Monthly Market Commentary - October 2025

The third quarter saw strong gains for global stock markets, boosted by a resurgence in US equities. The MSCI All Country World Index posted a near double-digit return (9.8% — all returns total, for Q3 and in sterling, unless otherwise stated) after ending the first half of 2025 up less than 1%. The main catalyst behind the advance was a growing belief that the Federal Reserve will aggressively cut interest rates to support the economy while risks from trade tariffs and international conflicts have seemingly receded, albeit not disappeared.

Fed resumes cutting cycle

The Federal Reserve (Fed) cut interest rates for the first time in 2025 in September, lowering the Fed Funds rate by 0.25% to 4.25%. However, it is more the expectation of further cuts which has supported stocks, with derivatives markets pricing a 3.0% end of 2026 Fed Funds rate. The MSCI North America index (10.3%) outperformed UK and European peers in Q3 after a negative return for the first half of 2025. In addition to the Fed’s supportive shift, relatively higher earnings growth has also provided a boost.

Presidential overreach?

US President Donald Trump has made several moves of late which could be seen as applying political pressure on organisations that are rooted in independent, apolitical processes. Poor employment data was swiftly followed by Trump firing the head of the Bureau of Labour Statistics, claiming the figures had been manipulated for political purposes. Trump has also sought to influence the Fed with repeated calls for lower interest rates, the appointment of one of his previous economic advisers, Stephen Miran, to the rate-setting committee and attempts to remove Lisa Cook for alleged mortgage fraud. Should trust in these organisations be damaged, then US assets may suffer, particularly US Treasuries, leading to yield curve steepening.

UK job losses rise modestly suggesting further rate cuts ahead.

The UK labour market has lost further momentum, with payrolled employees falling 164k in the year to July 2025 and the unemployment rate rising to 4.7%. Meanwhile, annual wage growth remains high (earnings excluding bonuses are up 4.8%) putting upwards pressure on inflation. These offsetting forces contributed to the Bank of England (BoE) keeping the official bank rate unchanged at its September meeting at 4.0%. While the rate has been significantly reduced from 5.25% in August 2024, the future path suggests the pace of lowering will likely slow with less than two further 0.25% cuts by the end of 2026 currently priced-in. The UK MSCI index (7.8%) posted strong returns in Q3, building on what had been an impressive start to the year. UK GDP growth has moderated in recent months — due to international factors, National Insurance increases and the rise in the living wage — but is still the fastest growing G7 economy year-to-date (YTD).

Long-dated bonds in the spotlight

UK 30-year government debt yields recently reached their highest levels since 1998 at 5.75%, with long-term borrowing costs increasing due to economic outlook concerns, both domestically and overseas. This level was comfortably above the 5.1% peak seen during the Liz Truss “mini-budget” fallout, although yields fell back to around 5.50% by quarter end. Longer-dated bonds have underperformed short-dated bonds as the yield curve has steepened. 15-year+ Gilt benchmarks fell (-2.4%) while 0–5-year Gilt benchmarks have posted positive returns (0.6%). This dynamic is due to longer-dated bonds declining because of high inflation, concerns around the UK’s fiscal position and a change in market dynamics (the decrease in Defined Benefit pension schemes — previously large-scale buyers of long-dated Gilts) while BoE rate cuts have supported the short end. Gilts have returned 1.7% YTD.

Summary

We are now three quarters of the way through 2025 and it’s shaping up to be another good year for stock markets despite a number of negative headlines around trade tariffs and ongoing conflicts. Volatility has increased around these headlines but overall, the strong performance reiterates our belief in maintaining a long-term approach to investing. Although US equities outperformed in Q3, the MSCI UK and MSCI Europe ex UK have been the standout performers thus far in 2025, rising 17.5% and 20.0% respectively. A fair chunk of this outperformance compared to the 7.4% YTD return from the MSCI North America index is down to currency moves, with sterling appreciating 7.4%.

We continue to like equities and whilst growth and earnings risks are to the downside, it appears that a recession looks less likely now than earlier this year. In particular, we see opportunities in European Union (EU) and Emerging Market (EM) stocks. Loosening budgets and fairer valuations are relative positives for EU stocks. Attractively valued EM equities look set to benefit from further stabilisation in the Chinese economy and exposure to Indian growth as well as IT and commodity companies. While fixed income currently offers historically attractive yields, we have seen volatility increase and are watching the fiscal situations in the UK, US and France closely. Yields in excess of 5% represent a sizeable return for government bonds while index-linked Gilts are currently offering an opportunity to lock in yields in the 2.0%-2.5% region above inflation for 20 years — a historically attractive level.