It has been an eventful year for investors. Early April witnessed a sharp selloff in equities following the ‘Liberation Day’ tariff announcements, but markets have since recovered to reach record highs in many regions. As we head towards the fourth quarter of 2025, and with tariff turmoil fading in the rearview mirror, we assess the prospects for economies and markets from here.
We see scope for further upward progress…
Our central view remains relatively constructive, with expectations of stable economic growth supported by additional interest rate cuts from the US Federal Reserve (Fed). September saw a 0.25% reduction, with potentially two further cuts anticipated in the remainder of 2025. September’s rate cut was prompted by signs of weakness in the US labour market and, and while markets pricing in meaningful further cuts in 2026 may be a little optimistic, the easing of financial conditions bodes well for the avoidance of recession. We see other potential positives. The AI investment boom could broaden out, and as related tools are embraced across a range of industries, productivity gains and earnings could tick upwards. For investors that may mean less emphasis on the ‘Magnificent 7’ tech giants makes sense from here. From a geographic perspective, 2025 has so far been a year in which many investors have positively reassessed prospects for Europe. As the geopolitical backdrop shifted, Europe moved to increase fiscal stimulus – primarily around defence and infrastructure spend – and there is potential for these injections of capital to have stronger-than-expected impacts as we move into next year.
Mindful of potential bumps in the road
At the same time, it is important to be cautious around downside risks. In the US, for example, the Fed has been under intense political pressure to more quickly loosen monetary policy. However, 2025 has already seen bond markets being quick to respond to US administration policy announcements – could perceived political interference trigger a further backlash? Weakness in labour markets prompted the Fed to recently move into a more accommodative stance and their hope will be that lower borrowing costs could serve to address any further decline in employment. If unemployment numbers continue to deteriorate, however, the likelihood of a ‘soft landing’ will lessen. Employment data will need to be watched closely.
Structural risks exist elsewhere. Could China’s efforts to tackle industrial overcapacity and inefficient resource allocation cause problems? And is their construction sector on solid foundations? Closer to home there are real positives around fiscal stimulus in Europe, but any significant rise in bond yields could expose vulnerabilities in the region’s fiscal stability.
Driving returns potential through active adjustments
From an active management perspective, closely monitoring data releases will be key. At the same time, it will be prudent to remain mindful of broader potential issues around the likes of Fed independence, tariffs and associated legal proceedings, together with global political developments and budget announcements in the UK.
So, how does this all translate into our portfolios and their positioning? At an asset class level, our positive world view is expressed via an overweight to equities – funded by a corresponding underweight to cash. Within equities we remain positive on the US. Yes, valuations are relatively high, but earnings and the health of the US consumer look robust. We see potential for further upside and, should lower interest rates lead to the expected ‘soft landing’, the environment would be supportive for US shares.
Despite concern around tariffs, we are also upbeat on emerging market equities. US dollar weakness is beneficial and fiscal stimulus bodes well. In the UK, lacklustre growth and concern over the health of public finances leads us to be cautious on equities. We have moved up to a neutral weight on Japan given continued momentum in corporate reforms, a positive earnings outlook and a potential catalyst via political change. In fixed income, a relatively benign economic backdrop should counter any meaningful pick-up in credit default rates, but yield compression leaves limited value on offer in corporate credit.
