Hall Capital “Market Views” Newsletter OCTOBER 2025

This is the 62nd edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

Tariffs Are Having an Impact
- but the impact is muted

After the rebound in equities following April’s dramatic sell-off—culminating in “Liberation Day”—the US stock market worked its way higher over the summer to record highs. Bonds have also inched higher. Our investment policy remains unchanged.  To explain our current thinking, we’ve outlined the following Q&A.

Q: Is the tariff drama over?

A: I thought that the drama had subsided until a court ruling challenged the tariffs and a slew a new tariffs were announced. Core inflation is slowly reflecting some of the tariff impact. While certain prices will spike over the next two or three quarters, they should then level out.  GDP growth was 2% in the June quarter, compared to 3% a year ago. Employment growth, strong through most of the first half, slowed materially over summer. The economy is feeling tariff headwinds, and inflation seems stuck around 3%, above the Fed’s 2% target. Slower growth, stubborn modest inflation, likely due in part to the tariffs, but no recession.

Q: Why haven’t we seen the full tariff impact on prices yet?

A: Several factors have delayed the pass-through:

1. Companies pre-purchased inventory in anticipation of tariffs.

2. Some foreign producers absorbed part of the cost.

3. Some U.S. firms also absorbed some increases rather than passing them on.

4. Many products received exceptions from the tariffs.

5. Consumers substituted away from goods that jumped in price.

6. Wholesale-to-retail math dampens the headline effect (a 15% tariff on a $50 wholesale cost only adds 7.5% to a $100 retail price). Also, keep in mind that the total imported manufactured goods value is $3 trillion vs. a total GDP of $30 trillion.

Q: Why has the stock market held up amid this uncertainty?

A: Consumer confidence hit a 13-year low in April but rebounded in May when the harshest proposed tariffs were shelved. Q2 S&P 500 profits, buoyed by lower tax rates, rose 11% year over year. The market recovery eliminated the risk of a negative “wealth effect”. (The wealth effect, or impact on consumer balance sheets of the stock market, is greater than ever due to record levels of participation in the stock investing). After declining in February, retail sales are now showing modest growth thanks to higher end consumers. However, employment growth has slowed. While the slowing of new hiring is a challenge to GDP growth, signs of a softer economy gave the Fed a rationale to resume cutting interest rates, which is always welcomed by investors. Above all, investor enthusiasm continued to be fueled by the expansion and promise of AI.

Q: How significant is AI growth for the U.S. economy?

A: The US GDP is $30 Trillion growing at about $1.5T a year. The investment in the US this year on AI infrastructure alone is expected to be $250 billion. Total US AI spend will be near $500 billion, which is a full third of the GDP expected growth. The infrastructure build-out is creating jobs for workers and profits for data-center suppliers. AI infrastructure spending is expected to grow 20% annually over the next several years reaching $.5 trillion annually by 2030. Total US AI spending is projected to reach $1.4T per year by 2028. Note this is the same amount as the much ballyhooed US manufacturing trade deficit for 2024. More on AI below. 

Q: What market risks concern us?

A: There is much noise to contend with: Will the Supreme Court uphold the lower court and deem tariffs illegal? Will the U.S. and China strike a workable trade deal? Will the Federal Reserve maintain its independence? When will the rising Federal deficit be felt? Could valuations in frothy market segments correct without broader fallout? While these may be important considerations, they are subsidiary to the “big two" that subsume all of what is important: growth and inflation. Despite a punk manufacturing sector, the services led GDP remains sturdy. Employment growth is positive, though slowing, and inflation is sticky at around 3%, but not yet alarming.

Is AI Overhyped or Transformative?
- both

We are mindful of Bill Gates' admonition, “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.” The impact of AI on corporate earnings and the economy overall is still in the early innings. It's going to take time. 

Sure there are some AI stocks that are priced for perfection. We don't own those. We mentioned C3AI over a year ago as one. Its stock is down by a third since in a strong tech market. No doubt there will be larger and more complete failures. 

During the dot.com build-out the enablers (CSCO, GLW, AOL etc.) were the first to move, but ultimately it was the exploiters of the internet (GOOGL, META, MSFT, etc.) that created the most value. The enablers are still growing but we have yet to see much AI impact from the exploiters.

According to an MIT study only 5% of companies are reaping a return on their investment in generative AI currently. More successful exploiters will emerge in time, with tech companies leading the way. Some, such as GOOGL, META and MSFT, are both enablers AND exploiters. 

Parts of the current market show signs of overheating and there will be a correction at some point. To date there has been over $3 trillion invested globally in AI and much more investment is planned. Not every AI enabler will make a positive return. As with after the internet build out, there will be big winners and big losers. 

However, at this point we don’t anticipate a market collapse reminiscent of the 2000 dotcom bust. The foundational players that we own—GOOGL, META, and MSFT—are fundamentally different from the likes of WorldCom, Lucent, or Global Crossing, which were swept away in that crash. We’re continuing to hold our core enablers and are actively seeking out exploiters that can harness AI to leapfrog their competition. When AI reaches the level of Artificial General Intelligence (AGI), capable of reasoning and learning on par with humans while harnessing the world’s data and limitless memory, its impact will surpass anything we can currently conceive. 

Focus List

We are no longer sharing the Focus List on our website. If you wish to see it, please email us or call the office at 626 578 5700.

Follow Up – from our letter one year ago

"Bottom line: we are not recommending any changes based on the upcoming election."
- The market was up and down right after the election but then recovered to new highs. The only policy issue that impacted the market was tariffs.

"Some Strategists Claim the Russell 2000 is Undervalued - it's not"
- Tom Lee famously declared mid-year last year that the small caps would rally 50% into year end. The Russell 2000 is up just 11% over the last year, compared to 18% for the S&P 500.

"The Focus List is built on companies with strong balance sheets, competitive advantages, and reasonable valuations."
- This conservative strategy has continued to outperform even in a year when many speculative stocks performed well.

NOTE: Now in addition to ALL our quarterly letters, on our website is a tab with just the Follow Ups.

About HALL CAPITAL

HALL CAPITAL, LLC is a registered investment advisor and was formed by Principals from Arcturus Capital in 2010.
For more information, contact Donald Hall 626 578 5700 x101 dhall@hallcapitalmanagement.com

HALL CAPITAL | 199 S. Los Robles Ave | Suite 535 | Pasadena | CA | 91101