Brasada Capital Third Quarter Of 2025 Quarterly Update

Market Overview - Despite high tariffs and a 22% correction in the S&P 500 earlier this year, equities are near all-time highs entering Q4, supported by monetary policy easing [2] - The Federal Reserve cut short-term interest rates to 4.00%–4.25% on September 17, indicating progress on inflation and softer labor conditions [2] - Markets anticipate two more 25 basis point cuts by year-end, contingent on cooling core service and wage inflation [2] Inflation and Consumer Impact - The headline consumer price index (CPI) is up 2.9% year-over-year, with low-income consumers feeling strain while high-income consumers remain resilient [5] - Goods deflation and cheaper traded inputs have mitigated the impact of tariffs on everyday prices, with import prices remaining flat to down through mid-2025 [4] - Core PCE inflation is in the high-2s, with stickiness in services rather than tariff-exposed goods [4] Corporate Activity and M&A Trends - Corporate boardrooms are increasingly engaging in mergers and acquisitions, driven by easing funding costs and a pursuit of scale [6] - Valuations have re-accelerated despite mixed deal volumes, with expectations for continued M&A activity in AI-adjacent tech, infrastructure, and select industrials [6] Earnings and Valuation Insights - The S&P 500 is near all-time highs with a forward 12-month price-to-earnings ratio of 22–22.5x, above historical averages, limiting expansion of stock valuation multiples [7] - Continued profit growth and free cash flow durability are essential for the next leg up in the market [7] AI Infrastructure and Investment Dynamics - Corporate investment in AI is driving market dynamics, with capital expenditure extending beyond GPUs to the entire infrastructure stack [11] - OpenAI is central to this investment shift, leveraging its user base to influence the AI value chain [12] - OpenAI's partnerships and contracts, including a reported ~$300 billion deal with Oracle, indicate a shift towards debt-fueled funding in the AI sector [16] Company-Specific Insights: Ferguson Plc - Ferguson is the largest specialty distributor for North American plumbing, with a revenue split of ~51% residential and 49% non-residential [22] - Despite a 16% drop in shares post-earnings due to fears of commodity deflation, revenue held steady, indicating resilience in pricing power [23] - The company is expected to continue compounding growth through organic means and accretive M&A, benefiting from structural advantages in sourcing and efficiency [25] Company-Specific Insights: Broadcom - Broadcom has been a strong performer in the semiconductor sector, positioned as a key player in the AI market alongside Nvidia [27] - The company excels in custom AI chips and networking solutions, with significant revenue growth expected in its AI segment [29] - Broadcom's strategic M&A and strong balance sheet position it well for future growth, particularly in AI and networking [33]