Global equity indices reached record highs in the third quarter of 2025, driven by the strong performance of large US technology companies, which reported better than expected results. Investor sentiment was supported by a lack of major US policy surprises, interest rate cuts, a cooling labour market, and moderate economic growth. Despite this positive environment, stubborn inflation and high market valuations remain key concerns. If inflation eases and earnings growth justifies current prices, investor optimism will be validated. However, given the long period of rising markets and potential for volatility, a cautiously optimistic stance is warranted, with a view to potentially raising cash reserves to deploy if markets decline.
Inflation remains above target in major economies. Core inflation, which excludes food and energy prices, serves as a crucial gauge for policymakers, and has remained stubbornly high, driven by sustained growth in the services sector and wages. The consensus is that inflation will ease only gradually and stay above central bank targets through the end of the year. This could limit the scope for further interest rate cuts beyond those already anticipated by markets.
Central banks began cutting interest rates during the quarter in response to signs of mild economic softening. The US Federal Reserve implemented a 25 basis-point cut in September, its first since 2024, citing weaker employment data. The Bank of England followed with a similar reduction, bringing its rate to 4.0%, while the European Central Bank held rates steady after a series of earlier cuts. In the bond markets, yield curves steepened as short-term yields fell on expectations of more rate cuts, while long-term yields rose due to concerns about persistent inflation. Although not yet a sign of government funding stress, high budget deficits and debt levels mean government bond markets are susceptible to volatility.
Labour markets, while still tight, are showing signs of loosening. In the US, unemployment rose to 4.3% by August, and the UK rate increased to 4.7%, a four-year high. A decline in job vacancies and downward revisions to previous hiring data also pointed to a weakening trend. Crucially, wage growth has started to moderate. Central banks have interpreted these trends as a sign of easing inflationary pressures, giving them the flexibility to cut interest rates to support economic growth without risking an inflationary spiral.
Corporate earnings were a significant bright spot. The second-quarter reporting season saw widespread positive surprises, especially in the US, where approximately 75% of the largest 500 companies exceeded expectations. The largest technology firms were standout performers, fuelled by demand for cloud computing and AI infrastructure. This earnings strength was not confined to tech; it also extended to industrials and consumer discretionary sectors, broadening market momentum and supporting equity valuations.
However, high valuations remain a point of concern, as the highly valued technology giants skew the overall US index. While US growth stocks appear stretched, better value can be found in European, UK and emerging markets. Similarly, in credit markets, corporate bond spreads are tight, indicating confidence in corporate financial health but leaving little room for error should economic conditions worsen.
The US Dollar was stable at lower levels, which provided a supportive backdrop for Emerging Markets (EM). A stable dollar boosted liquidity flows into these economies, whose local currencies and asset prices benefited from improved capital access and lighter dollar-denominated debt burdens. Consequently, EM equities rallied, particularly in Asia and Latin America.
In summary, the third quarter of 2025 was positive for markets. The ongoing challenge for investors is to balance participation in the rally with prudent risk management, acknowledging that while the current environment is favourable, it is not without vulnerabilities.
Market Commentary October 2025
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Global equity indices reached record highs in the third quarter of 2025, driven by the strong performance of large US technology companies, which reported better than expected results. Investor sentiment was supported by a lack of major US policy surprises, interest rate cuts, a cooling labour market, and moderate economic growth. Despite this positive environment, stubborn inflation and high market valuations remain key concerns. If inflation eases and earnings growth justifies current prices, investor optimism will be validated. However, given the long period of rising markets and potential for volatility, a cautiously optimistic stance is warranted, with a view to potentially raising cash reserves to deploy if markets decline.
Inflation remains above target in major economies. Core inflation, which excludes food and energy prices, serves as a crucial gauge for policymakers, and has remained stubbornly high, driven by sustained growth in the services sector and wages. The consensus is that inflation will ease only gradually and stay above central bank targets through the end of the year. This could limit the scope for further interest rate cuts beyond those already anticipated by markets.
Central banks began cutting interest rates during the quarter in response to signs of mild economic softening. The US Federal Reserve implemented a 25 basis-point cut in September, its first since 2024, citing weaker employment data. The Bank of England followed with a similar reduction, bringing its rate to 4.0%, while the European Central Bank held rates steady after a series of earlier cuts. In the bond markets, yield curves steepened as short-term yields fell on expectations of more rate cuts, while long-term yields rose due to concerns about persistent inflation. Although not yet a sign of government funding stress, high budget deficits and debt levels mean government bond markets are susceptible to volatility.
Labour markets, while still tight, are showing signs of loosening. In the US, unemployment rose to 4.3% by August, and the UK rate increased to 4.7%, a four-year high. A decline in job vacancies and downward revisions to previous hiring data also pointed to a weakening trend. Crucially, wage growth has started to moderate. Central banks have interpreted these trends as a sign of easing inflationary pressures, giving them the flexibility to cut interest rates to support economic growth without risking an inflationary spiral.
Corporate earnings were a significant bright spot. The second-quarter reporting season saw widespread positive surprises, especially in the US, where approximately 75% of the largest 500 companies exceeded expectations. The largest technology firms were standout performers, fuelled by demand for cloud computing and AI infrastructure. This earnings strength was not confined to tech; it also extended to industrials and consumer discretionary sectors, broadening market momentum and supporting equity valuations.
However, high valuations remain a point of concern, as the highly valued technology giants skew the overall US index. While US growth stocks appear stretched, better value can be found in European, UK and emerging markets. Similarly, in credit markets, corporate bond spreads are tight, indicating confidence in corporate financial health but leaving little room for error should economic conditions worsen.
The US Dollar was stable at lower levels, which provided a supportive backdrop for Emerging Markets (EM). A stable dollar boosted liquidity flows into these economies, whose local currencies and asset prices benefited from improved capital access and lighter dollar-denominated debt burdens. Consequently, EM equities rallied, particularly in Asia and Latin America.
In summary, the third quarter of 2025 was positive for markets. The ongoing challenge for investors is to balance participation in the rally with prudent risk management, acknowledging that while the current environment is favourable, it is not without vulnerabilities.
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