“Delivery, Divergence, Debt and the Donald”
The third quarter of 2025 saw equity markets dish up strong returns, powered by companies delivering robust profit growth. Global equities rose by c.9%, with the UK stock market up by c.5%. Bond markets were less cheerful: UK government bonds slipped c.0.9% as mounting debt burdens spooked investors, while corporate bonds posted modest gains.
Once again, President Trump was a constant presence — shifting from tariff threats to ratcheting up pressure on the U.S. Federal Reserve. Markets expect further U.S. rate cuts, while the Bank of England looks constrained by sticky inflation. Stronger-than-expected U.S. economic data, combined with the prospect of lower rates, drove equities to record highs through September, with emerging market stocks the standout winners.
Delivery
Profits did the heavy lifting. U.S. companies reported 12% year-on-year profit growth for Q2 — more than double expectations. With the U.S. comprising roughly 70% of the global equity index, this strength mattered enormously. Tech and financials led the way, while GDP growth rebounded to 3.8%, underpinned by consumers who, despite some pressure, kept spending.
UK companies cleared a much lower bar, but banks again shone with 17% aggregate profit growth. Emerging markets surged c.12% in GBP terms, led by Chinese tech names. Once again, profits delivered — and profits drove markets.
Divergence
Not all markets moved together. Within equities, defensive sectors such as utilities and consumer staples lagged badly, while cyclicals and tech powered ahead. Across asset classes, corporate bonds gained while government bonds struggled.
The U.S. economy again surprised on the upside, supported by resilient consumption and corporate investment. Europe and the UK, by contrast, flatlined under the weight of sticky inflation and soft growth.
Perhaps the most important divergence: governments groaning under deficits, while corporates kept balance sheets strong and earnings flowing. Investors once more favoured “profits over populism.”
Debt
Debt remained the elephant in the room. UK government debt now totals c.£3 trillion, the U.S. c.$37 trillion — both up around 40% over the past five years. Servicing costs are projected at £111bn for the UK next year and $1trn in the U.S. In the face of such dynamics, it’s no surprise government bonds struggled.
Away from sovereigns, the picture looked brighter. Corporate leverage is manageable, consumers have not overextended, and bond markets rewarded that discipline. Corporate bonds traded higher through Q3, while government debt remained under pressure.
Debt is a problem for sovereigns, less so for corporates.
The Donald
Trump remained an ever-present influence. Having rowed back from tariffs in Q2, Q3 saw him focus on the Federal Reserve — urging rate cuts, reshaping its board, and turning up the heat on Chair Powell ahead of his term ending next May.
More consequential was the passage of the One Big Beautiful Bill Act — a $3.3 trillion package of tax cuts and deregulation. While it swells the U.S. debt pile, it should provide a near-term boost to consumers and corporates alike.
Politics sets the headlines, but profits set the returns.
Outlook
The third quarter was a profitable one for investors, reinforcing the message that profits drive markets and companies adapt quickly to challenges. Strong gains have made for richer valuations and a period of consolidation would be no surprise.
We have therefore diversified client portfolios further — into equity markets with more attractive valuations, and into shorter-dated bonds that are less sensitive to long-term funding pressures.
Doubtless there’ll be bumps along the way, but we remain encouraged by nimble companies with strong balance sheets, consumers with cash to spend, and central banks with room to cut rates.
The value of investments and the income from them can go down as well as up and you could get back less than you invested. Past performance is not a reliable indicator of future performance.
The content of this article is not intended to be or does not constitute investment research as defined by the Financial Conduct Authority. The content should also not be relied upon when making investment decisions, and at no point should the information be treated as specific advice. The article has no regard for the specific investment objectives, financial situation or needs of any specific client, person, or entity.
