Brian Pietrangelo [00:00:01] Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to open doors in the world of investing. Today is Friday, September 26th, 2025. I'm Brian Pietrangelo and welcome to the podcast.

Today is an exciting day for a sporting event, and if you're a golf fan, you certainly know of it. If you're not, you might want to tune in on TV to take in the picture and excitement of the Ryder Cup Tournament. The Ryder cup was named in honor of its founder, Samuel Ryder, and has been in existence for almost a century, going back to 1927, so in two years we will be celebrating the 100th year anniversary of the Ryder Cup. The tournament is a competition between the European golfers and the United States golfers and occurs every two years, but it goes back and forth between the United States and the European location, so for those of us here in the United States, we've got a great treat in that it is with us this year in New York at Bethpage. What makes it exciting is it is a tournament against team play in many regards, and you do everything you can to help your team win, so it's quite exciting, a little bit different than the normal PGA tournament, which includes regular competition between individuals, but this is a team event, so it's really, really exciting. Tune in if you have an opportunity. Great to watch.

With that, I would like to introduce our panel of investing experts, pros in their own right, here to share their insights on this week's market activity and more. George Mateyo, Chief Investment Officer, and Joel Redmond, Managing Director of Business Advisory Services. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects and especially our Key Questions article series addressing a relevant topic for investors. In addition, if you have any questions or need more information, please reach out to your financial advisor.

Taking a look at this week's market and economic activity, we've got three key reports to share with you this Friday morning, beginning with the initial unemployment claims. Now, we don't report this every single week, but we do watch it every single week to see the trends. So if you go back to September 6th, the number actually ticked up quite heavily to 264,000, and we said at that time, back on the podcast a few weeks ago, that we would continue to watch it to make sure it wasn't a trend going up, and it might have been a one-week blip. Now that we are reporting the initial claims for September 20th, they're back down to 218,000, so in a reasonable number, tells us that that economic report remains favorable in that it is not escalating. So that's good news for the overall status in terms of one of the factors that we watch within the jobs market.

And second, we give you the report that also came out yesterday with regard to the Gross Domestic Product, or GDP, for the second quarter of 2025, and this is the third estimate that comes out in order. This was also a favorable report, given that for the second quarter of 2025 the first estimate came out at 3%, the second estimate came at 3.3%, and now the third estimate we received yesterday came out 3.8%. Now that's relevant for a couple of different reasons. First, it was going up, and that is good news because we know that it's slightly better than expectations in terms of the overall quarterly rate. The other part that is a little bit interesting is that the third estimate doesn't usually have a big delta in terms of the revisions from the second estimate, and here we've got a whole .5 percentage point going from 3.3 to 3.8. What's driving the revisions and the overall 3.8% increase for the quarter, it actually has been a big contributor from consumer spending overall in the United States, which has been a little bit stronger than expected.

And third, or finally, just this morning, the Bureau of Economic Analysis, I should say, also came out with their personal consumption expenditures report, and so we look at that from an inflation perspective because the PCE report is the preferred measure for the Fed, and on a month-over-month basis ending August. Overall, PCE inflation went up .3%, which was higher than the previous month. If we actually move to the year-over-year number, we'll talk about the consistency of PCE inflation, and more importantly, core PCE inflation, which excludes food and energy. So overall, personal consumption expenditures, or PCE inflation, went up in the month of August for 2.7% versus 2.6% in the prior month. In addition, on a month-over-month basis for core PCE... Now that 2.9% is the same as July, and it had gone up from June and May, so we continue to look at this as being somewhat favorable in that it is not going back up significantly, but also not favorable in that it's not coming down closer to the Fed's 2% goal. So that certainly has implications for the outlook for the remainder of the year with the Fed.

So George, let's turn to you first to get your take on this economic data that we have this week and what it might mean for the Federal Reserve policy and other parts of the economy.

George Mateyo [00:05:24] Well, Brian, I think this week was an interesting one from the economic perspective. As you mentioned, overall net-net, I think the numbers kind of suggest that things are doing quite well from the economy's perspective. Things probably surprised a little bit on the upside in terms of the overall strength of the economy. The numbers you referenced are somewhat backward-looking, so we have to acknowledge that that's somewhat in the past and in the rear view mirror. But nonetheless, you know, we did get some lift in consumer spending or maybe consumer spending was a little bit faster than people thought initially, which is always good since the consumer represents roughly 70% of the economy.

The other thing that really kind of stood out to me in looking at some of these numbers was the fact that spending on capital goods and really kind of infrastructure spending rose a pretty sharp amount driven by AI. And I guess if you strip out AI spending and look at capital spenders, you're spending it overall. XAI spending grew less than 1%, actually 0.1%. So practically no growth at all. But of course you have to add in AI spending because that's a big part of our economy right now. And that number was 1.6%. So almost a percent and a half differential between spending XAI and spending with AI, if you will. And that's the big deal when you think about the fact that the economy is... 30, 31 trillion dollars, that 1.5% difference adds up to a lot of money. So there is a lot AI spending that's really fueling the growth. And as we've talked about on these calls and other places too, should that start to slow down or maybe stall out a little bit, that could have some big implications for the economy. And I think it is notable to say that AI has become a big driver of the economy, and that's something that we have to factor into our thinking around workflow construction. And that certainly has been a case for many, many months now, many quarters.

But overall, I think it does suggest that the economy is in a pretty good place, but it's getting somewhat concentrated in terms of its risk magnitude and its concentration in certain areas. I think its also notable that when we kind of put this together, and I think what's happened in the market, I think we've seen a bit of a change in yields in the sense that maybe one of the reasons why the equity market has been a little bit sideways this week has to do with the fact that interest rates have bounced up a little bit again. Two weeks ago at this time, we were talking about the fact that the 10-year treasury yield would probably, maybe, might actually dip below 4%. I think it got really close, but today we're standing at about 4.2 or so percent. So we've had a significant move back up in yields, and that might be one of the reasons why the stock market is not really responding to better expected economic news, but it is actually kind of suggesting that maybe stronger growth means fewer rate cuts. And that's one thing the market has been kind of focused on for quite some time as well.

I think the Fed actually has to acknowledge the fact that the labor market hasn't really pulled off in a material way. We start to see, as you mentioned, jobless claim numbers take down again. There was a spike around Labor Day. That's pretty typical in the sense that some of these numbers that come out around the holidays somewhat distort the numbers. They kind of move around a little bit. There are some intricacies that need to be understood. But I think overall, the labor market seems to be doing okay for right now. And I've actually seen a lot of people suggest that maybe the more steady state of equilibrium with respect to labor in general actually has come down to two, meaning that in the past, given the size of our economy and really kind of where the growth is coming from, namely immigration, we needed 100,000 or so jobs to be kind of at a normalized level. And now that immigration has come way down, maybe that equilibrium level has also been adjusted lower as well. So what that means, I think, is that the Fed has to kind of take into account. They have to be kind of careful not to overdo it with respect to interest rate cuts. There are certainly some Fed governors that are really pushing for that. But overall, I continue to think that the economy is in a pretty good place right now. And that kind of slow growth environment will probably be persistent for a bit longer as we go forward for the back half of this year.

Brian Pietrangelo [00:09:13] Well, thanks, George, for those comments and to bring everybody up to speed. On the economic calendar, we have the Federal Reserve Open Market Committee meeting in October on October 29th, and we will not receive the PCE inflation until two days after. But what we will receive is the employment situation next Friday on October 3rd. So what do you think this all means for the next step for the Federal reserve for the remainder of the year, George?

George Mateyo [00:09:36] Oh, I think they've got at least one more cut kind of priced in right now. The market says kind of back off, maybe more than two cuts. There was some call that maybe we would see as many rate cuts between now and year end. I think that's a bit too far. I think the futures market right now is kind of a point to our, I'm sorry, a cut and a half kind of priced in in the sense that there's some thought that maybe they would cut once and maybe a second time in December if things start to really fall off from the labor market perspective. I think we have to be acknowledging too that we're also likely in this point of time again, Brian, where we're dealing with covered shutdowns, right? And that's a risk that you've kind of signaled as well. So that those things come and go and oftentimes they're really not events, but that's something we have to think about as well

Brian Pietrangelo [00:10:21] Right on, George. Normally we won't talk about it because it typically hurts resolve, but with this year might be a little bit different. We'll see. Thanks for bringing that up for our listeners.

George Mateyo [00:10:29] Yeah. And I think I would just kind of say one thing quickly on the shutdown issue is that I think it's likely to make data messy or maybe they analyze the data quite messy in the sense that you're right to say that this might be a little bit different in the since that the risk for shutdown at this time might be higher than it was in the past. Typically these are short-term market events. They don't really result in any significant dislocations. We saw a little of that in 2018. That was the last time we had a shutdown. I think the market was off maybe four or 5%, which probably didn't feel great at the time. Although I would argue that there were other things happening economically that may be driving those, that weakness in the stock market. But I think it was going to be important when you talked about the Fed meeting is that if we are in the midst of a shutdown, we're going to get some important numbers between now and then in early October. And if we don't have fresh data to really focus on, the market might have a difficult time trying to find its footings.

Brian Pietrangelo [00:11:23] Yeah, great point, George. Great point. Thank you. Well, George, thanks for all that information. And at this time, we'd like to bring in a special guest to the podcast, Joel Redmond. And Joel is our Managing Director of Business Advisory Services and leads our team nationwide advising businesses owners on transition. So Joel, we're excited to have you on today. You and your team do a lot of work with business owners. And we'd to have share some thoughts in terms of what business owners might be thinking about in light of everything that we've seen this year. Tariff scares. The artificial intelligence arms race, the One Big Beautiful Bill Act and a constant drum beat of indicators and stimuli we've seen from the broader economy. So Joel, your thoughts.

Joel Redmond [00:12:01] Thanks so much for having me on, Brian, really appreciate it. So one of the things I just see, and thrilled to be on with you, typically one of first things I hear about is just what are the things that business owners should be thinking about? And before I take a stab at that, I'd love to just take a minute and set some context for our listeners because when you use the term business owner, that's pretty broad.

So, in general, we look at three types of business owners. The easiest way is to parse them out by size. So. When you look at small businesses, middle market businesses, large businesses, if we start with the large businesses three, 4,000 public companies, these are the ones that you and your team so expertly analyze and comment on and work with clients on. Mag-7, the S&P Russell index components, the hugest of the huge. So, we do some work with the executives of these types of folks, but on an enterprise level, our group doesn't typically get involved too, too heavily on that side of things. At the other end of the spectrum, you have small businesses. This is the backbone of the economy, backbone of job creation. Businesses in general with $5 million or lesser than your revenue. Order nail salons, pizzerias, tax preparers, millions of service businesses, consultancies. There's about 15 million of those in the economy at any given time, depending on the data you look at. I think the National Association of Industrial Classification System, NICS. They do a study every year and they came up with about 15.3 million as of the close of last year. So, a lot of what we talk about does get into the upper strata of those businesses.

Typically, though, where we focus a lot our energy and attention is middle market businesses. And there's about 350 to 400,000 of these businesses out there at any given time. Typically, the middle market itself is divided within three strata. You've got lower middle market with about $5 million to $150 million in annual sales. Middle middle market, 150 to 500 million. And upper middle market 500 million approaching a billion dollars, almost at that big public company level. We work with a lot of these types of owners and at all levels, but the most common engagement that our group has is probably with that lower middle-market owner, that five to $15 million annual sales level. So someone who's well crossed, that $5 million threshold and it's kind of on their way to the next level.

Brian Pietrangelo [00:14:32] Sure does Joel, thanks for that context. And so what should these company owners, these lower middle market owners really thinking about in terms of opportunity and understanding?

Joel Redmond [00:14:42] So I think there's two answers to that. There's an evergreen answer and there's a topical answer. And so I'll give you the evergreen answers first. One of the biggest questions we hear directly and indirectly from business owners and sometimes their advisors, sometimes their stakeholders in that lower middle market space is, what should I be doing to prepare for a transition? Now, how can I be assured that I'm doing all of the right things to ensure I achieve my maximum transition value or transaction value? That's what we hear kind of again and again. And the short answer is there's probably at least 50 things to do. But fortunately, I remember a high school teacher from a long time ago who once told us, don't just discount the evidence, weigh the evidence. And so one of the things our team does is we routinely go through these 50 plus items that owners can consider doing in the legal sphere, in the financial sphere, in the sales and marketing sphere and all these different arenas. And we weight them in order of importance for owners getting ready for a transition or a transaction. We wanna make sure we're putting first things first.

And so typically we often have a top three for business owners who wanna know that they're ready. And so that top three is, the first one is just know the value of your business. The second one is make sure your legal and organizational documentation is in order. The third is to have expert legal counsel, whether they're on staff, whether they are fractional, have access to that general counsel as a sounding board. So might seem counterintuitive. None of those are financial things. None of them are talking about getting audited financial statements or leveraging the accountant for the type of entity that you're using. All those things are really, really important.

But the reason these three come up again and again is because they're binary indicators. And what that means is. They're not tiered. You know, if you have reviewed financial statements versus audited financial statements, you'll typically get a difference in value. You'll get more value if your financial statements are audited in a transition. But if you don't have organizational documents in order and you don't have the proper evidence that you own the business, for example, you can blow a deal. So on off versus levels of tiers.

Brian Pietrangelo [00:17:06] Does that make sense? Sure does, Joel. And I think for probably our listeners, the most important of that for you to give us a couple of comments on is valuation. And what are the important parts of that component?

Joel Redmond [00:17:18] If you don't know the value of your business, you can't know whether an offer is an adequate offer. If you also don't what you're going to net once the holdbacks and the escrow and the earn outs and the taxes and the debt and the intermediary fees are paid, how can you really know if you can accept an offer or if you have to reject an offer? So there's a wealth planning aspect to that. Does the net proceeds from this offer on my business meet my requirements to meet my core capital lifestyle spending needs? And then the basic question is, am I getting a fair price for my blood, sweat and tears that I've put into this enterprise?

Brian Pietrangelo [00:17:59] That's a huge one. Great. Now there's a ton of stuff to consider, but one that's more timely is some opportunities that came out of the One Big Beautiful Bill Act was for specifically business owners. You want to touch on that just so we can give our listeners a highlight.

Joel Redmond [00:18:13] Yeah, absolutely. So one of the greatest gifts we've received in the US tax code is Section 1202. It's the qualified small business stock provisions in our tax code. And it came about in the early 1990s. Congress basically wanted to incentivize businesses that made tangible or intangible products and services right here in the United States. And so, what they did was they put a provision in the code that enables the owners of a C corporation engaged in a qualified trade or business to receive some pretty hefty capital gains tax exclusions on the sale of those business interests. And so, the amount of gain on the sales that you receive from the sale these C Corp shares for the business that you founded, it depended on a few things. One of them was the date, the time period. The other big one was whether you were involved in a trade or a business that was quote unquote qualified small business. And so essentially, it's complicated and there's a ton of detail. In general, services businesses tend not to qualify and businesses that create tangible or intangible products and values do tend to qualify. The upshot of it all is before the One Big Beautiful Bill Act became law. As long as you founded your business on September 20 after September 27, 2010, 15 years to the day tomorrow by the way, any owner of this qualified small business stock could get a capital gains tax exclusion of the greater of two things. One was 10 times the adjusted basis in the stock and the second was $10 million. So, for purposes of back of the envelope, $10,000,000 exception exclusion from gain. Many States adopted as well, but it's a federal benefit.

Brian Pietrangelo [00:20:05] So pretty serious benefit. Thanks, Joel, for that tremendous information. And now we'll finish up the podcast as we usually do going back to George. To George, share your thoughts on what might be a great reminders for our audience members as investing principles and other things we always wanna keep track of.

George Mateyo [00:20:21] Well, Brian, I think we've been saying this for quite some time, but I still think it resonates and it makes a lot of sense to me, which is don't underestimate the power of diversification. This is a year in which we've actually seen portfolios that are more diversified than less actually outperform. And that hasn't been the case in the sense of the past couple of years returns. And I think Joel acknowledges a little bit in his remarks that we've seen returns be somewhat concentrated in just a handful of stocks. And that's been helpful, but going forward, diversification I think is working again, meaning you wanna be diversified by asset class, also by geographic region. In this sense, we've actually seen international markets do as well, if not better than domestic markets this year. And we also wanna be diversified, of course, by sector and security type.

I actually ran into a client this week, for example, who was talking about his portfolio and wanted to know if he actually should include what they call the NASDAQ triple Qs, the QQQs, which is a really kind of a key way to talk about a really heavily concentrated index that focuses on some of America's fastest growing companies. And we went back and looked, and I was kind of surprised with me that roughly 65% of that index is weighted towards technology companies, and another 10 or 15% or so are kind of related to tech companies. So, it's a very concentrated index right now, probably more so than I would have recognized. So, I think that might be something that I would really leave off to the side unless you've really got a high risk tolerance. But I think really staying diversified and staying balanced is gonna be really important for the back half of this year.

Brian Pietrangelo [00:21:53] Well, thank you for the conversation today, George and Joel. We appreciate your insights. And thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results, and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or financial advisor for more information, and we'll catch up with you next week to see how the world and the markets have changed. And provide those keys to help you navigate your financial journey.

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