Diamond Capital Management Market Commentary

Real GDP grew at a 4.4% annualized rate in third quarter of 2025, and that appears to be a tremendous pace of growth. Many Wall Street analysts now argue that growth must inevitably decelerate from here. However, if you look under the hood, things aren’t as they appear.

First, the most recent GDP print is distorted by significant accounting effects related to private inventory and trade flows. If we strip away these acyclical factors by looking at Real Final Sales to Private Domestic Purchasers, or even the New York Fed’s Weekly Economic Index, it becomes clear that the U.S. private  sector is growing at a rate closer to 2.5% on a normalized basis.

To be clear, that represents a robust level of growth for a mature economy like that of the U.S., but the level belies a certain narrowness. Capex related to technology and artificial intelligence has boomed, contributing 30-40 basis points/quarter for the last year. Meanwhile, other areas of the economy have lagged: the labor market has softened, the housing sector remains stagnant, and manufacturing capacity utlization sits meaningfully below potential.

In our view, this dynamic is likely to change in 2026. While we expect AI-related investment to continue growing, its pace of acceleration is expected to moderate. At the same time, interest-rate relief and the broad fiscal stimulus embedded in the “One Big Beautiful Bill” should induce improvement in growth conditions outside of technology.

Markets appear to be anticipating this change. While many investors may not have noticed, the Nasdaq 100 peaked on October 29^th. Meanwhile, the Russell 2000, the equal-weight S&P 500 Index, and the S&P Regional Bank Select Index have gone on to make new highs.

That shift is not a cause for concern; rather, it reflects the classic late-cycle broadening. As Ralph Acampora famously noted, “Sector rotation is the lifeblood of bull markets.” It does, however, call for careful portfolio positioning and an active approach to risk management. 

Could inflation undermine this constructive outlook? We believe inflation will likely remain benign. Historically, roughly 90% of inflation can be explained by three factors: energy prices, housing costs, and wage growth. Today, all three exhibit signs of disinflation. With meaningful slack remaining in key pockets of the economy, these pressures should continue to ease in the coming quarters. Given the current trajectory of the data, we believe the burden of proof lies with inflation hawks, and with those still predicting a recession.

 

                 

 

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