Macro
The most significant development this week was President Trump’s pledge to impose a 100% tariff on Chinese imports and restrict exports of “critical software” starting November 1. The move was a direct response to Beijing’s decision to tighten export controls on rare-earth materials and strategic inputs vital to semiconductor and defence supply chains. The announcement sent shockwaves through global markets, causing the worst sell-off since the liberation day.
For investors, this escalation raises the risk of a trade-driven slowdown and a period of sustained volatility as capital rotates toward defensive sectors and safe-haven assets such as gold and Treasuries. The renewed tariff threats revived memories of the 2018–2019 trade war, when escalating duties and uncertainty over policy direction depressed corporate investment and trade volumes. This time, the stakes are higher: rare-earths, semiconductors, and advanced software sit at the centre of both countries’ industrial and security strategies. While the measures are not set to take effect until November 1, the delay leaves room for high-stakes negotiations, and Trump hinted he could suspend the tariffs if China reverses its export restrictions.
Meanwhile, U.S. growth expectations are cooling. Bloomberg Economics now sees U.S. GDP expanding by around 2% in 2026, lagging behind most G20 peers and roughly half of China’s expected 4% pace. Economists warn that prolonged trade friction could shave several tenths off 2025 growth as firms delay investment and rebuild inventories more cautiously.
Asset prices surged over the past six months, creating a powerful wealth effect that temporarily bolstered consumption and lowered saving rates. According to Federal Reserve data, U.S. household net worth climbed by about $5.4 trillion in the second quarter, rising from $170.9 trillion to $176.3 trillion, a gain equivalent to roughly 17–19% of nominal GDP. Analysts, however, see this as transient rather than sustainable, noting that wealth gains remain concentrated among higher-income households and could unwind quickly if markets continue to correct amid renewed trade and policy uncertainty.
Rate
Fed minutes show a moderately dovish tone, signalling further rate cuts are likely after the September reduction. The committee judged the labour market’s fragility to be a greater risk than a potential inflation rebound, though members remained divided on the pace and extent of future easing.
Despite softer hiring, the Fed remains committed to price stability, and markets expect at least one more “risk-management” rate cut this year. Jeff Sherman of DoubleLine Capital said a November cut is likely, though December’s decision will depend on data. Inflation dynamics remain uneven: core goods, long a drag, are now contributing positively due to tariffs, especially on Chinese imports and home furnishings.
The administration’s new tariff policy, generating roughly 340–350 million dollars per month in revenue, has also built inflationary pressure into inventories. This uncertainty has fueled what Citadel’s Ken Griffin called an “economic sugar high,” as investors move toward gold, silver, and Bitcoin to hedge against dollar weakness. JPMorgan’s Jamie Dimon warned that if inflation proves sticky, the Fed could struggle to deliver the full 100 basis points of easing priced in by markets.
The dollar, overvalued for nearly a decade, has started to weaken, while breakeven inflation rates remain near the Fed’s 2% target. Sherman noted investors are avoiding long Treasuries and favouring short-term TIPS as tactical hedges, reflecting concerns over fiscal expansion and limited confidence in long-term policy discipline.
Credit
The credit market showed signs of cooling. The combination of the government shutdown and corporate earnings blackouts kept investment-grade issuance limited to just three transactions, including TD Bank and T-Mobile, while demand for 30-year Treasuries fell to record lows. High-yield activity was also subdued, with only 4.25 billion dollars issued in October, and junk bonds on track for their biggest weekly loss in more than four months. The collapse of First Brands served as a reminder of the excesses from the low-rate era, exposing aggressive risk-taking and weak due diligence, though analysts do not view it as systemic. BlackRock’s Amanda Lynam noted that the default cycle has likely peaked, supported by steady growth and resilient fundamentals, with defaults confined mainly to smaller or loan-only issuers.
In investment-grade markets, discussion centred on whether AAA corporate spreads could briefly turn negative. Lynam pointed out that only a few companies, such as Microsoft, still carry AAA ratings, while most operate efficiently at slightly lower grades. Balance sheets remain strong, with room for additional borrowing if needed. Overall, credit spreads are tight but not excessive, and the market appears to be consolidating rather than entering a new phase of stress.
Policy changes under the new Trump administration are also reshaping the credit landscape. The shift toward a more capital-friendly regulatory environment has reversed the tightening trend of recent years. With Vice Chair Michael Barr stepping down and Michelle Bowman assuming the role of top banking regulator, the Federal Reserve has redirected its focus away from Basel Endgame’s tougher risk-weighted asset rules toward regulatory relief, including potential cuts to the supplementary leverage ratio (SLR). Combined with significantly lower stress capital buffers (SCBs), this allows major banks such as Goldman Sachs, JPMorgan, and Morgan Stanley to hold less capital against risk. The resulting capital flexibility frees billions for buybacks and dividends while maintaining strong solvency. For credit investors, these changes are broadly positive, signalling lower default risk, reduced new debt supply, and the potential for further spread tightening that reinforces the sector’s relative strength.
Everyone highlights the rapid growth of private credit. U.S. life insurers, with about $2 trillion in total assets, are among its largest institutional drivers and currently account for roughly one-third of all private credit demand, around $350 billion of the $1 trillion private credit market. Typically, life insurers keep about 68% of assets in fixed income, including 26% public credit and 18% private credit holdings. The rest spans 13% equities, 9% mortgage loans, 6–7% structured or alternative assets, and around 6% cash and short-term instruments.
Private credit exposure, which stood at just 13–14% before the pandemic, has increased to 18% and is expected to reach about 21% over the next three years. This shift is projected to lift pretax profits by roughly $750 million, driven by a 60-basis-point yield premium over public bonds. Despite the move toward higher-yielding and less-liquid assets, overall credit quality remains strong: below-investment-grade exposure has fallen to 4%, while A–AAA holdings have risen.
The expansion of private credit has also benefited borrowers, providing greater flexibility alongside steady underwriting quality, healthy EBITDA growth, and contained losses. Jeff Sherman, however, warned that yield convergence with public markets reduces compensation for illiquidity and may lead to weaker lending standards. Both he and other analysts see limited contagion risk at this stage.
Equities
U.S. equities faced their sharpest sell-off in six months following President Trump’s announcement of new tariffs on China and export controls targeting critical software. The news reignited fears of slower global growth and trade fragmentation, sending risk assets lower while boosting demand for safe havens such as gold and Treasuries. On Friday, the S&P 500 fell 2.71% in its worst session since April, while the Nasdaq 100 dropped 3.49% and the Russell 2000 declined 3.01%. For the week, the three indices lost 2.43%, 2.27%, and 3.29%, respectively.
Despite the setback, the broader trend remains constructive. The S&P 500 rose 3.5% in September, marking its fifth consecutive monthly gain and maintaining a clear upward trajectory above its 10-month moving average, a level widely viewed as confirmation of a sustained bull trend. Still, historical precedent suggests such momentum often moderates. Since 2009, the index has shown nearly equal odds of advancing or retreating after five straight months of gains. With October historically one of the more volatile months for equities, the market’s technical strength remains intact but increasingly vulnerable to external shocks, particularly geopolitical tensions that could disrupt investor confidence.
Analysts continue to draw parallels between the current market cycle and the 1990s expansion, noting similar long-duration rallies and technology-driven leadership. Yet the comparison is imperfect, as today’s macro backdrop, valuation environment, and monetary regime differ sharply from those of the earlier period. The composite P/E ratio, which combines trailing, forward, and cyclically adjusted earnings multiples, has climbed to its third-highest level in modern history, surpassed only by the dot-com bubble and the 2021 liquidity surge.
While valuations remain elevated, the context is more nuanced. In 2000, the S&P 500’s forward P/E ratio peaked near 30, compared with about 23 today when including the “Magnificent 7” and roughly 19 excluding them. Real interest rates are also far lower, with ten-year TIPS yields near 1.7% compared with more than 4% in 2000, meaning the opportunity cost of holding equities is less punitive. Even so, high valuations leave a limited margin for error and suggest investors should moderate expectations in the face of policy and geopolitical uncertainty.
Market leadership remains heavily concentrated in AI-driven mega-cap stocks, which now account for roughly 30% of the S&P 500’s market capitalisation but employ only 1 to 2% of the U.S. workforce, a striking disconnect between Wall Street performance and Main Street activity. Headline economic data continue to show steady growth, with GDP expanding around 2 to 2.5% and unemployment near historic lows. However, the combination of tariffs, elevated borrowing costs, and uneven consumer spending suggests recent equity gains have been fueled more by liquidity, innovation, and sentiment than by broad-based economic strength.
Excluding the Magnificent 7, the remaining “S&P 493” trades at a valuation premium to developed markets outside the U.S., despite offering comparable earnings growth. Global equities are therefore beginning to look more attractive on a relative basis. Indeed, an increasing number of developed-market indices are breaking out to new highs, indicating a potential “bullish broadening” phase in which market leadership gradually diversifies both geographically and sectorally beyond the U.S. mega-caps that have defined the past three years.
The Mag-7stocks have been the dominant force behind the S&P 500’s performance, driving both its advances and pullbacks. They contributed 63% of the index’s total gains in 2023 but also 56% of its losses in 2022. Without these firms, overall S&P 500 earnings growth in 2023 would have been negative. Analysts expect the remaining “S&P 493” to see profits rebound in 2024 and accelerate to double-digit growth in 2025 as margins improve. While the Mag-7 remain central to earnings expansion, the broader index recorded positive margin growth in the second quarter of 2024, hinting at early signs of a healthier earnings base beyond the mega-caps.
Historically, S&P 500 earnings have grown between 5% and 8% annually, a range that aligns closely with current projections. The typical earnings cycle lasts two to four years, alternating between periods of expansion and mild contraction, though pandemic disruptions, inflation shocks, and aggressive rate adjustments have distorted recent cycles. Since 1950, corporate profits have risen in roughly twice as many years as they have declined, underscoring the long-term resilience of U.S. earnings. Consensus estimates from major investment banks now call for EPS growth of about 8 to 9% in 2024 and 10 to 11% in 2025, supported by margin recovery, AI-driven productivity gains, and continued strength in service-oriented and capital-light industries.
According to J.P. Morgan Asset Management’s Guide to the Markets – U.S. (as of September 30, 2025), the median forward P/E ratio for S&P 500 constituents stands at 19.4x, above the 20-year average of 16.2x. Valuation dispersion remains historically high at 16.8x compared with a long-term mean of 11.8x, reflecting how narrow market leadership has inflated aggregate multiples. This concentration leaves the index sensitive to any reversal in the mega-cap growth trade, particularly as monetary policy, fiscal dynamics, and geopolitical developments reshape investor expectations heading into 2026.
Valuation dispersion: Dispersion between the forward P/E of S&P 500 stocks in the 20th and 80th percentile
Source: JP Morgan Asset Management, Guide to the Markets – U.S., data as of September 30, 2025. Based on Compustat, FactSet, and Standard & Poor’s.
One area where investors see opportunity is healthcare, which now trades at its lowest relative valuation in more than 15 years. The sector has significantly lagged the S&P 500, compounding at roughly 9 to 10% annually over the past decade compared with 15% for the broader index. It has risen only about 15% since the end of 2021, versus an 80% gain for the S&P 500. Many investors view this as a potential mean-reversion play, supported by improving fundamentals and clearer policy direction. After a slow start to 2025, healthcare is projected to post one of the strongest EPS rebounds next year, driven by innovation in biotechnology and medical technology. President Trump’s recent agreement with AstraZeneca to reduce U.S. drug prices in exchange for tariff relief marks a significant policy shift that lowers regulatory uncertainty while promoting domestic production and affordability. Similar agreements with other pharmaceutical companies are expected, further easing policy-related headwinds.
With demographics providing steady long-term demand, policy risks receding, and valuations near cyclical lows, the healthcare sector appears well positioned for recovery and potential outperformance. Moreover, if the AI-driven equity boom cools over the next two years, healthcare could serve as a valuable diversifier given its defensive characteristics. The sector’s relative resilience is evident in past downturns: it declined only about 40% during the Global Financial Crisis compared with a 55% drop for the S&P 500, and it held up far better than most sectors during the 2022 market correction.