The third quarter of 2025 saw a return to ‘business as usual’ for global stockmarkets. Buoyed by the anticipation of a US rate cut – plus a sense US tariffs might not prove as bad as at first expected – the MSCI World index rose 7.4% over the three months.
It was the usual suspects leading the charge too, with the CNBC Mag7 index up 23.6% over the quarter. Indeed, by the end of the period, the worry had become the apparent complacency of markets – and this concern seems likely to define the investment environment for the remainder of the year.
Global markets overlooked a still-uncertain backdrop – as tariffs were announced erratically and unpredictably over the quarter – to focus instead on the first US rate cut since December 2024. The Federal Reserve did not disappoint, in September cutting the Fed funds rate by 25 basis points to a 4%-4.25% range.
The technology sector was also given a boost by strong corporate earnings and the continued strength of AI spending. Nvidia, for example, beat analysts’ estimates for both revenues and profitability as demand for its chips showed no signs of abating.
This appeared to be driving the US economy to new heights, in spite of weaker jobs data. A revision to US GDP numbers in late September showed the economy growing at an annualised pace of 3.8% in the second quarter of 2025.
US tech may have been resurgent but the diversification trade remained intact. Asian markets – especially China and Japan – were strong over the quarter. Commodities were also buoyant, with gold in particular hitting new highs. Healthcare continued to lag, thanks to ongoing uncertainty over drug pricing, while energy stocks struggled as the oil price fell.
“By the end of the quarter, investors were showing signs of discomfort – highlighting concerns over valuations and the apparent imperviousness of markets to the various risks.
Unlike the dotcom boom, where investors could readily sidestep the exuberance, any AI-related meltdown may be harder to avoid.”
The Chinese market was strengthened by another postponement over tariffs, as well as by some encouraging economic data. Other Asian markets were strong too, with the Schroders quarterly update noting: “The Taiwan index market outperformed against a backdrop of ongoing strength in technology stocks, driven by continued demand for artificial intelligence.
“Korea’s outperformance was similarly helped by strong performance in the technology sector – particularly memory-related stocks in September. Progress on trade negotiations with the US was also supportive.”
The strength of China in turn boosted emerging markets funds, with the MSCI Emerging Markets benchmark up 11% over the quarter. This was in spite of real weakness from former star India, which continued to struggle with weaker-than-expected economic growth and high valuations.
Japan meanwhile finalised a trade deal with the US in early September, securing a 15% tariff rate. Investors chose to ignore the country’s political situation, focusing instead on its ongoing corporate governance reforms. The Nikkei continued to hit new highs over the quarter.
The UK and Europe just about held their own in this environment. The FTSE 100 continues to push higher, leaving the UK’s small and midcap stocks in its wake – and it was a similar picture in Europe. Most notably, the French market was partially derailed by the turmoil at the French parliament, as the country welcomed one prime minister after another.
AI, AI everywhere
By the end of the quarter, investors were showing signs of discomfort – highlighting concerns over valuations and the apparent imperviousness of markets to the various risks. Fund flow data showed rising nervousness around the AI trade and the US market. Both the International Monetary Fund and the Bank of England have recently warned that valuations are increasingly in bubble territory and there is the risk of a sudden correction.
Part of the problem is that AI has become such a huge part of the market. In this article for the Financial Times, Ruchir Sharma, chair of Rockefeller International, said: “AI companies have accounted for 80% of the gains in US stocks so far in 2025. That is helping to fund and drive US growth.” Unlike the dotcom boom, where investors could readily sidestep the exuberance, any AI-related meltdown may be harder to avoid.
Fund managers are divided. While some have backed away from the sector completely, others are more selective. “We have exposures to AI and the growth of AI through our holdings,” says Gabrielle Boyle, manager on the Trojan Global Equity fund, for example.
“Alphabet is our largest holding. We also hold Meta and have been holders in Microsoft for many years. We have significant exposure to companies that we categorise as being in a position to benefit and garner revenues from the growth of AI and the application of AI to their existing business model.”
Meta, she notes, has seen an improvement in its targeted advertising while Microsoft has already benefitted from significant investment in computing power, as well as applying AI to its own business and selling software around it. On the other hand, Boyle’s fund has not been exposed to semiconductor businesses, such as Nvidia, which has significant concentration in its customer base. “We like our companies to have significant breadth and not be dependent on single customers,” she adds.
Eyes on the Fed
Signs of market complacency have also been evident in the bond world. By the end of the quarter, US treasury markets were anticipating another three to four rate cuts by the end of the year – a level that looked out of line with both the risks around inflation and the Federal Reserve’s own statements.
“The divergence between the more dovish FOMC ‘dots’ [which chart short-term interest rate projections from the Fed’s top policymakers] and the more hawkish growth and inflation profiles suggests the recent policy action should be seen as an insurance cut, rather than a substantive shift in the Fed’s reaction function,” argues Michael Feroli, chief US economist at J.P. Morgan.
“That said, we think a major shift in labour market momentum would be needed to prevent another cut in October – and there will only be one more employment report between now and then.” The group sees two further cuts as a more realistic expectation.
For Fidelity Strategic Bond fund manager Mike Riddell, the prevailing mood of optimism is a concern. “US non-farm payroll data continued to show signs of weakening, with a low figure and further downward revisions to previous months, indicating fragility in the US economy,” he points out.
“Markets have shrugged off these concerns, however, rallying around expectations of a Federal Reserve rate cut, particularly following Jerome Powell’s dovish speech at Jackson Hole, coupled with the deteriorating jobs and unemployment situation in the US.” In consequence, Riddell has moved to an underweight position in US duration – and also sees growing fragility in the US dollar as another reason to swerve US treasuries.
Nor was it just US treasuries where optimism had started to look overdone by the end of the quarter – credit markets were also showing signs of exuberance, with credit spreads reaching multi-decade tights over government bonds.
“The credit market has continued to perform well,” notes Fidelity in its quarterly update. “Credit spreads across investment-grade and high-yield have tightened, along with treasury rates going down, so combined the return has been impressive. On investment-grade, spreads have tightened 10% to 15%. The spread is now at historic tight levels.”
The group believes there are still pockets of opportunity in the very high-quality part of investment-grade, adding: “In particular, medium-term bonds look attractive as investors look for diversification away from US treasuries. Supply has been very limited because corporates had already taken advantage of ultra-low interest rates. We like short to medium high-quality investment grade papers.”
‘Debasement’ bargain?
Wall Street’s latest trend may prove to be an important factor in the months ahead. The ‘debasement trade’ is the bet that high levels of US government borrowing and erratic economic policy will continue to weaken the US dollar.
This is being seen in the strength of assets such as gold, cryptocurrencies, stocks and real estate – and helps account for the astonishing rise in the gold price, which tipped over $4,000 (£3,007) in early October.
“Precious metals have been on a tear in recent weeks as the debasement trade gathers momentum,” says Daniela Sabin Hathorn, senior market analyst at Capital.com.
“Ongoing US fiscal and political uncertainty has added to demand for safe havens, while a drop in real yields – driven by expectations of continued monetary loosening from the Federal Reserve – has further supported prices. Both gold and silver posted their strongest monthly gains since the pandemic in September and the bullish momentum has extended into October.”
The outlook for the rest of the emerging world is better and could brighten further if the dollar continues to depreciate.”
Indeed, this bullishness has extended to the relative risks of emerging and developed markets, with investors currently reappraising their view of the former as universally risky and the latter as universally safe. There has been some convergence of sovereign bond yields, and volatility has been similar across both asset classes.
“The outlook for the rest of the emerging world is better and could brighten further if the dollar continues to depreciate,” says David Rees, head of global economics at Schroders. “Central banks have already seized the space created by the deflationary impulse from stronger currencies to cut interest rates, which ought to boost domestic demand in 2026. India has been at the forefront of the latest rate-cutting cycle, while there is a good chance Brazil will start easing policy before year-end.”
Elsewhere, investors are still waiting for a smallcap revival, with the rally seen at the start of the year now stalled. This is particularly true in the UK and Europe, where the strong performance of larger companies has not extended down the market capitalisation spectrum.
All things considered, there are vanishingly few pockets of value in global financial markets today. Europe and the UK are noticeably lower-rated than elsewhere, while smaller companies across the world still appear to offer some prospects for growth. Any gains, however, are likely to be harder won and more selective in the final months of 2025.
