Author: cvernon

The Calm Before the Storm?

I spent the past weekend at my alma mater to watch them play their biggest rival. Football weekends there are filled with celebrations, traditions, and of course, tailgating. Saturday was a quintessential Midwestern day to be outside: sunny, low 70s, light breeze — no better conditions for food and drinks in the parking lot. About three hours before kickoff, however, massive thunderstorms rolled in which sent fans scurrying for cover and threatened to delay the game. For fans who hadn’t checked the forecast, they were ill-prepared to stay dry and enjoy the game as it rained for the duration of the match. Nonetheless, the stadium stayed full for the entire game, a testament to the home team’s performance as well as fan loyalty. That said, I saw plenty of cold and wet attendees in the concourse after the game — those who weren’t equipped for the conditions undoubtedly wished they had been better prepared for what the environment brought Saturday.

On my drive home Sunday, I couldn’t help but worry if as investors we find ourselves right where I was Saturday afternoon, wondering if the conditions were too good to be true for a mid-October day in the Midwest.

Two Sentiments Diverged

This week’s chart compares institutional and retail investor sentiment using two established indicators. Institutional sentiment is represented by the National Association of Active Investment Managers (NAAIM) Exposure Index, which measures the average U.S. equity market exposure reported by NAAIM member firms (i.e., organizations that actively manage client portfolios). Reported exposures for this index include -200% (leveraged short) to -100% (fully short), 0% (market neutral), +100% (fully invested), and +200% (leveraged long), capturing the breadth of positioning from extremely bearish to highly bullish. Retail sentiment is represented by the American Association of Individual Investors (AAII) Sentiment Survey, which reflects the bullish-minus-bearish spread regarding the six-month outlook for stocks across individual AAII members (i.e., retail investors). When analyzed together, these indicators offer perspective on how both institutional and individual investors view the near-term prospects of equity markets.

Readers will note that these two indices have moved in tandem throughout most of the last several years but have diverged significantly in recent weeks as retail investor sentiment has plunged. It is not entirely clear what’s driving this latest divergence, but several factors likely play a role. Specifically, renewed U.S.–China trade tensions, the ongoing federal government shutdown, and interest rate uncertainty have likely weighed more heavily on retail investors, who tend to be more influenced by headline noise. Institutional money managers, on the other hand, appear to be maintaining confidence in healthy corporate fundamentals and the broader economic backdrop. Regardless of its exact cause, this divergence underscores the notion that sentiment data should be viewed as context-dependent rather than as a market timing signal.

The Paths to Liquidity

After a three-year drought, the IPO market is stirring again… but only for a select few. Just 18 companies have gone public in the U.S. through the end of June, which puts 2025 on pace to be the slowest year for IPOs in a decade (though total exit value this year has already surpassed 2024 levels). The companies that have listed thus far in 2025 have looked markedly stronger from a fundamental standpoint than those in the 2021 cohort. Indeed, nearly a quarter are profitable, with average revenues above $800 million and median valuation-to-revenue multiples around 4x (down from roughly 17x a few years earlier). This new IPO class has clustered around themes like artificial intelligence, cryptocurrency, defense, and space, all of which have been buoyed by government policy and widespread investor interest in growth.

This being said, the secondary market has quietly become a powerful alternative source of liquidity that has reshaped the venture capital ecosystem. According to PitchBook, U.S. venture secondary transactions reached $61.1 billion over the past year, slightly exceeding VC-backed IPO exit value and accounting for nearly one-third of all venture exits. “Mega-unicorns” such as SpaceX, Stripe, Databricks, and OpenAI have actively launched tender offers and secondary SPVs to provide liquidity for employees and investors while remaining private enterprises. The secondary market has expanded rapidly in recent years, with dedicated dry powder reaching $8.2 billion in 2024 (up from roughly $4 billion in 2022) and SPV capital raising surging more than tenfold. Still, despite this remarkable growth, secondary exit value remains a small slice of the venture ecosystem at just 1.9% of total unicorn market value.

The result of these dynamics is a tale of two markets: One public and highly selective, the other private, flexible, and increasingly institutionalized. While acquisitions continue to account for most venture exits by volume, the evolving dynamic between IPOs and secondaries is redefining how liquidity is delivered to investors… and redefining what “going public” really means in today’s venture landscape.

Industrial Real Estate: Smaller is Better?

This week’s chart compares realized and expected Market Revenue per Available Foot (“M-RevPAF”) growth within the industrial real estate space across three segments: The top 50 markets, smaller-building markets, and bulk building markets. M-RevPAF blends rent and occupancy into a single metric, providing a comprehensive view of market revenue performance.

Over the past several years, elevated new supply in low-barrier bulk distribution markets has pressured occupancy and rents, causing this segment to lag both smaller-building markets and the Top 50 diversified index. That gap is expected to widen further by 2029, as smaller-building markets are projected to deliver roughly five percentage points of additional cumulative revenue growth relative to bulk markets. For instance, smaller-building markets like those in infill and supply-constrained areas such as South Florida are positioned to capture stronger rent growth and maintain higher occupancy rates due to demand dynamics and limited new deliveries. Conversely, bulk distribution markets are still digesting significant deliveries from the 2021-2023 development cycle, which may keep vacancies elevated and rent growth muted for several years.

These forecasts highlight the potential for a meaningful divergence in performance across industrial subsectors, stressing the need for discipline and precision when it comes to capital allocation by asset managers. Allocations toward smaller markets can help enhance portfolio resilience and capture outperformance relative to bulk distribution markets, where managers should be employing more conservative underwriting (assuming longer lease-up periods, requiring wider exit cap rates to compensate for slower NOI growth, etc.). A diversified approach that combines Top 50 markets with targeted exposures to smaller-building strategies may offer the best balance between growth and stability for investors in the years ahead.

2025 Investment Symposium

Watch the flash talks from Marquette’s 2025 Investment Symposium livestream on September 26 in the player below — use the upper-right list icon to access a specific presentation.

 

Please feel free to reach out to any of the presenters should you have any questions.

The Divided States of ESG

Trifecta status for a state exists when a single political party holds the governor’s seat and a majority in both chambers of the state legislature. In terms of Environmental, Social, and Governance (ESG) investing, most Republican trifectas and states with divided governments have enacted legislation opposing ESG measures in recent years, while Democratic trifectas have passed bills in favor of ESG. Specifically, 36 states have passed a total of 127 bills either supporting or opposing ESG initiatives since 2020. At the time of their enactment:

  • 60% of the bills were in opposition to ESG and from a Republican trifecta state
  • 25% of the bills were in support of ESG and from a Democratic trifecta state
  • 12% of the bills were in opposition to ESG and from states with a divided government

While the darkest shades of blue and red in this week’s chart represent the states with the highest number of enacted ESG bills, it is interesting to note that the states represented by the lightest shade of blue (CT, NJ, NM, NY, WA) are Democratic trifecta states that have not passed any ESG bills to date. Readers should also note that ESG investing is federally regulated by the Department of Labor and the Securities and Exchange Commission, with strict disclosure requirements for investment managers to substantiate any ESG-related claims.

Future ESG legislation will likely vary on a state-by-state basis based on political leadership, making upcoming elections particularly relevant. Election outcomes in politically divided states that have yet to adopt any ESG bills will be especially noteworthy when it comes to gauging sentiment. Upcoming gubernatorial races with potential ESG implications include New Jersey and Virginia later this year, as well as Alaska, Arizona, Michigan, Nevada, Vermont and Wisconsin in 2026.

The Running of the Bulls

Barring a significant equity market drawdown in the coming weeks, the current bull market will turn three years old in October. The gains posted by the S&P 500 Index during this time have certainly been robust, with the benchmark delivering 24% and 36% returns in the first and second 12-month periods of the current bull market, respectively. This strong performance has led many investors to question if stocks will continue to deliver in the near future. Interestingly, bull markets in decades past have seen positive stock returns well into the third, fourth, and fifth years; however, these gains tend to be more muted than those notched in the first two years. Over the last 50 years, the pattern has often been the following:

  • Year one: Explosive gains are recorded as markets rebound from oversold conditions. The average return of the S&P 500 Index in the year after a bear market trough is roughly 37%.
  • Year two: Equity returns are still strong but less extreme, with the S&P 500 Index averaging a return of 17%. Earnings growth and investor confidence begin to stabilize.
  • Years three–five: Equity momentum slows. Average returns compress to 8%–13% and markets become more vulnerable to corrections.

To expand on the final bullet point, the third, fourth, and fifth years of a bull market often prove shakier given the convergence of several structural factors. For instance, early in the cycle, central banks and governments typically provide aggressive stimulus to allow markets to recover from troughs; however, inflation and financial stability risks typically arise within a few years. These factors usually prompt tightening from policymakers, which can constrain equity performance. At the same time, the sharp rebound in corporate profits that characterizes the first two years begins to normalize, making year-over-year comparisons less favorable. Valuations, which tend to increase in the early innings of a bull market as confidence returns, also usually peak around year three. This causes any future stock gains to be more dependent on genuine fundamental improvements (i.e., earnings growth) rather than continued multiple expansion. Finally, after two years of strong performance, investor sentiment often shifts from optimism to caution, with growing fears that current conditions may not persist. While it is impossible to predict the trajectory of equity markets from here, it may be prudent for investors to expect more muted gains from stocks in the years ahead simply based on historical patterns.

Oil Pressure?

Earlier this year, Marquette published a Chart of the Week that detailed the muted change in oil prices in the aftermath of U.S. strikes on Iranian nuclear facilities. Tensions in the region have persisted in recent time, with last week seeing Israeli airstrikes that targeted Hamas leadership in Qatar. In response to this development, oil ticked higher as investors assessed the increased risk of commodity supply chain disruptions but later gave back most of these gains. This represents a continuation of the trend exhibited during most of 2025, in which geopolitical shocks do not materially increase the price of oil. One possible explanation for this dynamic would be persistently elevated supply of the commodity.

As displayed in the chart above, there has been a sustained imbalance between oil supply and demand for most of the last six months, with supply outpacing demand. Indeed, OPEC+, which includes the Organization of Petroleum Exporting Countries, Russia, and other allied producers, has moved to aggressively raise output in 2025, which has resulted in a production capacity increase of over two million barrels per day since April. Despite this already increasing supply, OPEC+ recently made an agreement to add an additional 137,000 barrels per day to its production capacity in October. These increases in capacity have significantly outpaced global demand, driving prices lower and widening the oil supply glut. Going forward, while geopolitical instability may support temporary price increases, the longer-term outlook for oil remains clouded by excess supply and uncertainty surrounding future consumption of the commodity.

Getting That Paper

Commercial paper is a type of unsecured debt instrument that can be utilized by companies to finance short-term liabilities. The U.S. commercial paper market, which eclipsed $2 trillion in total value in 2007, was decimated in the aftermath of the Global Financial Crisis, with ultra-low interest rates pushing most companies toward longer-term obligations. That said, this method of financing is currently experiencing a revival, as 2025 has seen more than $200 billion in new U.S. commercial paper issuance. This is the highest figure notched in a calendar year since 2006. Indeed, major corporations including Uber, Netflix, Coca-Cola, PepsiCo, Philip Morris, and Honeywell have recently ventured into the commercial paper market, collectively raising billions through instruments that usually mature within one to three months. Total U.S. commercial paper outstanding stood at more than $1.4 trillion at the end of August.

The recent growth of the commercial paper market reflects a notable change in how U.S. companies are choosing to finance operations. With borrowing costs elevated and trade tensions persisting, firms have opted to bolster cash reserves while avoiding the higher expense of long-term debt, particularly as potential interest rate cuts from Federal Reserve loom. This trend is consistent with the approach of the U.S. Department of the Treasury, which has relied heavily on short-term T-bill issuance to cover government funding needs. It is important to note, however, that commercial paper utilization exposes issuers to certain risks. For instance, if long-term interest rates remain high, companies could be forced to regularly roll over short-dated obligations. A surge in short-term borrowing by both businesses and the government may also increase competition for investors, raising funding costs further.

What’s It All Worth?

In private markets, secondary transactions have increasingly gained attention and acceptance as a viable liquidity option for both general partners (“GPs”) and limited partners (“LPs”). During the first half of 2025, secondary market volume reached record levels, surpassing $100 billion for the first time in history. Specifically, volume totaled $102 billion in the first six months of the year, with a nearly even split between LP-led (53%) and GP-led (47%) transactions. To put this in perspective, secondary transaction volume for the entirety of 2022 was $103 billion. Although dry powder has declined in recent months — from $216 billion in 2024 to $171 billion — fundraising is expected to more than offset this decrease, with $218 billion projected to be raised over the next year.

As is common with most asset classes, increased market participation leads to more capital being raised and deployed, which, in turn, drives asset prices higher. The secondary market follows this same trend. Typically, secondary transactions are priced at a discount to the net asset value (“NAV”) of the assets or stakes being sold. However, secondary pricing across all private asset classes increased in 2024, reaching 89% of NAV (up from 85% in 2023). Buyout secondaries saw the highest pricing last year, trading at 94% of NAV, while pricing of private debt secondaries jumped from 77% of NAV in 2023 to 91% in 2024. In contrast, real estate secondaries traded at the lowest percentage of NAV, settling at 72% in 2024. This figure is more consistent with the 71% trading value exhibited by real estate secondaries in 2022 and 2023.

This brings us to the central question of this piece: What’s it all worth? Simply put, whatever someone is willing to pay! But how do we value an asset purchased at a discount? Can we trust the original valuation? Historically, secondary buyers have tended to mark acquired assets up relative to the previous owner’s NAV shortly after the transaction closes, but is this a fair and accurate way to value an asset? If buyers conduct thorough due diligence, their own assessments of a company or portfolio will inform their willingness to pay market-clearing prices, meaning pricing is not determined solely by the current value of an asset. Indeed, buyer perspectives on future growth potential, exit opportunities, and comparable market transactions all influence secondary market pricing. Additionally, recent strong capital inflow for the asset class may be putting pressure on acquirers to put money to work, potentially contributing to the recent uptick in pricing.