Quarterly markets review - Q3 2025
The quarter in summary:
Global financial markets posted strong gains in Q3 2025, driven by robust artificial intelligence (AI) and technology demand, solid corporate earnings, and a well-anticipated Federal Reserve (Fed) rate cut. A weaker US dollar supported emerging markets. Credit, digital assets, and commodities — with notable, record-setting rallies in gold and silver — also performed well.
Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions, and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
Global equities
Global equities rallied in the third quarter, with both developed and emerging markets delivering substantial returns. The gains were primarily fuelled by the continued AI boom, strong corporate earnings, and a Fed interest rate cut. Emerging markets also benefited from the weaker US dollar.
While concerns about US trade policy were not as headline dominating as they had been earlier in the year and progress was made on several fronts, uncertainty persists. Companies globally are reconfiguring their supply chains to reduce their dependence on the US and China, which have been at the centre of recent trade conflicts.
Even amid the strong rally, elevated stock valuations, persistent inflation and ongoing geopolitical tensions continue to present potential challenges for markets.
US
US shares scored strong gains in the third quarter, as the S&P 500 Index and the Nasdaq Composite both climbed to record-setting highs. The markets benefited from optimism over a rate cut by the Fed in September (with expectations of more coming before year-end), strong corporate earnings and renewed enthusiasm for AI, which helped boost the technology-heavy Nasdaq.
Technology and communication services were strong performers, while healthcare and energy lagged, with the latter hindered by falling oil prices.
The continued resilience of the US economy was evident from strong gross domestic product (GDP) growth, steady consumer spending and benign core inflation. A late-September revision to US GDP numbers showed the economy expanded at an annual rate of 3.8% in the second quarter of 2025. Those positive economic indicators also helped boost investor optimism about the fourth quarter. An anticipated government shutdown, which did materialise on the first day of the fourth quarter, also created some uncertainty for markets.
Eurozone
Eurozone equity markets experienced gains in Q3 2025. The financials and healthcare sectors led the advance, while telecoms and communication services lagged. Bank shares in particular were buoyed by some strong corporate earnings.
The services sector expanded in Germany, Italy, and Spain, while France lagged because of political uncertainty. Foreign demand remained weak, with a decline in new export orders for the twenty-eight consecutive month, providing an indication of the ongoing challenges in global trade (source: HCOB flash eurozone purchasing managers’ index for September).
European Central Bank (ECB) President Christine Lagarde acknowledged that the significant inflation spike experienced between 2022 and 2024 has subsided, and inflation risks are currently balanced. Inflation aligned with the ECB’s 2% target in August, but September figures are expected to slightly exceed it. Despite the US-initiated trade tariffs, Lagarde noted the eurozone has managed better than expected, with limited and moderate growth impacts rather than significant inflationary pressure.
On the political front, French prime minister François Bayrou was forced to step down after his package of budget cuts and tax rises failed to win support in parliament.
UK
UK equities saw strong performance. The FTSE 100 experienced its best quarter since late 2022. A resilient global economy helped drive returns. A weaker British pound also aided companies with internationally focused businesses. The communication services and technology sectors were strong performers, propelled by the continuing enthusiasm for AI. Basic materials also experienced a rally, driven by higher gold prices. Additionally, the London Stock Exchange saw a resurgence in initial public offerings.
UK inflation persisted at 3.8% in August, with pressures from food, energy, and regulated utility costs keeping it close to 4%. In response, the Bank of England’s (BoE’s) Monetary Policy Committee voted by a narrow majority in August to reduce the Bank Rate by 0.25 percentage points to 4.0%—its first cut since 2020. In September, the BoE also announced it would be slowing its programme of quantitative tightening, a move that could help lower bond yields and borrowing costs.
Japan
The Japanese equity market advanced strongly, with TOPIX Total Return rising 11.4% and the Nikkei 225 up 11.0%, both reaching record highs. Sentiment strengthened as US rate cut expectations firmed, while domestic political developments—including anticipated party leadership changes—lifted risk appetite.
Cyclical sectors outperformed: non-ferrous metals, energy, and semiconductor-related stocks benefited from global AI demand and higher commodity prices. At the same time, robust corporate results, share buybacks, and dividend increases highlighted ongoing governance reforms and improving shareholder returns.
Although currency volatility and policy uncertainty intermittently weighed on trading, confidence in an earnings recovery and Japan’s structural reform momentum remained primary drivers of performance.
Emerging markets
Q3 saw the MSCI Emerging Markets (EM) index deliver double-digit returns, outperforming the MSCI World in US dollar terms, driven by index heavyweights China, Taiwan, and Korea. US-China trade talk progress was beneficial for the EM index, as was the Fed’s September rate cut and ongoing investor enthusiasm for AI-related stocks.
Egypt, Peru, China, and South Africa were the top-performing index markets over the quarter, with each delivering more than a 20% return in US dollar terms. In China, ongoing progress on US-China trade talks, as well as the continued focus on their anti-involution policy, was beneficial for market sentiment, while in South Africa, the index market’s performance was helped by stronger precious metals prices. 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.
Brazil lagged the EM index as political uncertainty weighed on the market. Saudi Arabia ended the quarter in positive territory behind the EM index, having declined in US dollar terms in both July and August. September’s performance recovery was driven by news that authorities intend to lift the 49% foreign ownership limit currently in place on listed equities.
Malaysia, UAE, and Poland posted positive returns but lagged the broader index, while Indonesia, India, and Philippines all declined in US dollar terms. US trade tariffs, including the recent imposition of a 100% tariff rate on pharmaceuticals being exported to the US, weighed on India’s index market.
Asia ex Japan
Asia Pacific ex-Japan equities gained broadly, led by North Asia and tech-heavy sectors. South Korea and Taiwan were standout performers, fuelled by strong AI and tech demand. Chinese equities also posted strong gains, driven by capital inflows and investment in AI and chip self-reliance despite weaker domestic demand. In contrast, India and ASEAN (Association of Southeast Asian Nations) markets, lagged because of more modest non-tech gains and tariff pressures. The Philippines was the weakest market, trading well below its long-term average.
The Fed’s 25 basis points rate cut in September and robust global liquidity boosted investor sentiment, while foreign inflows concentrated in tech-focused markets like Korea and Taiwan. Rising commodity prices—including gold, silver, and copper—reflected strong global demand and supply disruptions, reinforcing the tech- and AI-led equity rally across North Asia.
Global bonds
The performance of government bond markets was mixed during Q3, with US Treasury yields ending the quarter lower (yields are inverse to price), while UK, German, and Japanese yields all rose over the period.
In the US, an initial steepening of the yield curve (marking an outperformance of shorter dated bonds) was driven by rate cut expectations and concerns about the Fed’s independence being compromised (reducing the market’s confidence in the central bank’s longer-term inflation-fighting credentials).
Signs of a weakening labour market, combined with relatively well-behaved inflation (despite expectations for tariff-driven price pressures), increased the likelihood of an interest rate cut. By the time the Fed’s Federal Open Market Committee (FOMC) delivered its 25 basis point cut (to 4.0%-4.25%) at its September meeting, the impact was fully priced by the market. The voting pattern of two previous hawkish dissenters also helped placate market concerns around Fed independence and the yield curve reversed its previous steepening trend.
Contrary to the US market, eurozone yields ended the quarter higher. The resolution of tariff uncertainties (a 15% baseline tariff rate was agreed upon for nearly all EU goods entering the US) together with clearer signs that Germany’s increased fiscal spending on infrastructure and defence would primarily benefit the domestic eurozone economy contributed to the positive macro outlook.
French government bonds lagged other eurozone markets. Sebastien Lecornu replaced Prime Minister Bayrou after the latter lost a confidence vote aimed at garnering support for the government’s deficit reduction agenda. The rating agency Fitch downgraded France’s sovereign rating from AA- to A+ in acknowledgement of ‘political fragmentation’ and ‘weak fiscal record’.
Markets now believe that the European Central Bank (ECB) has ended its rate-cutting cycle. Policy rates were unchanged during Q3. Although inflation forecasts were revised down further below the central bank’s target of 2% the economy is showing little cause for concern.
Gilt yields rose, too. The Bank of England cut rates to 4.0% in August while indicating that it will continue its gradual approach to easing monetary policy conditions. UK’s fiscal position continued to be in the spotlight. Data released showed that public sector net borrowing year to date was £11.4 billion higher than the Office for Budget Responsibility‘s March forecast.
Political fragilities drove the weakness in Japan’s government bond market, with the coalition under political pressure to increase public spending. Despite inflation now being well above the Bank of Japan’s (BoJ’s) 2% target and an upward revision its own inflation forecasts, the BoJ continued to hold rates at 0.5%.
It was a positive quarter for credit markets. US investment grade spreads tightened further, outperforming government bonds and reaching multi-decade tight levels. From a sector perspective, the market move was broad-based. US consumption has remained robust and corporate earnings continued to be solid, driving a constructive outlook for corporates. A resurgence of US issuance during September was well absorbed, reflecting an ongoing investor demand for yield and positive sentiment. There was similarly positive performance across eurozone and UK investment grade bond markets.
Within the high yield corporate bond market, European high yield outperformed on an excess return basis (over government bonds) but lagged the UK and the US high yield on a total return basis in local terms. Investment grade bonds are the highest quality bonds as determined by a credit rating agency. High yield bonds are more speculative, with a credit rating below investment grade.
Commodities
In commodities, the S&P GSCI Index posted modest gains for the third quarter of 2025. Precious metals experienced a significant rally, with gold and silver, in particular, posting record-breaking gains. The performance of the broader index was weighed down, however, by a relatively flat energy sector.
Digital assets
In Q3 2025, digital asset markets staged a strong rebound, highlighting signs of growing maturity and institutional adoption. Bitcoin (BTC) rose by 7% and Ethereum (ETH) surged by a remarkable 67% over the quarter. The rally was propelled by a dovish Fed stance and institutional inflows, with Bitcoin reaching a new all-time high of $124,500 in August.
The most consequential development was the passage of the GENIUS Act in July, which finally provided comprehensive regulatory clarity for stablecoins. Ethereum, home to much of this innovation—from stablecoins and decentralized finance to tokenized real-world assets—benefited directly.
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