The third quarter was dominated by policy brinkmanship and a late-September pivot from the Fed. After weeks of speculation the Fed cut rates by 25 bps in September, framing it as cautious insurance against a softening labour market rather than the start of a rapid easing cycle. Markets had half-priced this outcome and took it in their stride. The US government shut downs means September data will not be available.  Gold hit an all time high taking its surge to 50% this year.  Fund flows data showed a slight rotation from equities into bonds and cash.

Equities climbed the wall of worry. Global stocks finished the quarter solidly higher, a tech-led advance that pushed several big indices to fresh high, while investors continued to debate how much AI enthusiasm is already in the price. Style leadership stayed narrow (mega-cap growth to the fore), but breadth improved at the margin. Mega-cap technology stocks remain the key beneficiaries of this build out phase with their unmatched resources and technological expertise. They are dominating in cloud infrastructure, chips and data management systems but opportunities are emerging in other sectors like energy, industrials and utilities.    

Fixed income delivered mixed results; front-end yields faded after the Fed move and the all-in yield on quality credit kept demand strong. Credit spreads tightened modestly, suggesting strong corporate fundamentals, leaving sterling investment-grade attractive as a funding source for 4% spending rates.

Geopolitics and trade both continue to be dominant themes.  Tariff talk waxed and waned through the quarter; markets cheered any hint of de-escalation but kept one eye on inflation pass-through if barriers rise again. Corporate earnings held up better than feared, yet the buy-side narrative settled into a more cautious tone.

In July, HM Treasury scrapped the UK Green Taxonomy, signalling a pivot toward transition-plan reporting rather than activity lists, this is useful for engagement, but it removes a tidy classification tool many hoped to adopt. Meanwhile the FCA’s Sustainability Disclosure Requirements (SDR) bedded in: the anti-greenwashing rule is live and enforceable, labels and disclosures are phasing in, raising the bar on how managers market “sustainable” strategies to charity clients. Trustees should ensure any labelled funds in the portfolio can evidence their claims and that managers’ client communications meet the “fair, clear, not misleading” test.

Equities have momentum, but leadership remains narrow and sentiment fragile.  The Bank of England and James Dimon have both sounded the warning bell on US markets.  Quality investment grade credit remains a credible income source at current yields provided the duration matches cash flow timing.

The first half of this year has been dominated by uncertainty with Trump’s tariffs overturning previous trade relationships and re-shaping global trade relations, even as he backtracked on his ‘Liberation Day’ commitments.  Markets recovered by the end of April, were in year-to-date positive territory by mid-May and US markets were at an all time high by late June.  Markets gained around 12%, with emerging markets benefitting from a weaker dollar (it’s worst semi-annual drop since the 1970s).  Tech stocks soared once again with the ‘Magnificent 7’ up 19%.  Fixed income markets notched up a modest 1% gain, gold continued to perform strongly (up 5%) and bitcoin surged by 30%.

Geopolitical uncertainty has only increased with Israel’s attacks on Iran’s nuclear facilities and the US providing military assistance with targeted strikes.  Military spending commitments have risen dramatically amongst NATO allies with a 5% of GDP commitment by 2035 and Germany has passed a paradigm shifting fiscal expansion plan, which will see huge spending increases on infrastructure and defence spending.

The outcome of tariff negotiations is still uncertain, with August 1 2025 (extended) marking the date regions, like the EU, face a 50% tariff if no deal is reached but for businesses the impact has already been very real.  There is an unwillingness to commit to investment, consumption and stock purchases have been accelerated. There has also been a re-routing of Chinese goods to Europe.  Outlook for the global economy remains at 2-3% through 2025 and into 2026 but with headline GDP shrinking in the US, this might be over optimistic.  Q2 has seen earnings downgrades with earnings growth for the S&P forecast to be +5% rather than +9.4% at the start of the quarter.

Given events, it is surprising markets have held up so well with institutional investors broadly remaining cautiously bullish, looking to secular drivers such as AI.  M&A activity has surged suggesting corporate confidence.  If growth was to slow in the US, which would require a weakening in either consumption or employment (which are both currently holding up), then the prospect of stagflation could prove a real issue for the Fed keen to cut rates to encourage growth yet keep a lid on inflation.

Bond markets were also hit by market volatility with UK treasury yields rising and the US dollar falling as uncertainty built,  yet in many markets yields ending the quarter almost unchanged.  Spreads of corporates over gilts tightened to 0.87%, which has brought spreads back to levels not seen since the GFG as demand continues to be underpinned by attractive all-in yields.

For sustainable investors the impact of America’s culture wars is being felt with healthcare spending by the National Institutes of Health being cut by 10% versus last year, support for clean energy and electric vehicles being cut back and the US withdrawing from the Paris agreement is also a huge blow for global climate goals.

With Trump in the White House volatility was always going to be the watchword of 2024 but the dramatic policy changes of the last 2 weeks has been unprecedented in living memory.  On 2 April Trump announced trade-weighted effective tariffs of over 20%, double the 10% expected and a significant jump from the current 2.5%.  By 7 April the US market was in bear market territory, reaching a sustained drop of 20% with $9.5 trillion wiped off global markets, yet 24 hours later, on 9 April, the NASDAQ had posted its second best day ever and the US closed one of its best trading days of all time.  Trump had flagged his tariffs on the campaign trail and indeed during his first term, with a particular focus on China and certain sectors like car manufacturers. He has three bug bears; tariffs, a strong dollar and trade deficits.  Yet no one predicted the scale nor breadth of tariffs announced on ‘Liberation Day’, with tariffs being almost double (on average) the worst case scenario predicted by investors.  They are based on trade deficits and so penalise companies that sell more to the US than vice versa leading to bizarre outcomes such as South Korea facing 25% tariffs even though the two countries have a free trade deal. 

It wasn’t until bond markets began dumping US Treasuries that Trump was brought to heel and performed his U turn announcing a 90 day pause.  No doubt his approval rating falling 5% in two weeks and the dramatic weakening of the dollar also panicked him.  Markets breathed a sigh of relief but the impact of this attack on global trade has only just begun to be felt.  With his shock and awe tactics Trump has managed to leave investors relieved that the baseline tariff level is ‘only' 10% with investors almost suspending disbelief to imagine that 174 trade deals (which usually take years) can be pushed through in 90 days.  By the end of the 90 days on 8 July, 60 countries will face higher rates with China facing 145% tariffs on imports.  The EU faces a 20% tariff and he had already imposed a number of tariffs on certain sectors such as 25% on all car imports and 25% on steel and aluminium,  These are the highest tariffs since the 1930s when the Smoot-Hawley Act raised them to 40%, leading to inflation, a trade war and contributing to the Great Depression:

Most concerning for investors is that Trump does not appear to have a plan or indeed logic for his tariffs.  His see-sawing and reactionary policy such as exempting electronic goods - iPhones etc, when he belatedly realised that price rises would dent his popularity speaks to a total lack of any grand plan.  The DOGE initiative is all about reducing government and yet the tariffs are an effective tax on consumption of some 2.5% of GDP. Further, a trade war with the world’s second largest economy will have no winners.  Whilst the US is the crucial export market for China, President Xi has been planning for this, his targeted tariffs will impact Trump voters, such as soybean farmers and its $20 trillion dollar economy will prove more resilient than Trump assumes. Markets are assuming that with an economic softening rates will come down, however, it is equally likely that prices rises will ultimately be borne by the consumer leading to further inflationary pressure with US inflation rising to 4-5% by the end of the year.

The quarter started with price volatility in AI stocks as DeepSeek in China released a seemingly more efficient Large Language Model at an astonishingly low price.  As the Chinese economy has been in the doldrums for such a long time, investors have failed to notice the impressive strides their large tech companies and indeed small ones are making.  This contributed to the underperformance of the US magnificent 7 and the US underperforming the rest of the world in Q1 by 10%, its most significant underperformance for 23 years.  The Bank of America fund manager survey showed the biggest reduction in US exposure in its 24 year history with investors looking to Europe for opportunities.   As markets now have a singular focus on tariffs, it is important for investors not to lose sight of other innovations and opportunities, which can offer long term rewards to the patient investor. Loss of confidence in the US and the inflationary impact of tariffs will have continued repercussions for markets. Look out for managers positioned to companies with less vulnerable supply chains, strong pricing power and under-exposed to vulnerable sectors like autos but with indiscriminate selling most portfolios have all been hit in performance terms.

2024 was a strong year for equities with developed markets returning 21% (MSCI World GBP) and Emerging Markets returning 10% (MSCI Emerging Markets).  Markets were powered by a belief in AI and corporate American (which is now 73% of the global index) and the ‘Magnificent 7’ (which are now over 20% of the global market) led markets to new heights.  These companies are a diverse bucket, from Microsoft to Tesla and for the better quality ones share prices have not run ahead of valuations as earnings have continued to impress.  These companies have flourished against a backdrop of anxiety and distrust, higher inflation and higher interest rates.  2024 was a record year for elections and populist governments stole a march almost everywhere, including most notably in the US with Trump returning to power.  It was a year of conflict as the conflict in Ukraine ground on and tensions flared up in the Middle East once again.  Protectionism and isolationism, two sides of the same coin are on the rise and companies have re-aligned their supply chains as politicians are using trade tariffs for political gain.  Chinese equities had a false dawn in Q3 following a stimulus programme but investors reflected that it was not sufficient to deal with the fundamental credit issues facing the country.  India, which has roared ahead of China in recent years, had a pull back after some companies faced governance issues that came under scrutiny in the US.

In many ways its been a terrible year for ESG as it has been drawn into the culture wars in the US and characterised as ‘woke capitalism’.  Climate risk has become a flash point of division from red to blue states in the US with most pension fund boards accepting climate risk but state treasurers in red states have bought in a raft of anti-ESG legislation.  Government defined benefit plans in the US hold $8.7 trillion in assets and could go some way to helping global efforts to meet net zero.  To varying degrees State Street, JP Morgan and Black Rock pulled out of ClimateAction 100+ as they felt that disclosing investment choices threatened their fiduciary responsibilities to investors.  Larry Fink, for years a proponent of ESG, appeared to row back from his commitment in his annual letter to shareholders talking about ‘energy pragmatism’ and saying the term ESG had been misused by left and right.  Later in the year, Amazon and Meta, amongst other companies, ditched their diversity and inclusion programmes and scrabbled to elevate Trump allies to significant positions e.g. Joel Kaplan will be the chief global affairs officer at Meta.  In the UK challenges around the FCA’s Sustainability Disclosure Requirements and in particular the need for evidence, led to a slow and difficult rate of adoption and prominent managers like Stewart Investors declining to participate further.  Against this backdrop, the ESG market is maturing and it remains resilient in Europe with $18 trillion in assets (out of $30 trillion ESG assets globally) and is projected to reach around 25% of $140 trillion of total assets by 2030.

2024 will go down as the year that passive funds surpassed active but it’s also the start of AI being incorporated into investment strategies, something that will further accelerate the efficiency of of markets but also the potential for volatility especially if these trading strategies all react in the same way (as explored by the IMF”s latest Financial Stability Report).  Market concentration is at its highest with the top 10 stocks accounting for a third of the S&P and Nvidia responsible for 5% of the S&P 500’s returns in 2024 and achieving a bigger weighting in the MSCI World Index than France.  There is an ongoing listing crisis, with fewer companies choosing to list in the US (and it’s even worse in the UK), restricting opportunities for public investors.

The whole world is betting on the US, confident that Trump will cut taxes and favour deregulation.  Markets are trading on a PE ratio of 22x with the US IT sector trading on 29x; valuations are expensive but equally companies have strong cash flows and expected earnings growth of 12%.   From a global perspective Europe will be hit by concerns over tariffs, issues in China remain and Trump is notoriously unpredictable.  Investors have unbridled faith in corporate America and are paying little heed to the macro environment, either the rules of the game have changed or 2025 might prove to be a volatile year. The goldilocks scenario and one that would benefit your managers, is that share price gains broaden out from the tech stock as more stable growth stories are rewarded but there remains a risk that, unless profits can be demonstrated from AI applications, these tech companies will stutter and being highly correlated, drag the market down with them.