6 October 2025
Coming into the third quarter of 2025, tariff uncertainty was still a troubling concern for policymakers and investors. But as summer wore on, policy uncertainty faded, and their attention turned to the AI boom, resilient profits, and a resumption of Fed rate cuts as drivers of market returns. That contributed to a strong quarter across asset classes.
With technology-related sectors accounting for more than 70% of US profits growth, AI fever was a key focus. The S&P 500 rose by 7%, with the mega-cap Magnificent 7 stocks up by 17%. An even stronger performance unfolded in Asia. Chinese markets saw gains of close to 20%, helped in part by its burgeoning tech sector, a trade truce with the US, and the continuing policy support to boost economic growth. Frontier and developed Asia markets, particularly Taiwan and South Korea, saw double-digit rallies. A rare detractor was India, which closed the quarter down 7%.
In fixed income, markets saw volatility, with government bonds delivering modest gains, and corporate credit reaching multi-year tights. Growing concerns about the fiscal outlook in some economies saw a spike in yields at the longer-end of the curve, with 30-year yields in Europe and Japan rising sharply.
After falling rapidly in H1, moves in the US dollar turned choppy in Q3 (see page 2). Meanwhile, one of the biggest rallies was in gold, with the yellow metal continuing to break new highs on the back of central bank buying and Fed rate cuts.
What comes next? As we enter the final quarter of 2025, attention is divided between the AI boom as a growth driver, and potential signs of weakness in the US labour market. While an ongoing broadening out of market leadership is expected, elevated uncertainty can still trigger episodic volatility. Investors should remain agile.
The global economy was more resilient than expected in the first half of 2025, according to the latest outlook from the OECD. But downside risks loom. Higher trade barriers, as well as geopolitical and policy uncertainty are weighing on economic activity in many countries. So, what are the report’s key takeaways?
#1. Exceptional US growth is slipping away. OECD projections put US GDP growth falling to 1.8% in 2025, and 1.5% in 2026. Growth in the eurozone is also expected to slow down – but not everywhere. Spain is on course to be the fastest growing western economy now.
#2. There are also upgrades to the growth outlook for emerging markets. While tariff uncertainty still prevails, countries like India, Mexico, and Saudi Arabia are in improving shape. And the combination of better growth and a weaker US dollar should enhance the appeal of EMs to investors.
And finally, #3. Is US and UK inflation stuck at 3%? Inflation in most G20 economies is projected to fall as growth and labour markets soften. However, inflationary pressures could resurface, with the OECD forecasts suggesting a de facto shift in inflation targets.
The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management, Bloomberg, Macrobond. Data as at 7.30am UK time 03 October 2025.
Meanwhile, as AI tools become more widely integrated into various industries—from healthcare and finance to manufacturing and logistics—not only will we see productivity gains, but innovation too. Healthcare – a laggard performer in recent years – could see faster drug discovery that helps unlock value in a heavily discounted market. So, although AI enthusiasm has been predominantly centred on mega cap tech, spillovers into the broader market shouldn’t be underestimated.
One simple answer could be that this is just history repeating itself. With the arrival of Donald Trump in the White House for a second term in office, 2025’s dollar action has tracked a similar path to the one it followed during the president’s first term. If history keeps rhyming, recent choppiness could continue for now.
Eurozone stocks have been one of this year’s broadening-out success stories. A mix of distress-level valuations, the prospect of fiscal expansion in Germany, and a cooling sentiment towards the US, have driven a near-30% rally across the bloc in USD terms in 2025. But the eurozone’s performance fizzled out in Q3 – particularly in Germany – on rising valuations, euro strength, tariff uncertainty, and lacklustre earnings. Yet, further south, the rally has continued. Stocks in Spain, Portugal, Italy, and Greece have delivered impressive gains, driven by cheap valuations and strong growth (with the OECD pencilling-in Spain to be the fastest growing western economy in 2025 and 2026). |
While the eurozone pauses for breath, there could be pockets of value in the south even after the recent run. Despite a strong Q3, Spain only trades at a modest premium to its 10-year average PE ratio. On a current multiple of 12x, it’s still cheaper than Germany on nearer 15x. With the strongest earnings momentum among its peers – plus the benefits of domestic strength and exposure to reinvigorated LatAM markets – there could be more to come.
Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Costs may vary with fluctuations in the exchange rate. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 03 October 2025.
Source: HSBC Asset Management. Data as at 7.30am UK time 03 October 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way.
Positive market sentiment persists, driven by ongoing expectations of further Fed easing and enthusiasm around AI developments, despite rising political uncertainty in the US. The US dollar index weakened as a weak ADP employment report boosted US Treasures, with market still anticipating four to five 0.25% rate cuts by end-2026. In equity markets, US indices advanced, propelled by tech stock performance. The S&P 500, Euro Stoxx 50 and Nikkei 225 all hit record highs. Meanwhile, Asian markets largely rose at the start of Q4, supported by positive tech news. South Korea’s Kospi and Hong Kong’s Hang Seng surged, while India’s Sensex posted modest gains amid further easing signal from the RBI. China’s Shanghai Composite closed higher before October Golden Week holiday. In commodities, oil prices fell amid growing oversupply concerns, whilst gold prices reached an all-time high.
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