Trade tariffs and geopolitics dominate in Q3

Resilient economic data and the easing of trade tensions helped push global equity markets upwards in the third quarter of 2025. Central banks cutting interest rates, or signalling their intention to lower rates, was another theme that supported equity markets. While investor sentiment fluctuated through the quarter with concerns over inflation, the overall trend in stock markets was upwards – with the US leading the way.

Performance across European markets was more muted, largely held back by weak consumer sentiment and political uncertainty, especially in Germany and France.

Bond markets delivered mixed results and broadly underperformed equities. While short-term US bonds benefitted from expectations of rate cuts, long-term yields remained elevated due to investor worries about inflation and government spending.

Economic resilience drives the US

In July, the US House of Representatives approved President Trump’s tax and spending plans - known as the 'Big Beautiful Bill' - which reinforced expectations for continued economic momentum.

Later in the quarter, the Federal Reserve delivered a small rate cut which should also support the economy and steady inflation. This helped boost the US equity market, particularly healthcare and materials companies. Technology stocks lagged as AI euphoria waned. 

Rate cut boosts UK equities

Q3 kicked off with predictions of strong corporate performance among energy and materials companies, and a rally in these stocks helped drive the overall performance of the UK equity market. UK markets also received a boost from the Bank of England when it cut the base rate of interest – however, investor sentiment soured with a surprise spike in inflation. Data showing weakness in the manufacturing, services and retail sectors also weighed on the stock market.

Caution in European markets

The mood was cautious in the Eurozone too, amid a combination of political uncertainty, poor corporate earnings growth and a mixed batch of economic data.

In France, equity markets were held back by crisis in the National Assembly, the country’s parliament, and concerns about high levels of government debt. Prime Minister François Bayrou was ousted after he lost a vote of no-confidence among MPs, before a new Prime Minister, Sébastien Lecornu, was appointed –the fifth person to hold the post in just two years.

There was brighter news in Germany, where a large-scale fiscal stimulus package was greeted warmly by investors. The EU agreed a trade deal with the US, while the European Central Bank held interest rates steady and signalled that further cuts are unlikely to be made in the near-term.

Broad-based strength in Japan

Progress towards a favourable trade agreement between Japan and the US helped lift Japanese equities, with particularly strong gains coming from the auto sector.

Data showing steady economic growth, stronger domestic demand and a solid corporate results season also buoyed Japanese equity markets.

The Bank of Japan maintained its cautious stance, monitoring currency movements and import prices amid speculation about potential future interest rates going up. Political developments, including the Prime Minister’s resignation, fuelled expectations that there will be additional fiscal support in the coming months.

Emerging markets lead the way 

Emerging market equities outperformed developed markets during the third quarter, largely thanks to a rally in Chinese stocks. Performance was boosted by a number of factors including optimism around AI, the easing of trade tensions and a weaker US dollar.

How did this affect portfolios?

Global equities were strong during the third quarter, as the MSCI All-Countries World index (a broad global stock index) returned 9.6% (in GBP terms). US equities make up the bulk of the index, and so it was investor optimism around the strength of the American economy and its corporations that provided most of the gains. 

UK equities also rose during the quarter, with the MSCI UK index achieving a return of 7.8% (in GBP terms) - despite a challenging economic backdrop. Support for stocks came from weakness in sterling, as many UK companies derive their earnings from abroad.

European equities underperformed other regions during the third quarter, with the MSCI Europe-ex-UK index returning 4.8% (in GBP terms). The biggest drags on performance were stock markets in Germany and Denmark. 

Emerging market equities shone during the third quarter – with the MSCI Emerging Markets index returning 12.6% (in GBP terms) – performance that beat developed market equities.

As mentioned, it was the MSCI China index that propelled the broader emerging markets sector, with a rise of 22.9% during Q3.

Turning back to Japan, the MSCI Japan index delivered a return of close to 10% for the third quarter, a result that was broadly in line with the return from US equity markets.

Fixed income markets were unsettled in Q3. Corporate bonds once again outperformed global government bonds, as strong financial results from a range of sectors encouraged investors into corporate debt. In the UK, stubborn inflation and concerns about government finances ahead of the November budget pushed long-term borrowing costs to their highest level since 1998.

Real estate investment trusts (REITs) performed well over the quarter, particularly those focused on the energy sector. This comes on the back of increased demand for electricity to power data centres, and with increasing take-up of AI.

Our view on the major asset classes

Equities

Higher trade tariffs imposed by the Trump administration on key trading partners will be a drag on economic growth both in the US and around the world. This will be offset by the US government’s fiscal spending package, which should stimulate the global economy. So, although we expect global GDP growth to slow in real terms over the next six months, it is likely to accelerate in 2026 and should also be supportive for stock markets.

We maintain our positive view of Japanese markets, which we expect will begin to offer better value in the medium-term.

Bonds

Bond markets are still highly volatile, with both yields and prices moving sharply.

High quality corporate bonds are a more attractive option than government bonds from developed economies, owing to the moderately higher returns available. We remain slightly cautious on developed market high yield bonds, which are companies lacking the credit rating of mainstream ‘investment grade’ corporate bonds.

Real assets

We maintain our view that diversifying portfolios with some exposure to ‘alternative’ assets, such as listed infrastructure and REITs, will help provide consistent returns over time. This is because alternative assets have lower correlation to equity and bond markets.

Overall

How do we view portfolio composition moving forward?

We introduced the State Street Global Equity Diversified Index Fund (GEDI) into our Multi-Asset Funds in June, and during Q3 we began incorporating it into our Model Portfolio Service and discretionary portfolios as well. GEDI is an index launched by WTW and MSCI that provides exposure to global equity markets while considering factors such as decarbonisation and climate risk.

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Information correct as of 30th September 2025.