Please see below, an article from Tatton Investment Management, analysing the key factors currently affecting global investment markets. Received this morning – 22/09/2025
Slowdown? What Slowdown?
The weekend’s domestic and international political events continue to be a source of risk but Monday’s markets continue close to Friday’s closing levels. Last week saw rate cuts but higher longer bond yields, and record highs for some equity markets.
The Federal Reserve cut interest rates and signalled more before the year end. The Bank of England didn’t – but its reduction in quantitative tightening. Dovish central bank actions are usually positive for bond prices (meaning yields would fall). It may seem of odd then that US, UK and most developed market long maturity yields rose.
The US yield rise on Thursday came from expectations of stronger growth, following the Fed’s switch to supporting employment over containing inflation. Investors are more confident about the world’s largest economy, so long-term US rate expectations actually moved up. If current rates are ‘neutral’ and the Fed cuts further, stronger US growth will require higher rates in the future.
The Fed turned dovish after weak jobs data, but rumours of a ‘weak’ US economy are exaggerated. There’s no sign of credit stress and households are arguably beneficiaries of higher rates, thanks to savings built up during the pandemic. For all the talk of tariff recession, corporate profit margins are expanding and companies are confident enough to pass on costs to consumers (hence US inflation currently running hot). The Fed thinks tariff inflation will be ‘transitory’ and they’re probably right – so a rate cut isn’t unreasonable – but neither the US nor global economy were crying out for support.
Notwithstanding Thursday’s spike, bond yields and corporate credit spreads have come down recently – meaning easier borrowing conditions and a boost for price-to-earnings valuations. Underlying earnings are improving too, not just in the US but everywhere. This is potent fuel for stock markets.
Why profit margins are expanding is slightly confusing, considering tariff warnings and weaker employment. The most plausible conclusion is that productivity is improving – perhaps from the AI efficiencies long promised. We hope so, since productivity growth is the only sustainable source of long-term real growth.
Autumn 2025 market outlook– Overview
We expect risk assets to keep steadily climbing in the months ahead, but there are risks to the outlook.
US tariffs have dominated the narrative this year, and have led to an underperformance of US stocks through a weaker dollar. The full effects haven’t been felt yet (further deadlines and inventory depletion will come) but the US economy is clearly more resilient than feared. A recession is highly unlikely in the medium-term and company earnings forecasts are improving.
The dollar has substantially weakened, which effectively makes global trade and finance cheaper (as the currency of global trade) and thereby boosts global liquidity. The Federal Reserve’s interest rate cuts should also support liquidity, but counteracting this is the rebuilding of the US Treasury General Account (TGA) balance – tapering off a liquidity flow that has supported markets in 2025. Investors will have to generate their own liquidity from here.
Tariff impacts have been milder than feared in April, and markets have ignored multiple geopolitical risks. But the dollar’s weakness and gold’s strength are signs of lingering anxiety. Background geopolitical risks can make downturns worse if and when they come. We hope the rumours of US capital controls are just that.
Regional Outlook
UK stocks are among the best performers in 2025 and the economy isn’t as weak as coverage suggests. The jobs market is improving, Britons have high savings and long-term gilt yields have fallen from their highs. Stubborn inflation has stopped the Bank of England from cutting interest rates but we expect that to change in the coming months, supporting UK markets.
US stocks are well supported but will struggle to outperform other regions as they have in the past. Interest rates and bond yields are falling, supporting smaller businesses. Corporate earning have held up well as tariffs work their way through the economy. Inflation will stay elevated, as demand is strong enough to pass on tariff costs to consumers, but the Fed thinks labour market weakness will prevent a wage-price-spiral. Large cap valuations are still higher than other regions, while earnings forecasts look broadly similar.
Europe is benefitting from a generational fiscal boost, but markets have front-run much of that boost. The euro’s strength tells us the US-to-Europe rotation continues – and is now backed up by a catch-up in European earnings expectations. Equity valuations should catch up with the US, which can only happen if Europe outperforms.
Japan is now seeing the benefits of its globally competitive workforce and corporate reforms. Our long-term positivity on Japanese equity remains.
China has significant upside but global investors should, as ever, be cautious. Chinese stocks are the world’s strongest in 2025 despite continued economic weakness. Investors think a turnaround will come from significant government support and a strong liquidity flow from domestic buyers. Chinese tech is a bright spot, but tariffs and geopolitical tensions mean there’s a risk of stranded capital.
Emerging Markets (EMs) should benefit from a weaker dollar. The Shanghai Cooperation Organisation foretells greater EM reliance on China and less on the US – but that could lead to tensions with the US.
Asset Classes
Bonds have room for more yield falls. The recent spike in long-term yields wasn’t a debt panic (it was a move up in real yields) and it has now reversed. With interest rates falling, that could continue. But recently improving growth and the long-term increase in the supply of bonds relative to overall asset markets limit how low yields can go.
Equities should benefit from improving profit margins and business sentiment. Cap size has become a bigger differentiator than region, and smaller caps are now faring better thanks to lower interest rate expectations. Global liquidity has tapered off, meaning bank lending is needed for further gains. But with businesses feeling positive, investor optimism is well-founded.
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Marcus Blenkinsop
22nd September 2025