mohd izzuan/iStock via Getty ImagesDear Clients and Friends,This quarter continued a narrowly led rise in the market. The S&P 500 returned 2.30%, including dividends, while its equal-weighted counterpart declined 1.87%, and smaller companies (Russell 2000) continued to lose ground to larger companies. Beneath the surface of near-record index levels, this divergence highlights an increasingly bifurcated market, where headline strength masks widespread churning and deteriorating breadth across the broader market.For long-term clients, this will come as little surprise as we have been talking about this market structure for a while now. We revisit this theme because over our investment careers, we have experienced several similar narrowly led investment booms. In each one, the narrative eventually outpaced what the underlying business fundamentals could support.The most obvious precedent was during the late 1990s, when the advent of the internet spurred an unprecedented investment boom in telecommunications infrastructure. The internet fundamentally transformed the world, perhaps even more than its early evangelists envisioned, yet capacity was built out far too quickly. We talked about Micron (MU) in the last letter, but another boom-and-bust example during this period was market darling Cisco Systems (CSCO), celebrated as the indispensable plumbing of the web, which briefly became the most valuable company in the world before plummeting nearly 90% once excess capacity choked off customer orders.In hindsight, the better strategy has always been to anchor our investments to what their intrinsic value could support, not to abandon our discipline and chase short-term price momentum. Sustainable capital compounding is, after all, measured across full market cycles, not quarterly sprints.Many investors today have never learned this lesson, and from our perspective, they appear to be reaching aggressively for higher returns in crowded trades, with little regard to the risk involved.Today’s boom narrative is of course around AI, which remains an area of substantial long-term opportunity, even if the ultimate investment winners will be harder to predict than the market suggests. We continue to stand by what we said in this regard last quarter:Of course, if the AI trade continues to be the only game in town, owning these unrelated to AI businesses will continue to be a drag on relative performance in the short-term. Many investors assume avoiding the highest-flying AI names means missing the AI opportunity. We believe the opposite. Our goal is to own the businesses that will still be earning exceptional returns on capital a decade from now, regardless of which AI models, chips, or software ultimately dominate.Macro UpdateUnderlying demand remains resilient. Second-quarter real GDP expanded at an annualized 2.2% (with private domestic demand up 4.6%), while August real consumer spending advanced 0.6% (source).However, persistent inflation and elevated energy costs continue to raise financing hurdles. With August PCE up 3.4% year-over-year, the Fed lifted its policy rate to 3.75%–4.00% in September. Meanwhile, stalled negotiations with Iran have kept Brent crude near $100 per barrel, tightening corporate margins and consumer budgets.As always, we are not in the business of forecasting interest rates, energy prices, or geopolitical outcomes. For one, these factors do not lend themselves to reliable prediction. For two, even if they did, forecasting the market’s reaction to each prediction would still be a fool’s errand. Instead, we take the economic environment as it exists and position around it. In a climate of higher borrowing and input costs, we continue to prioritize high-quality businesses with balance-sheet strength that can comfortably fund their own growth and dividends from free cash flow.Election UpdateLooking ahead to November, headlines will inevitably focus on the midterm elections and the battle for congressional control. While election cycles reliably generate short-term noise and anxiety, history reminds us that broader market direction tends to transcend party politics. In fact, equity markets have historically shown remarkable post-election resilience: following every midterm election from 1950 through 2022, 19 consecutive cycles, the S&P 500 was higher 12 months later, delivering an average gain of 15.4%. At some point this streak may be broken but this something to be cognizant of:Source: Strategas ResearchFor long-term investors, the political outcome matters far less than the concrete policies that follow. Markets care little about campaign rhetoric; they care about how legislative and administrative actions flow into corporate income statements, most notably through tax and trade policy.Tariffs, in particular, function as a direct tax on commerce, influencing input costs, inventory planning, and profit margins. We are already seeing adjustments take shape: September’s U.S.–China bilateral discussions recommended more favorable tariff treatment on approximately $30 billion of non-sensitive goods in each direction (source). If implemented, lower import duties and improved export access could provide immediate margin relief and demand tailwinds for select industries. Conversely, where tariffs remain elevated or expand, businesses will continue to shoulder margin pressure and the friction of rerouting global supply chains.How We Are InvestingAgainst this backdrop, we continue to find compelling growth and income opportunities across a wide range of industries, anchored by two primary themes.First, we are participating in the secular infrastructure expansion along with expanding computing demand to serve AI. Rather than chasing speculative momentum, we focus on mission-critical “picks and shovels” type names: from power, cooling, and electrical equipment to freight transportation and construction materials. While these businesses serve distinct end markets, they share durable competitive strengths and clear long-term tailwinds.Second, we continue to find value in essential, everyday franchises outside the technology spotlight. Favorable demographic trends support long-term demand across pharmaceuticals and senior living, while sectors such as waste management, insurance, and payments provide resilient, recurring cash flows across economic cycles. Selective international investments further expand our opportunity set beyond domestic markets.Underpinning all these investments is our fundamental process: we invest in businesses, not ticker symbols. We look for durable competitive moats, high recurring revenues, solid balance sheets, and capable management teams that allocate capital prudently. Above all, we remain disciplined on valuation, even the finest business makes a poor investment if bought at an inflated price.Admittedly, many of these non-technology holdings have faced a frustrating year. Elevated interest rates and higher energy prices have pressured corporate costs, consumer demand, and equity multiples across the broader economy, while the only market enthusiasm has remained intensely concentrated in the technology sector.For example, Heico (HEI) is one of our largest positions in our Focused Equity Strategy, and we have owned it since 2019. The company has a lot of momentum and has reported record results this year. However, the stock is currently down for the year. According to our analysis, this is the first time since 1999 that Heico has been down while the S&P 500 was up for the year. The S&P 500 is made up of about 39% technology and if you include Amazon, Google, and Meta, which are not classified as technology stocks, roughly 50% of the S&P 500 is now invested in technology stocks. While we maintain significant technology exposure, we do not have 50% of our strategies in technology. This has been a handicap for us this year.Chasing narrow market leadership carries substantial risk and our commitment remains focused on owning high-quality compounders capable of delivering attractive, risk-adjusted returns over the full cycle.Opportunities in Fixed IncomeHigher interest rates present a timely opportunity to revisit the balance between stocks and bonds. As of September 30, 10-year and 30-year Treasury yields stood at approximately 5.3% and 5.6%, respectively, hovering near 24-year highs. For clients that are retired or are approaching retirement allocating a portion of their portfolio to high-quality corporate or municipal bonds now generates dependable income while reducing reliance on stock sales to fund spending.To implement this, a ladder of bonds with staggered maturities can help align predictable cash flows with anticipated expenses. While fixed income carries duration and inflation risks, bond prices decline if interest rates rise, and inflation erodes real purchasing power over time, a disciplined allocation balances these factors. It maintains equity growth potential while providing confidence that nearer-term cash needs are reliably protected.Because asset allocation must reflect your specific spending horizons, tax considerations, and comfort with market swings, we tailor these strategies individually. If your retirement plans, income requirements, or risk tolerance have evolved, please reach out so we can review your portfolio together.We remain constructive on the opportunities ahead. Thank you for your continued trust and partnership.Sincerely,Ed ZhangDisclosureThis quarterly update is being furnished by Brasada Capital Management, LP (“Brasada”) on a confidential basis and is intended solely for the use of the person to whom it is provided. It may not be modified, reproduced, or redistributed in whole or in part without the prior written consent of Brasada. This document does not constitute an offer, solicitation or recommendation to sell or an offer to buy any securities, investment products or investment advisory services or to participate in any trading strategy.All figures are estimated and unaudited. In addition to management fees, the managed accounts will also bear its share of expenses and fees charged by underlying investments. The fees deducted herein represent the highest fee incurred by any managed account during the relevant period. Past performance is no guarantee of future results.References to indices or benchmarks are for informational and general comparative purposes only. There are significant differences between such indices and the investment program of the managed accounts. The managed accounts do not necessarily invest in all or any significant portion of the securities, industries or strategies represented by such indices and performance calculation may not be entirely comparable. Indices are unmanaged and have no fees or expenses. An investment cannot be made directly in an index and such index may reinvest dividends and income. References to indices do not suggest that the managed accounts will, or is likely to achieve returns, volatility or other results similar to such indices. Accordingly, comparing results shown to those of an index or benchmark are subject to inherent limitations and may be of limited use.Certain information contained herein constitutes forward looking statements and projections that are based on the current beliefs and assumptions of Brasada and on information currently available that Brasada believes to be reasonable. However, such statements necessarily involve risks, uncertainties and assumptions, and prospective investors may not put undue reliance on any of these statements. The information contained herein is believed to be reliable but no representation, warranty or undertaking, expressed or implied, is given to the accuracy or completeness of such information by Brasada. The information presented in this newsletter is the opinion of Brasada Capital Management, LP and does not reflect the view of any other person or entity. The information provided is believed to be from reliable sources but no liability is accepted for any inaccuracies. This is for information purposes and should not be construed as an investment recommendation. Past performance is no guarantee of future performance. Brasada Capital Management, LP is an investment adviser registered with the U.S. Securities and Exchange Commission.Original PostEditor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.