Tailored Portfolios, Personally Managed

Global markets in the third quarter of 2025 were robust, perhaps surprisingly so. Investors have weathered geopolitical disruption, a government shutdown in the US, political paralysis in France, rising government borrowing levels, and tariff uncertainty… and yet markets have kept rising. The S&P500, the main US equity index, rose nearly 8%, the FTSE over 6%, and Japan’s main index was up more than 10%.

The AI investment-led boom

AI-related stocks continue to be a key driver of US market appreciation. Nvidia continues to power ahead, as do its main customers, the ‘hyperscalers’ Microsoft, Meta and Alphabet. We have seen a flurry of announcements of deals to purchase more chips, increase compute capacity, build more data centres, and secure more of the massive amounts of electricity to run them.

We are seeing a good deal of concentration in the market, with the ten biggest US names accounting for 39% of the US market and 26% of the global market. These are hugely profitable companies that are generating significant levels of cashflow, so the investments they are making and planning are funded. Consumers are adopting ChatGPT and other models at speed, and there are 800 million weekly users of ChatGPT worldwide at the last count. However, if there is a slow take up of AI applications by corporates, this could lead to caution on the long-term investment case for AI.

Researchers at MIT (Massachusetts Institute of Technology) examined enterprise-level AI usage. They interviewed 150 business leaders, conducted 350 employee surveys, and analysed 300 public deployments. The conclusion: just 5% of companies saw rapid revenue gains from AI, while the rest stalled or saw little measurable impact on profit and loss statements. This doesn’t mean AI won’t eventually help companies sell more or make cost savings, but it does give pause for thought.

Elsewhere in the US, there is clear evidence that US labour markets are cooling, yet output keeps defying gravity.  Capital Economics estimates third-quarter GDP growth at 0.9% quarter-on-quarter, roughly 4% annualised. This is coming from productivity growth, as firms are getting more out of both workers and capital.

Beyond the US – the other 33% of the global stock market

I had hoped that this would be the year US exceptionalism faded a little. However, while the US is investing, Europe is still quite far behind. Even with fiscal relaxation on the horizon, it will take time before Germany’s stimulus feeds through to its own economy and that of its neighbours. Europe’s problems have some significant structural causes: underinvestment in infrastructure and high energy costs are both stifling, and its industrial base is increasingly outcompeted by China.

The UK and Europe have lagged the US a little this quarter. In your portfolios, it’s about finding a balance between an expansive, but quite expensive, US market, and looking for opportunity in Europe, where there are some excellent companies. China is also gaining ground rapidly in AI, providing a commensurate boost to its tech giants listed on the Shanghai market. Emerging markets more generally have been mixed.

 The late budget and the manifesto straitjacket

The run-up to the UK budget, which has been set for the latest possible date of 26th November, will not be particularly pretty. Reeves’ task is unenviable, but the delay risks making things worse. The long run-up coincides with the retail “Golden Quarter”, and households, already saving at rates unseen since the Global Financial Crisis, may well tighten their belts further in the run-up to Christmas.

Both Starmer and Reeves sold themselves pre-election as pro-growth and business friendly. Workers, Labour promised, would be spared tax hikes on their payslips. That promise is now beginning to look less like discipline and more like a straitjacket.

We will see further tax rises, but what we don’t know yet is where they will hit and whether Reeves will decide to revisit her manifesto commitments. Personnel changes at Number 10 and the Treasury would imply that the budget is seen as the most significant event of the year.

Polling shows this government is setting records in terms of how unpopular it is so shortly after coming to power. Reform UK, who are polling far ahead of the Conservatives and Labour, are due to announce a new fiscal plan in a speech from Farage on 3rd November, as they seek to boost their credibility among voters, business leaders and the markets in the lead up to the next election. This will only add pressure to Reeves.

There are many ‘difficult decisions’ to be made, particularly around what seems to be unsustainable growth in benefits spending. The costs of servicing debt are now almost as much as the defence and schooling bill combined. The UK isn’t at a French-style crise quite yet, but Reeves has her work cut out.