Macro
Global politics and markets were once again shaped by rising geopolitical frictions and fiscal concerns. In Beijing, President Xi Jinping used a high-profile regional summit to advance his vision for a new, multipolar world order. Flanked by Russia’s Vladimir Putin and North Korea’s Kim Jong Un during a grand military parade marking the 80th anniversary of victory over Japan, Xi projected China as an alternative power centre to the West. His calls for “sovereign equality” and economic cooperation with countries such as India underscored efforts to consolidate a bloc resistant to Western influence. Yet, the message of solidarity stood in stark contrast with Beijing’s continued willingness to interfere abroad and its close alignment with the architects of the war in Ukraine.
The imagery of three autocrats standing together was not lost on investors. Markets interpreted it as another reminder that global governance is fragmenting, with competing economic spheres emerging across trade, defence, and technology. The optics reinforced the perception of a growing divide between democracies and authoritarian economies, adding to long-term uncertainty around global supply chains, investment flows, and resource security.
In the United States, domestic politics have taken centre stage ahead of next year’s midterm elections. President Trump’s approval rating has fallen to around 40%, weighed down by the economic fallout from tariff-driven price increases and voter frustration over higher living costs. Internal polling suggests the public remains firmly opposed to the trade war, with most Americans prioritising lower prices over protectionist measures. Analysts expect the administration to pivot away from trade disputes and toward issues such as immigration, law enforcement, and cultural politics, areas where voter sentiment remains favourable.
For financial markets, this shift is viewed as marginally constructive. Investors typically discount domestic unrest but react sharply to international trade and fiscal shocks. A quieter trade agenda could therefore reduce market volatility, even as the political debate intensifies at home.
August payroll data showed a clear slowdown, with only 22,000 jobs added versus expectations of 75,000 and prior months revised down by 21,000. The unemployment rate rose to 4.3%, while average hourly earnings increased 0.3% month-on-month and 3.7% year-on-year, both slightly below forecasts. Weak data triggered a 12-basis-point drop in two-year Treasury yields, the lowest since 2022, as traders priced in a September rate cut and even discussed a 50-basis-point move.
Analysts point out that the labour market is cooling but not collapsing. They described the trend as “sub-trend growth”, consistent with a soft landing rather than a recession. JPMorgan’s Kay Her noted that job creation remains narrowly focused in sectors like healthcare and education, and that low response rates in BLS (Bureau of Labour Statistics) surveys have led to frequent data revisions. Companies appear to have paused hiring but have not yet begun significant layoffs.
Rates
Despite geopolitical tensions, global bond markets are showing renewed strain as long-term yields climb across major economies. Japan’s 30-year yield reached a record high, while U.S. and European benchmarks touched multi-year peaks, reflecting growing unease over swelling fiscal deficits and rising debt issuance. Investors increasingly question how long bond markets can absorb such heavy supply, raising fears of a self-reinforcing feedback loop between higher yields and sovereign credit risk.
In the U.S., weaker payroll data reinforced expectations for a September Fed rate cut. Only 22 thousand jobs were added in the latest report, well below forecasts, and previous months saw downward revisions. The unemployment rate rose to 4.3%, while wage growth moderated to 3.7% year-on-year. The data confirmed that labour conditions are cooling rather than collapsing, consistent with a soft-landing scenario. Market pricing now implies that the Fed is back in motion to ease policy, with roughly three cuts expected by year-end.
Still, traders remain divided over how far the easing cycle can go. Some warn that the front end of the Treasury curve has become crowded as investors position for short-rate declines, while the long end faces persistent upward pressure from fiscal concerns. That mix suggests the potential for further curve steepening. Policymakers therefore face a difficult balance between supporting growth and maintaining fiscal credibility, particularly as sustained deficits risk undermining the disinflation narrative. Meanwhile, China continues to rely on fiscal stimulus to offset weak domestic demand, highlighting the divergence in global policy trajectories.
Credit
Credit markets opened in September with exceptionally strong issuance, marking one of the busiest starts to a month in recent years. In Europe, total weekly bond supply reached about €79 billion, the highest since mid-May, supported by a record 10-year gilt auction in the UK. In the United States, roughly $67 billion in investment-grade bonds and nearly $10 billion in high-yield bonds were priced, making it the second-most active week of the year. Companies such as Citi, Merck, and Cigna took advantage of borrowing costs that have returned to levels last seen in 2022.
Demand remained robust, supported by strong inflows, elevated cash balances, and stable spreads. Oversubscription ratios stayed high, with nearly one-quarter of European corporate issuance coming from US borrowers taking advantage of cheaper euro funding costs. Market participants described conditions as highly liquid, with default rates still low and fundamentals intact. UBS strategists noted that bankruptcy filings remain subdued, consistent with expectations of a soft landing and easing credit conditions.
Despite the heavy supply, spreads continued to tighten as investors absorbed issuance with little difficulty. Positioning surveys show that most fixed-income managers are maintaining high cash levels, keeping technicals strong through the autumn. With yields still elevated and expectations of further rate cuts ahead, total returns are projected to be in the range of 6 to 10% annualised through year-end.
Private credit remains a focus. Some investors have flagged early signs of deterioration in loan quality, particularly in business development company portfolios concentrated in technology and services. While these pressures are currently contained, markets continue to watch for any spillover into public credit should economic momentum weaken.
Equities
U.S. equities remain supported by expectations of monetary easing and steady earnings growth as the economy moves beyond the near-term tariff impacts. Despite the strong index performance, the median S&P 500 constituent remains roughly 11% below its 52-week high, highlighting how narrow leadership has become.
Consensus anticipates three Fed rate cuts in 2025, with policy easing likely to continue into early 2026. Historically, when the Fed cuts rates without triggering a recession, equities tend to post solid mid-single-digit gains. Under this scenario, the S&P 500 is projected to reach around 6,600 by year-end and 6,900 by mid-2026, corresponding to total returns of about 2% and 6%, respectively. These forecasts assume 7% earnings growth in 2026, supported by resilient corporate margins and a gradual re-acceleration in economic activity.
Valuations remain demanding. The S&P 500 trades at 22× forward earnings, near the 96th percentile since 1980, suggesting limited room for multiple expansion. The next phase of the cycle will likely depend on earnings delivery rather than re-rating. With both valuations and margins already elevated, and interest rates having little room to fall, absolute returns are likely to be lower. However, this environment favours alpha generation, as the spread between winners and laggards continues to widen across and within sectors.
Technology remains the primary growth engine, but its influence is evolving. Artificial intelligence continues to drive innovation, though its full potential increasingly relies on infrastructure upgrades that bridge both digital and physical assets. This shift is creating opportunities across semiconductors, hardware, power utilities, and industrial equipment providers, blending traditional Growth and Value exposures.
Following a 32% rally in 2024, AI-related equities have gained another 17% YTD, supported by record levels of hyperscaler investment. Capital expenditure among the largest cloud providers, including Amazon, Alphabet, Meta, Microsoft, and Oracle, has reached about $312 billion over the past four quarters, with year-on-year growth accelerating from 69% in Q1 to 78% in Q2. For 2025, total hyperscaler spending estimates have been revised up by $100 billion to $368 billion, sustaining demand for semiconductors, servers, and data infrastructure. The durability of this investment cycle will be key to maintaining current valuations into 2026.
Earnings reports highlight how AI adoption is spreading across industries. In recent quarters, 58% of S&P 500 companies mentioned AI on their earnings calls, with the majority linking it to productivity and efficiency gains. Among them, 24% discussed AI applications in customer service and call centres, 24% in coding and engineering, and 23% in marketing. These trends suggest companies are still early in embedding AI into core operations, a phase that will likely create clear distinctions between leaders and followers as tangible productivity benefits emerge.
From an infrastructure standpoint, U.S. data centre capacity is expanding at an unprecedented rate. Around 72% of total capacity is concentrated in just 1% of U.S. counties, reflecting how tightly facilities cluster to reduce latency and interconnection costs. As data intensity rises, power availability is replacing proximity as the main factor driving site selection. After grid constraints emerged in Virginia in 2022, developers have shifted toward states with more capacity and favourable regulation. Texas has become the most competitive state for new data centre construction, followed by Arizona and Georgia, while grid operators in California (CAISO), Mid-Continent (MISO), and Mid-Atlantic (PJM) regions are approaching capacity limits. Power availability may soon become a structural constraint for AI infrastructure growth.
Market activity reflects this evolving environment. Global equities were modestly net sold last week (–0.4 standard deviations relative to the one-year average) as short sales outpaced long buying by a 1.2-to-1 ratio. Industrials were the most heavily shorted U.S. sector, experiencing the largest notional short selling in more than five years. Materials, Consumer Discretionary, Communication Services, and Financials were net bought, signalling early signs of rotation toward cyclical sectors.
As the economy stabilises and policy support returns, the market is likely to transition from a liquidity-driven rally to one based on fundamentals and productivity growth. Breadth is expected to improve gradually, with health care, financials, and industrials positioned to benefit from catch-up potential. In this Postmodern Cycle, where valuation support is thin and macro tailwinds are weaker, stock selection and thematic alignment are becoming decisive drivers of performance.