The S&P Composite 1500 Health Care Index (the Index) rose by 3.9% in the third quarter, underperforming the S&P 500 index, which gained 8.1%. The health care sector has struggled under the weight of persistent challenges—like labour shortages and regulatory uncertainty— compounded this year by major new threats: the sweeping Medicaid cuts proposed in the One Big Beautiful Bill Act (OBBBA) and the potential earnings hit from Most Favored Nation (MFN) drug pricing.

Despite these headwinds, history shows that such periods of deep pessimism and discounted valuations—especially in companies with strong free cash flow—often set the stage for outperformance, making this potentially a unique opportunity to have exposure to innovative health care companies.

For the third quarter of 2025 the S&P 500 Index’s financials sector was up 3.4% (underperforming the S&P 500 index’s +8.1% return). This was a continuation of the solid rally that the sector had in Q2.

Taking the tariff back-and-forth rhetoric out of the equation, we continue to see solid fundamentals across a broad range of business models, along with an improving global macro (primarily credit conditions and the consumer holding up well). We are also seeing ongoing improvement in inflation expectations (with the Fed easing to a new target rate of 4-4.25%) as we transition into 2026. Nevertheless, this could all be reversed by a possible recession from the second or third derivative reaction to the new global tariff environment (albeit the recent news around this has been “less bad” versus what we have been seeing). There continues to be uncertainty around the future structure of the tariffs, the response from our trading partners, and then the implications around confidence and sentiment for both the consumer and business.

Overall, the large money center, consumer finance, and super-regional banks are significantly better positioned today across a broad range of balance sheet, capital, and risk management metrics. Valuations in the sector have normalised. We believe that tailwinds for future earnings growth will be primarily driven by solid revenue trends and credit controls; growing net interest margins; ongoing expansion of their fee-based business opportunities; and continued efficiency improvements through better use of technology and AI. We are also seeing opportunities with solid fundamentals and attractive valuations in global alternative asset management firms, P&C insurance companies, and several digital payment and financial technology companies.

During 3Q25, the Alerian Midstream Energy Index (AMNA) was up +1.3%, underperforming the 8.1% return of the S&P 500 Index. Oil prices continue to face headwinds of weak demand, particularly from China, which has persisted in 2025.

In the beginning of the year, natural gas had spiked off multi-year lows as seasonal electricity demand expectations along with the long-term need for new electricity generation will benefit natural gas—the most environmentally friendly fossil fuel. We still strongly believe that long-term natural gas demand growth remains a positive tailwind and recent bolt-on investment projects have the potential to drive accelerated cash flow growth over the next three to five years.

We believe that over the longer-term, midstream energy companies will play an important role in our energy future. The global energy transition will require multiple sources of energy to be successful and hydrocarbons – especially natural gas - will continue to have a role, driving future demand not just for the commodities but for the essential logistical systems that move them. With physical steel in the ground, midstream energy infrastructure companies have difficult-to-replicate asset networks with high barriers to entry, and whose adaptability to transport other energy sources is underappreciated, in our view. Management teams are increasingly aware of the role they will play in our energy future, focusing not just on the environmental impact of their operations but also on how their asset bases can and will be part of a greener future.

Overall, U.S. utility stocks had a strong third quarter, as several factors, including continued concerns about the Trump administration’s uncertain tariff policies causing a potential recession in the U.S., contributed to investors rotating into “safe haven” securities such as utilities.

After experiencing a relatively weaker quarter in early 2025, power generation companies as well as data centre stocks continued their rebound in 3Q25. This quarter also provided powerful reminders that the benefits of AI-related power demand also extend to regulated electric utilities as several companies also announced deals to supply power to new hyperscaler data centres and/or increased their EPS growth guidance based on higher demand growth forecasts. We believe strong long-term fundamentals and still-reasonable valuations underscore the opportunity in the utilities sector. The S&P 500 Utilities Index increased by 7.6% in 3Q25, slightly underperforming the 8.1% return of the S&P 500 Index.

Continued solid execution, along with the potential growth opportunities from renewable energy investments, should help to drive the sector’s earnings going forward. Strong fundamentals and macro factors underscore the opportunity in the sector, especially given what remains a lower-than-average interest rate environment.