Artificial Intelligence: Engine of Change

“Once in a while, a technology comes along that is so powerful and so broadly applicable that it accelerates the normal march of economic progress. I believe that generative AI belongs in that category.”
Andrew McAfee, MIT Sloan School of Management

The third quarter of 2025 underscored the remarkable resilience of the U.S. economy, surprising many who had expected growth to slow. Markets have been supported less by speculation and more by the earnings strength of U.S. Large Cap stocks, showing that businesses continue to adapt and thrive despite uncertainty. At the same time, we are living through an era of technological transformation, where artificial intelligence is emerging as a powerful driver of change. Beyond powering innovation across industries, AI is spreading rapidly through the corporate landscape. According to J.P. Morgan, since 2023, about 10% of all U.S. firms have adopted AI applications, a number expected to grow to 15% in the next six months [1]. From companies focused on technology to companies focused on accommodations and food services, adoption is broadening across all 14 major industries, illustrating how quickly AI is moving from niche to mainstream. In Q3, public markets reflected this momentum while our Private Capital strategies continued to find opportunity in credit, real assets, and opportunistic investments.

Key Market & Economic Themes

Since bottoming in October 2022, the S&P 500 has delivered 95.63% total return or 25.3% per year, mostly driven by valuation expansion. As markets continue to rise and credit spreads tighten, certain pockets, including recent IPOs and the high yield credit market, are beginning to show signs of froth. These dynamics reinforce our focus on the discipline of staying anchored to long-term drivers of return rather than chasing short-term swings.

The Fed now faces a delicate balancing act: is the greater risk a cooling job market or the chance that inflation could re-accelerate? On the surface, growth looks strong. At the end of Q3, The Federal Reserve Bank of Atlanta’s GDPNow estimate for Q2 was revised upward from 3.3% to 3.9% [2], and several sectors delivered solid results. Yet beneath those numbers, the picture is mixed. “Soft” data, such as consumer surveys and sentiment, suggests households are cautious, while “hard” data, including GDP, retail sales, and corporate earnings, continues to show resilience.

The labor market reflects the same push and pull. Companies have slowed their pace of hiring, and unemployment claims are starting to creep higher. Yet the headline unemployment rate has remained stable, pointing to a market that is cooling around the edges without showing broader signs of weakness.

Public Markets [3]

Monetary policy has taken a notable turn. The Federal Reserve ended its rate-hiking campaign last year, and after pausing for several months, it has now begun to cut interest rates. Historically, when rate cuts occur at or near market all-time highs, following a period of historically high levels, both equity and bond markets have tended to perform well over the next 12 months. Absent a recession, proactive cuts can help prevent the economy from tipping into contraction – quite different from the reactive cuts that typically come after a downturn has already begun. Inflation remains the variable to watch. So far, the hard data, particularly GDP and retail sales, has not shown meaningful disruption from tariffs or price pressures. Still, the effects of trade policy and supply chain frictions may emerge with a lag. While we cannot yet confirm whether inflation will re-accelerate, the risks remain elevated, and vigilance will be essential as we head into 2026.

Year-to-date, equity market performance has started to broaden beyond a handful of mega-cap leaders. The “Magnificent Seven” have contributed 47% of the S&P’s return – still meaningful, but down from the outsized 73% in 2024. At the same time, international equities, especially emerging markets and Chinese stocks, have rallied, and Small Caps are beginning to participate as well. This broadening of performance is a welcome development as we head into the final quarter of the year.

Performance

Our relative results this year have reflected shifting leadership across regions and styles. In the first quarter, we lagged benchmarks as international equities outperformed and our positioning remained more U.S.-centric. In the second quarter, we added exposure to developed international markets. At the same time, Growth stocks, which had struggled in April, rebounded strongly into June and provided an additional tailwind to our strategies. In the third quarter, we reallocated a portion of domestic Large Cap Core Equities into Emerging Markets as momentum accelerated and capital rotation into the region gained strength.

A cornerstone of our investment process is maintaining discipline and diversifying between short term tactical opportunities and long-term alpha drivers, even in markets where returns are heavily concentrated in specific themes and in a small group of companies. To achieve this, we incorporate factor strategies grounded in fundamentals like profitability, and broader economic measures such as Leading Economic Indicators. While cap-weighted indices can perform well during momentum-driven rallies, history shows that alternatives like factor investing have added value once market leadership shifts or concentration eases. This discipline reflects our philosophy: we believe prudent diversification and thoughtful construction are essential to protecting and compounding wealth over time.

Looking Ahead

As we enter the final quarter of 2025, we continue to see opportunity in U.S Large Cap Growth stocks supported by continued strength in corporate earnings and complemented by selective opportunities abroad. With few signs of an imminent U.S. recession, the Federal Reserve has the flexibility to be more accommodating should economic growth begin to soften. We believe this environment provides a constructive backdrop for equities, most specifically U.S Large Cap Growth stocks, which benefit disproportionately when the Federal Reserve is able to loosen monetary policy.

Private Markets

Private markets continued to provide a wide range of opportunities this quarter. We remain focused on partnering with experienced managers and accessing strategies that balance growth potential with downside protection.‍

New Fund Launches. Two new strategies came to market this quarter. Magnolia Growth and Innovation II invest in early-stage and growth companies at the forefront of innovation. Redwood Buyout Opportunities II focuses on established businesses, using operational improvements and strategic repositioning to create value.

Closed Partnerships. Decarbonization 2022, Logistics 2022, Industrial & Aerospace 2022, and Credit Opportunities 2023 are now fully subscribed. Within Credit Opportunities 2023, we committed to a co-investment with our partner WhiteHawk, described below.

Open Partnerships. Private Credit Opportunities II is actively deploying capital in today’s attractive interest-rate environment. This quarter, we partnered with Marathon on an asset-based lending strategy that makes loans secured by real, cash-flowing assets such as real estate, equipment, receivables, and aircraft. These structures can offer meaningful downside protection and complement our existing partnerships with Monroe and Pantheon.

In real estate, Sun Belt Plus Real Estate I advanced with a co-investment in the Atlanta Financial Center, a landmark three-tower campus in Buckhead. The $42 million first-mortgage loan finances its acquisition and repositioning, with an investment basis of just $46 per square foot, well below distressed sales and stabilized valuations, creating meaningful downside protection.

Opportunistic Investments. Through our credit funds, we also invested alongside WhiteHawk in a loan to Catalyst Brands, the retail platform formed through the merger of JCPenney and SPARC Group, bringing together the brands JCPenney, Aeropostale, Brooks Brothers, Eddie Bauer, Lucky Brand, and Nautica. Backed by Simon Property Group, Brookfield, Authentic Brands, and Shein, the loan refinanced debt and supported the company’s turnaround. As with all WhiteHawk loans, principal and interest are secured by the company assets, offering meaningful protection.

Looking Ahead

Private credit has been in the headlines this year, with some pointing to excess. While the sector has grown quickly, we remain confident in our approach, which emphasizes discipline and protection:

• ‍Lower Middle Market. Our private debt allocations are with experienced lower-middle-market managers such as Monroe, who have managed through multiple cycles and are deliberately avoiding the largest, most aggressively priced deals.
• Asset-Backed Lending. We avoid consumer lending, instead favoring loans secured by tangible collateral through managers like WhiteHawk and Marathon, which provides a layer of downside protection.‍
• Secondaries. Finally, we have committed capital to secondary managers. These funds are positioned to take advantage of potential market dislocations, with the ability to purchase portfolios of loans at discounts should stress in the credit markets accelerate.

While headlines may focus on areas of excess, we believe our approach, conservative underwriting, asset-backed exposure, and opportunistic secondary allocations, provide a strong foundation for navigating current market conditions.

Closing Perspective

For investors, the current environment presents both opportunities and challenges. On one hand, resilient growth, technological innovation, and supportive policy provide strong reasons for optimism as we look toward 2026. On the other hand, periods of rapid change can bring volatility and test conviction. We believe artificial intelligence will remain a defining force for years to come, a true engine of change reshaping industries and fueling new cycles of investment. At the same time, our Private Capital strategies continue to provide essential diversification, offering opportunities in credit, real assets, and early-stage growth that complement what we see in public markets.

Periods of transformation demand both optimism and discipline. That is why our approach continues to emphasize diversification, careful manager selection, and a long-term perspective. We believe these principles remain the best foundation for protecting capital and capturing opportunity in the years ahead.
Thank you for the continued trust you place in our team and process. We welcome your questions at any time and look forward to guiding you through the opportunities ahead.

Sincerely,

David Damiani, CFA
Chief Investment Officer

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[1] Guide to the Markets U.S.4Q 2025 (J.P. Morgan Asset Management)
[2] GDPNow Forecasting Model (Federal Reserve Bank of Atlanta)
[3] Data sourced from Bloomberg

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Disclosures

The views expressed represent the opinion of Balentine LLC (“Balentine”). The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Balentine believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Balentine’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance, or events may differ materially from those expressed or implied in such statements. Investing in equity securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results. Balentine utilizes proprietary models to evaluate economic trends. The Tier 1 model gives us parameters to determine how we should allocate our assets across our building blocks. The Tier 2 model guides us toward allocating within building blocks. Balentine uses a combination of several factors, of which models are only part, when determining its investment outlook. Balentine is not soliciting or recommending any action based on any information in this document.

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