Q3 letter to investors: Navigating a two-speed economy

After a strong start to the year, the third quarter brought with it renewed volatility for financial markets and a heightened sense of caution amongst investors.

Despite this fact, underlying fundamentals across the Fundrise portfolio remained resilient, continuing to support positive net returns year-to-date for a majority of investors, with the venture platform and income-focused funds in particular being outsized contributors to that performance.

At the same time, the risks we identified last quarter—renewed inflation, rising Treasury yields, and higher borrowing costs—became even more pronounced.

In spite of this fact, AI-related investment continued to accelerate aggressively.

A two-speed market

The result is an increasingly two-speed economy: one part experiencing a once-in-a-century build out of new infrastructure driving exceptional growth, and the other where persistently higher rates and weakening consumer sentiment is creating greater and greater headwinds.

Source: Wall Street Journal

To illustrate just how stark the divide has become consider the below:

• AI capex exceeds $1T - AI capex is expected to exceed $1 trillion globally in 2026, with US hyperscalers alone planning to spend nearly $800 billion (roughly 10x what they spent as recently as 2019).
• ⅓ of GDP growth from AI - US GDP grew at an annualized pace of approx 2.4% for the first six months, with roughly 1/3rd of that growth estimated to have come from AI related investment.
• Inflation is at 3.4% - Inflation reemerged in the wake of the Iran war and remained persistent through the summer at 3.4%, well above the target rate of 2%, with gas prices alone up nearly 30%.
• Fed Funds rate up 25 basis points - In response to sticky inflation, the Federal Reserve adjusted its benchmark Fed Funds rate up 25 basis points to a range of 3.75%-4.00%, the first such rate increase since the summer of 2023.
• 10-year Treasury passed 5.33% - US Treasury rates spiked over the past several weeks, with the 10-year yield surpassing 5.33%. This marked the largest single quarter increase since 1994 and drove up borrowing costs across the economy with mortgage rates jumping above 7.25%.

Increasingly, this two-speed economy is diverging into wholly different parts, each with very different risk and return expectations.

The “haves” and the “have nots”

The “haves”, i.e., those companies and sectors that are directly building and benefitting from AI, seem to have unlimited potential with stocks setting all-time highs and new startups breaking valuation and revenue growth records.

Whereas the “have nots”, i.e., those companies and sectors that are either not seeing the direct benefits of AI or worse are negatively impacted by it, face a grim future that some argue ends in extinction.

Source: Carson Group

Case-in-point, as of the time of writing this letter, nearly half (44%) of the stocks in the S&P 500 were trading 20% below their 52-week highs, the definition of a bear market, despite the index itself being just 2% off its all-time high.

While this extreme separation between winners and losers is rare, it is not unheard of. Similar setups have occurred a few times before with the most notable being in advance of the 1929 market collapse and the 2000 dot com bubble.

As an investor, this creates a difficult juxtaposition. On the one hand, you want to ensure exposure to the once in a generation wave that is AI, while on the other, you want to be protected against those sectors increasingly weighed down by a strained consumer and slower growth.

Source: JP Morgan Asset Management

Easy to say, but hard to do. Broad indexing alone may not be a viable solution to achieve this outcome (as highlighted by the divergence across the S&P 500).

For investors, the central dilemma is the clear tradeoff between ever more concentration in high-growth AI or diversification at the cost of short-term performance.

How can an investor reduce risk without sacrificing too much return?

Aligning investors to the growth

Achieving this balance has increasingly become our primary focus and where we believe the breadth of the Fundrise platform becomes a distinct advantage. Our ability to invest across asset classes: real estate, credit, venture and across the capital stack: debt, preferred equity, common equity allows us to pursue the broader long-term opportunity but in generally differentiated ways.

Whether it is backing the companies building AI or financing the infrastructure supporting them, our ability to work directly with partners in private markets means we have better control on not just what our investors own, but also the price we pay, the terms we receive, and where we stand in line to be paid. Those are tools that simply buying a broad market index does not provide. Of course, flexibility alone is not enough, and no structure eliminates risk. The advantage must be earned through disciplined underwriting, and hands-on execution.

Onward.