust business investment. Labor demand slowed further, with job gains weakening and the unemployment rate edging up to 4.3%, but layoffs remained limited—suggesting a healthy adjustment rather than a sharp downturn. (See Figure 2.)
Against this backdrop, the Federal Reserve lowered interest rates for the first time this year, shifting its focus toward sustaining growth as the labor market cooled. However, core inflation remained near 3%, held up by lingering tariff effects on certain goods and persistently high service-sector prices. (See Figure 3.) The quarter closed with the start of a partial U.S. government shutdown on October 1, adding modest near-term uncertainty but not expected to alter the broader economic trajectory.
GLOBAL GROWTH MODERATED BUT REMAINED STEADY
Abroad, economic activity was generally stable as global recession risks continued to recede. Europe's growth outlook brightened modestly as business sentiment improved and fiscal measures, such as increased government spending, offset weak export activity, while the U.K. managed modest expansion despite elevated inflation. In Asia, China's economy showed uneven momentum—bolstered by technology exports and government support but weighed down by soft domestic demand and an ongoing property market correction—while Japan's growth remained positive amid a weaker currency that boosted exports. Many central banks had already begun cutting rates earlier in the year, and the Fed's latest move added to the broader shift toward easier monetary policy. These efforts, combined with steady consumer activity and targeted fiscal spending, helped sustain confidence and support a modest pace of global expansion despite trade and political headwinds.
ECONOMIC OUTLOOK
U.S. ECONOMIC GROWTH SHOULD REMAIN MODERATE AS POLICY EASING TAKES HOLD
The U.S. economy is expected to grow at a moderate pace into 2026 as lower interest rates and fiscal incentives support spending and investment. The Federal Reserve's recent rate cut—the first since late 2024—has helped restore confidence, and additional easing is anticipated over the coming quarters. A resilient consumer sector and steady business investment should sustain activity, even as the labor market cools and hiring remains subdued. Inflation is expected to decline gradually but remain above the Fed's long-term target, reflecting ongoing tariff pressures and robust service-sector demand. Overall, productivity gains, fiscal stimulus, and a supportive policy mix point to a continued expansion, albeit at a slower and more balanced pace than earlier in the cycle.
GLOBAL GROWTH EXPECTED TO STABILIZE AS CENTRAL BANKS EASE AND POLICY SUPPORT BUILDS
Abroad, global economic conditions should remain steady as major central banks continue to lower rates and fiscal policy remains supportive. Europe's growth outlook has improved modestly, aided by stronger business sentiment and government spending that is offsetting weaker export activity. In the U.K., growth is likely to stay positive but constrained by elevated inflation and tight fiscal conditions. In Asia, policy support in China and Japan, alongside a weaker yen and incremental trade normalization, should underpin activity, while emerging economies are poised to benefit from easing financial conditions and robust demand for technology exports. Although geopolitical risks and trade frictions persist, a synchronized easing cycle and resilient consumer trends suggest that global growth will remain on a stable—if uneven—path heading into 2026.
ON THE MINDS OF INVESTOR
WHY ARE INVESTORS BUYING BOTH AI STOCKS AND GOLD?
Investors are navigating two major market trends. Optimism about artificial intelligence is driving enthusiasm and demand for technology stocks, as investors look to capitalize on what they see as a lasting source of profit and growth. At the same time, unease about rising deficits, central bank independence, and geopolitical risk is fueling renewed demand for gold. These are not two sides of the same trade, however; they reflect a widening divide between confidence in technological innovation and concern about government and policy stability.
The excitement surrounding AI remains a defining theme in markets. Investors see it as a once-in-a-generation catalyst for economic transformation, with the potential to lift profits and reshape industries. Many are buying more shares of the usual mega-cap technology stocks or investing in new AI-focused stock funds—in hopes of amplifying returns as the theme continues to unfold. The underlying belief is that the benefits of AI innovation will continue to accrue primarily to technology companies, reinforcing their dominance even as this next stage of the AI revolution takes shape.
At the same time, a separate "debasement trade" has emerged. Concerns about fiscal discipline, persistent deficits, and political polarization have reignited demand for perceived stores of value such as gold. For some investors, gold represents both protection against potential policy missteps and participation in an asset that has been steadily rising. The appeal is as much emotional as it is strategic—a blend of fear of loss and fear of missing out.
Both the AI and gold themes carry meaningful risks. In the case of AI, concentrated stock market leadership and elevated valuations leave portfolios exposed if the extraordinary expectations now embedded in prices prove difficult to meet. If productivity gains take longer to materialize or if the earnings uplift from AI adoption turns out to be smaller than investors hope, today's valuations could become hard to justify—making markets more vulnerable to disappointment and potentially triggering a considerable pullback in AI-related stocks. As investors continue to double down on these same technology names, that concentration only magnifies the risk, leaving portfolios even more sensitive to shifts in sentiment or earnings reality.
In gold, sharp price swings and its tendency to offer inconsistent protection during market stress can erode its perceived defensive role. History also shows that gold's strongest rallies are often followed by sharp reversals, reflecting a persistent pattern of mean reversion in real (inflation-adjusted) prices. After major peaks in 1980 and 2011, for example, gold entered multi-year periods of negative returns as enthusiasm faded and investors rotated back toward yield-producing assets. The current surge above $4,000 an ounce may prove no different, as valuations already sit well above long-term inflation-adjusted averages (see Figure 4). Ironically, by chasing performance in pursuit of higher returns and trying to lower risk, investors may instead be widening their range of outcomes—making portfolios more volatile and less diversified at precisely the wrong time.
When gold is trading at elevated prices in inflation-adjusted terms (based on price divided by the Consumer Price Index (CPI) level), prices have often declined in subsequent periods. That happened in 1980, when steep prices were followed by a long period of sluggish returns during most of the following decade. The same pattern showed up when the real price of gold reached a peak in August 2011, which was followed by a sharp downturn from 2013 through 2015.
Looking ahead, the path forward will hinge on whether earnings momentum within technology persists and broadens beyond a few dominant firms. The path forward also depends on whether central banks can manage easing cycles effectively and fiscal discipline improves, shaping how durable the next phase of growth will be.
If stock performance widens as AI adoption continues to spread, the technology companies that have led markets higher could begin to lag as other sectors experience the next wave of returns. Conversely, if policy trust stabilizes, the appetite for gold hedges could fade just as quickly as it emerged. In the Portfolio Management section that follows, we examine how investors can balance opportunity and protection through sound portfolio construction built on asset classes that have withstood the test of time—helping them capture opportunity while keeping portfolios balanced amid shifting trends.
PORTFOLIO MANAGEMENT
With both stocks and bonds climbing meaningfully this year, portfolios have benefited from a supportive economic and policy backdrop. Yet as enthusiasm builds, investors face a familiar challenge: how to participate in progress without becoming overexposed to it. Stock market leadership remains concentrated, but the beneficiaries and participants in the next wave of innovation and productivity growth are beginning to broaden across the economy. Against this backdrop, maintaining diversified exposure across a thoughtfully constructed mix of asset classes has rarely been more important.
PARTICIPATING IN AI'S NEXT PHASE—WITHOUT OVERCONCENTRATION
As discussed earlier, the rapid adoption of artificial intelligence has dominated investor attention, fueling both excitement and stock market concentration risk. There are several ways for investors to address this challenge—broadening exposure to innovation while avoiding overreliance on a few dominant names.
Within technology, diversification beyond the largest companies can help capture a wider range of opportunity, including smaller-cap software, semiconductor, and hardware firms that enable or apply AI in new ways. Beyond the technology sector itself, productivity advances and AI adoption are increasingly transforming financial, health care, and industrial sectors, while infrastructure, utilities, and energy companies stand to benefit from the growing demand for data processing, transmission, and power generation that supports the AI build-out. Global diversification also plays a critical role, as AI investment and infrastructure development are expanding rapidly across Europe and Asia. In private equity, exposure to early-stage technology and software companies offers another avenue for innovation, complementing top-heavy public-market allocations.
BUILDING STABILITY THROUGH REAL ASSETS AND BONDS
At the same time, renewed interest in gold underscores investors' desire for stores of value amid concerns about inflation, fiscal deficits, and currency stability. Many investors continue to view gold as a traditional hedge and a source of perceived stability, though it does not generate income or contribute to economic growth. Essential real assets—such as infrastructure and real estate, which are physical investments that underpin everyday economic activity—can offer income, inflation protection, and a durable store of value. These assets can also provide genuine long-term stability to a portfolio, supported by their role in sustaining the economy through transportation networks, utilities, energy systems, and diverse property types including industrial, residential, office, and retail real estate.
While real assets can help preserve purchasing power over time, high-quality bonds continue to play a distinct and complementary role in managing portfolio risk. Although correlations between stocks and bonds have risen in recent years, they still remain relatively low—underscoring bonds' continued role as a counterbalance to market volatility. Bonds also tend to be materially less volatile than stocks, helping to stabilize portfolios during periods of uncertainty while providing a steady source of income in calmer times. With yields still compelling and the potential for further rate cuts ahead, their role as a stabilizer remains essential within a balanced portfolio.
STAYING DISCIPLINED IN AN ERA OF CHANGE
Together, these principles reinforce that portfolio strength is built on balance and diversification, not short-term predictions. In an environment where optimism runs high and innovation headlines dominate, enduring investment success depends less on identifying short-term winners than on building portfolio resilience. Diversification across equity, real estate, infrastructure, and bond asset classes—and within each of them across sectors and geographies—can provide the best foundation for navigating an uncertain world. At Capstone, we believe that staying disciplined, maintaining balance and diversification, and focusing on long-term objectives are what allow investors to capture opportunity while preserving peace of mind.
FAQs
Market & Policy Environment
Q: What’s driving the market to new highs right now?
Moderating inflation, steady economic growth, and the first rate cuts from major central banks—especially the Federal Reserve—have boosted investor sentiment.
Q: Are stock market gains sustainable given current valuations?
Valuations are elevated, suggesting returns may moderate from recent highs. Even so, steady earnings, productivity gains, and supportive policy create a constructive backdrop.
Q: How are lower interest rates influencing investment returns?
Rate cuts have helped lift both stock and bond prices by reducing borrowing costs and supporting growth expectations.
Q: Will the recent U.S. government shutdown affect markets or the economy?
The partial shutdown that began on October 1 adds short-term uncertainty, but historically such events have had limited economic impact once resolved.
Economic Outlook
Q: Is the U.S. economy slowing, or is it still resilient?
The U.S. economy remains resilient. Consumer spending and business investment continue to offset a cooling labor market, while inflation pressures have eased to manageable levels.
Q: How are global economies performing?
Growth abroad has steadied. Europe is seeing modest improvement, while Asia’s activity remains mixed. Central banks around the world are lowering rates to reinforce stability.
Q: How do tariffs and fiscal deficits factor into the outlook?
Tariffs have added friction to trade and kept inflation modestly above target, while persistent fiscal deficits have contributed to higher government borrowing.
Investor Themes
Q: Why are investors buying both AI stocks and gold?
These trades reflect two opposing forces: optimism about innovation and caution about policy stability. AI represents long-term growth potential, while gold appeals as a store of value.
Q: Could the enthusiasm around AI be overdone?
AI adoption is transforming industries, but market leadership remains concentrated. Broad exposure across sectors and regions helps reduce that concentration risk.
Q: Is gold still a reliable hedge?
Gold can offer diversification benefits but also fluctuates sharply. Real assets such as infrastructure and real estate may offer more consistent long-term stability.
Portfolio Positioning
Q: What does diversification mean in today’s market?
It means balancing opportunity with stability—holding a mix of growth assets like stocks alongside bonds, real estate, and infrastructure.
Q: Are bonds still attractive after their recent gains?
Yes. Even with lower yields, bonds continue to offer meaningful income and portfolio stability.
Q: How can investors participate in innovation without taking excessive risk?
Diversifying beyond the largest technology companies is key. Exposure to smaller-cap tech, global firms investing in AI, and private markets can broaden opportunity.
Q: What role do real assets play in a diversified portfolio?
Real assets—such as infrastructure and real estate—provide income, inflation protection, and tangible value.
Risk & Perspective
Q: What are the biggest risks heading into 2026?
Slower global growth, political tensions, and fiscal challenges could contribute to volatility.
Q: How can investors protect gains while staying invested?
A balanced mix of growth assets and stable income sources remains a sound defense.
Q: What should investors keep in mind amid so many cross-currents?
Balance and discipline remain essential. Maintaining diversified exposure continues to be an effective approach for capturing opportunity while managing risk.
SOURCES & ENDNOTES
¹ Notes: U.S. Stock returns are represented by the Russell 3000 Index Total Return (TR) USD. International Stock returns are represented by the MSCI All-Country-World Ex-USA Investible Market Index (IMI) Gross Return (GR) USD. U.S. Bond returns are represented by the Bloomberg Aggregate Bond Index Total Return (TR) USD. International Bond returns are represented by the Bloomberg Global Aggregate Ex-USA Dollar-Hedged Index Total Return (TR) USD. Past performance is not indicative of future results.
IMPORTANT DISCLOSURE INFORMATION:
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by Capstone Financial Advisors, Inc. (“Capstone”) will be profitable. Definitions of any indices listed herein are available upon request. Please contact Capstone if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. This article is not a substitute for personalized advice from Capstone and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. Investment decisions should always be based on the investor’s specific financial needs, objectives, goals, time horizon, and risk tolerance. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed by other businesses and activities of Capstone. Descriptions of Capstone’s process and strategies are based on general practice, and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review by contacting us at capstonefinancialadvisors@capstone-advisors.com or (630) 241-0833.