INVESTMENT THEMES - October 2025

INVESTMENT THEMES - October 2025
Brian Goodstadt, CFA
Chief Investment Officer/Managing Partner

Speculation Reaching Extreme Levels During Recent Market Rally 

The stock market has surged more than 35% since the depths of the tariff-related selloff in early April, with much of the rally concentrated in the riskiest, most speculative stocks. This level of speculation resembles only two prior episodes over the past 25 years, as shown below. We expect this trend to moderate if and when economic growth slows.

The Goldman Sachs Speculative Indicator, encompassing penny stocks, unprofitable companies and stocks with extreme price-to-sales multiples, has spiked sharply. History shows such rallies are typically brief. For example, the valuation component alone (shown below), indicates that more than 20% of large-cap stocks globally now trade at over 10 times revenues, a level rarely sustained for long.

Notably, while corporate stock buybacks are at record highs, insider buying has fallen to multi year lows, a sign of waning confidence beneath the surface.

Prudently Investing in Less Speculative Assets

Paragon portfolios tilt toward higher-quality, less speculative stocks, historically reducing overall portfolio risk by 10% to 15% versus benchmarks across standard deviation, beta, and downside deviation (risk in down markets).

One area we favor is international quality stocks, which offer both attractive growth and valuations. The iShares MSCI International Quality ETF (IQLT), a core holding, owns stocks with projected earnings growth of 17% over the next year, exceeding the 16% growth rate of the U.S. “Magnificent Seven” tech giants, yet trades at valuations 35% lower and provides a dividend yield eight times higher. We believe such quality exposures are well-positioned when speculative excess subsides.

Taking Measured Risks in Bonds

Within fixed income, municipal bonds, especially high-yield munis, have become increasingly attractive compared to taxable corporate bonds and Treasuries. Corporate high-yield spreads remain near historic lows, offering limited compensation for risk, while municipal high-yield spreads have widened meaningfully. This chart below shows the disparity between corporate and municipal high-yield spreads.

This divergence stems largely from a temporary surge in municipal issuance as municipalities feared an end to municipal bonds’ tax-exempt status. With the new tax bill affirming the muni tax-exemption, issuance is expected to normalize, supporting valuations.

To capitalize on the yield advantage, we added a short-duration high-yield municipal bond fund for clients whose tax situation is helped by exposure to tax-free bonds. Its portfolio yield is roughly two percentage points higher than our core muni bond fund holdings. As shown below, the short-duration high-yield muni bond sector has the most attractive spreads in the fixed income universe, particularly for clients in the 32% tax bracket and above.

Munis typically have much higher credit ratings than corporate bonds, as shown below. But the lower risk really shows up in the high yield segment, as muni bond default rates have been much lower than corporate bonds over the last 55 years. Historically, BB-rated bonds, our primary exposure, have default rates nearly five times lower than comparably rated corporate bonds (3.3% vs 15.5%), highlighting their superior risk-adjusted profile.

Conclusion and Strategy

Paragon’s investment approach remains anchored in global diversification, quality and discipline. We take measured risks where opportunities present themselves but avoid chasing speculative manias. Over the long run, we believe staying grounded in fundamentals, diversifying across asset classes and geographies, and maintaining a disciplined process offers the best path to sustained investment returns.