GDS Investments' commentary for the month of September 2025.
"Greed is a bandage which a higher power sometimes binds across the eyes of reason” – American journalist and author Edwin Lefevre
What a tumultuous year it has been. As we enter a new season (to our own amazement, it is September already!), we want to take a moment to zoom out and consider the broader economic and market forces that have been at play this year, and what they mean for the future. For our part, our model of the economic and business environment has fundamentally shifted in ways we see as reshaping the investing landscape.
A Shift Toward State Capitalism?
For decades, the American economic model has prioritized private enterprise, with the public sector playing at most a supporting role by facilitating capital and providing investments in infrastructure, education, and other areas. Now, that balance is shifting. Under the Trump Administration, we are seeing the federal government take more direct control in the economic arena than it ever has.
As a result, we seem to be edging toward a new system resembling state capitalism (or, as The Wall Street Journal phrases it, “State capitalism with American characteristics”). This is where the government still allows private enterprise but intervenes heavily, particularly when political priorities are at stake.
Recent events provide stark examples.
Apparent Interference with Federal Reserve Independence
In an unprecedented move, President Trump attempted to remove a sitting Federal Reserve Governor last month. We are not in a position to comment on the specifics of that case. Our concern, rather, lies in the broader implications: namely, the potential erosion of Fed independence.
Stepping back, we see an administration that has expressed a desire to oust Federal Reserve Chairman Jay Powell, then backtracked, before threatening to sue him. Trump clearly sees Powell as an obstacle to his own goal of lower interest rates, which is likely more politically than economically motivated. Now, the Trump Administration appears to be feeling out alternative routes to achieve the reach the same endpoint: more control over the Fed.
The Federal Reserve was designed to function at arm’s length from the rest of government, almost a sort of informal “fourth branch,” charged with managing inflation and unemployment free from political concerns. That independence has long served as a safeguard, ensuring the Fed’s mission isn’t redirected to serve political ambitions.
As an example of a central bank that does follow political rather than economic motivations, let’s look at the country of Turkey. A few years ago, Turkish President Recep Tayyip Erdogan, who controls their nation’s central bank, forced interest rates to stay low despite economic indicators, and inflation skyrocketed to 85%.
That’s the fear here.
“If the Federal Reserve falls under control of the president, then we’ll end up with higher inflation in this country probably for years to come,” Douglas Elmendorf, an economist at Harvard and former director of the nonpartisan Congressional Budget Office, told ABC News.
For our part, we view this as a dangerous experiment in American economic governance. Politicizing the Fed is a path fraught with risk.
Government Stakes in Private Companies
Separately, we’ve seen the Trump Administration signal an increased willingness to forge unusual financial ties with private enterprises, with Intel and Nvidia offering recent examples. Trump has claimed that Nvidia will pay an apparent 15% “kickback” on H20 chip sales in exchange for eased export restrictions. (What this means about the pre-existing national security concerns is anyone’s guess). For its part, Nvidia seems to be awaiting published rules before committing to anything.
The details around these dealings are murky, and much is likely happening behind the scenes that we don’t know and therefore cannot properly digest. Still, the optics are troubling. Government leaders publicly criticizing a company’s leadership, only to reverse course after private meetings and then invest federal funds into that same company, sends a confusing message. It suggests a transactional model where access and alignment with political objectives might override traditional market considerations.
That is not capitalism as we’ve known it.
A Fragile, Top-Heavy Equities Market
All of this is unfolding against the backdrop of an unusually fragile equities market.
As we’ve noted in past letters, market concentration is near historic highs. The S&P 500 today is being disproportionately supported by a small number of mega-cap stocks, often referred to as the “Magnificent Seven.” At the start of 2025, these companies made up over 34% of the S&P 500. That surpasses even the peak of the dot-com bubble, where the top 10 companies accounted for around 25%-30% of the index before the bubble burst.
The dot-com bubble isn’t the only precursor to this situation, either. In the early 1970s, the so-called “Nifty Fifty” (blue-chip stocks like Polaroid, Kodak (NYSE:KODK), and IBM (NYSE:IBM) were seen as invincible. Investors drove valuations sky-high, and the S&P 500 subsequently suffered steep losses in 1973–74.
To put it plainly: this level of concentration is rare, risky, and reminiscent of past market bubbles.
And it’s hard to deny the parallels today. Companies like Tesla (NASDAQ:TSLA) and Costco (NASDAQ:COST) are undeniably strong businesses, but many are trading at unsustainable valuations (e.g., 50–60x earnings with modest growth) that simply outpace reasonable expectations of future performance.
There comes a point where what needs to happen exceeds what will or can happen. As with the Nifty Fifty or the dot-com bubble, even solid companies can end up priced at an unsustainable level, while other areas of the market lag.
That’s where we seem to be right now. The top-heavy nature of the S&P 500 means broader market exposure may now carry unintended risk. The vast majority of companies in the index, perhaps as much as 90%, have underperformed, especially those more vulnerable to tariffs and weakening supply chains. That leaves a small elite disproportionately influencing index performance.
All that said, history tells us that when the market becomes this lopsided, the next cycle often favors the neglected majority. After the dot-com bubble burst, the small-cap Russell 2000 outperformed the large-cap S&P 500 by a wide margin from 2000 through 2006. We suspect a similar rotation may be ahead. In other words, from a value investing perspective, this distortion may ultimately present opportunity.
The Guardrails
So, what guardrails are protecting us from the risks imposed by an economically aggressive presidential administration and a top-heavy equities market?
So far, the Federal Reserve has been conducting itself, in our view, in a responsible manner. Its governors have continued to, in all apparent good faith, continued to try to conduct Fed policy in alignment with their core mandates.
We cannot say the same of Congress. In a more traditional political environment, the legislative branch might have acted as a check on presidential overreach. So far this year, however, it has been largely quiescent.
That leaves two remaining guardrails: the courts and the credit markets.
The courts have sent mixed signals. The Supreme Court, for example, has at times appeared to shield Trump through moves like procedural stays, while simultaneously suggesting he may ultimately lose on the merits.
The bond market, on the other hand, offers perhaps the most reliable guardrail at the moment. Unlike the political system, the credit market is a prudent discounter of risk, and it cannot be bullied or bypassed. If Trump were to succeed in subordinating the Fed and pushing interest rates lower for political gain, for example, we have no doubt the 10-year Treasury yield would spike, and inflation expectations along with it. This, in turn, would almost certainly force rapid policy adjustments.
Deutsche Bank believes the reaction could be catastrophic. Global head of FX research George Saravelos at Deutsche published a note in July arguing that the market reaction to the loss of independence at the Fed would be extreme:
“We believe the market reaction would be large. The empirical and academic evidence on the impact of a loss of central bank independence is fairly clear: In extreme cases, both the currency and the bond market can collapse as inflation expectations move higher, real yields drop and broader risk premia increase on the back of institutional erosion.”
Just bear in mind as you digest this gloomy economic hypothetical that trying to predict market behavior, especially under unprecedented circumstances, is as much guesswork as it is analysis.
Our view: rumblings from the bond market could be enough to stay Trump’s hand, as it did immediately after his “Liberation Day” tariff announcements. As we wrote back in our May letter: “Ultimately, it was the credit markets’ repudiation of Trump’s tariffs that triggered the 90-day pause.”
Think of the bond market as the oxygen of the financial system. It enables day-to-day operations, from payrolls to capital expenditures. If that oxygen thins (i.e., if borrowing costs rise or confidence falls), there will be a counterreaction. How intense that reaction will be is anyone’s guess, but as the markets rumble, policies will certainly change.
As a result, the bond market will likely determine what level of state capitalism the U.S. can sustain. If it tolerates further interventionism, that may become our new normal. If not, it will surface the limits of this risky experiment.
Insightful Media on Current Holdings
- Novo Nordisk (NYSE:NVO) is looking to expand its Ozempic product into an additional market. Beyond the existing applications for issues like obesity and diabetes, Novo is testing Ozempic as a possible treatment for conditions like Alzheimer’s and Dementia, given that GLP-1 users who have been taking the injectable for at least two years had ~ a 20% lower risk of a dementia diagnosis.
- Airbnb (NASDAQ:ABNB) is talking about a future beyond restricting their app to manage only accommodations during travel, describing their future as ‘the Airbnb of anything.’ The idea is to turn Airbnb into a service its users can leverage for a variety of purposes, rather than limiting it to a single, limited use-case. This has the potential to increase not just usage by its existing customer base of 150+ million users globally but aggressively expand its total addressable market in future years. Airbnb founder and CEO Brian Chesky discussed his vision for the future of Airbnb in a fascinating interview on the Social Radars podcast. (For additional background, revisit our October 2024 letter, in which we discuss Airbnb and Chesky’s participation at the 2024 Goldman Sachs Communacopia + Technology Conference, along with Airbnb CFO Ellie Mertz.)
- Google/Alphabet Inc (NASDAQ:GOOGL) dodged the worst possible penalties in its U.S. antitrust case. This was a high-stakes case that could have seen Google stripped of a series of valuable properties and deals, including its market-dominant Chrome browser. It will keep Chrome in its product portfolio, though it has been barred from making exclusive search-related deals. Shares jumped 8% in the aftermath of the decision, as investors showed relief that Google would not be broken up.
- Rivian’s (NASDAQ:RIVN) CEO RJ Scaringe continues to impress us with his vision. We recently listened to two wide-ranging conversations with him, covering topics like AI’s impact on self-driving technology, competition with Chinese EVs, and the future effects of EV-related policy changes. Listen to his sit-downs with This Car Pod and InsideEVs.
- Valaris Limited (NYSE:VAL) presented at Barclay's Energy-Power Conference at the start of September, discussing their market outlook, future plans, and value-driven approach to capital allocation. A recording of the presentation is still available, as is the PowerPoint presentation itself.
What All This Means for Us
Longtime readers may notice that our letters have taken on a different tone this year. Historically, we focused on portfolio changes, company-level decisions, and value-investing education. We shied away from macroeconomic and political commentary.
That has changed, not because we want to wade into politics, but because these issues now shape the larger environment in which we invest. When the federal government intervenes in capital markets, or when tariffs and tax policies directly affect the viability of businesses we own, we must take this into account.
For instance, in the case of Rivian, a company we’ve discussed previously, the rollback of EV tax credits could change the dynamics of the entire industry. In this case, we believe it may work in Rivian’s favor by removing subsidized competition that has been “force-fed” into the market by legacy OEMs. Nevertheless, this is an example of how the economic changes that have been roiling in the background all year now necessitate deep, second-order thinking.
And that kind of second-order analysis is what we’ll continue to do on your behalf.
To be clear, we are not predicting economic doom with our comments today. But we firmly caution against complacency. We’ve entered a period of heightened policy experimentation, elevated market concentration, and blurred lines between public and private sectors. That means more risk, requiring more care in decision-making, but perhaps also laying the groundwork for more opportunity for disciplined and alert investors.
On Our Desk
Lastly, we recently listened to an insightful and pleasantly grounded conversation about AI on the Knowledge Project Podcast. Investor and technology analyst Benedict Evans chatted with podcast host Shane Parrish. You might recall we wrote earlier this year about how enthusiasm around LLMs has waned somewhat “due to lack of quantifiable value.” Yet even now, parsing hype from pessimism, AI-boosting from AI-trashing, can be challenging. We found this conversation (in which Evans refers to AI as “the biggest thing since the iPhone but only since the iPhone”) to be refreshingly levelheaded and thought-provoking. Watch the conversation here.
As always, we thank you for your trust, your partnership, and your patience. We remain committed to navigating this environment with clarity, rigor, and an unwavering focus on long-term value.
With warm regards,
Glenn Surowiec
484.888.9155
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