Please see below, an article from Tatton Investment Management, analysing the key factors currently affecting global investment markets. Received this morning – 08/09/2025
Pause for thought
When traders return from their summer holidays, they reassess their outlooks, but while there’s no shortage in narratives, stocks moved very little last week.
Long-term bond yields continued rising on Monday and Tuesday – fuelling more panic about inflation and debt – but even they fell back into the weekend. The main driver of bond moves is real yields, which reflect growth expectations rather than inflation or credit risk, so it’s unclear what message the ‘bond vigilantes’ are sending. They might be demanding a higher term premium (the return investors demand for tying in for longer), as you might expect when the long-term bond supply is set to increase.
But this isn’t a panic signal. UK yields rose last autumn to similar derision, but quickly fell back. The US court ruling against Trump’s tariffs worsened the US debt outlook this week, but when 30-year treasury yields hit 5%, bond traders sensed a bargain regardless.
For stock markets, higher yields make equities less attractive – and investors were already worrying about high price-to-earnings valuations (mainly the US). But high valuations come from high expected profits, and US earnings are rebounding (as are Europe’s, covered below). If the economy grows, companies usually beat their earnings forecasts, so factoring in growth expectations makes valuations look more reasonable. Earnings have been the main driver of the recovery rally from ‘Liberation Day’ after all.
That long rally has paused, as investors weigh up mixed growth signals (Friday’s US jobs report was weaker than expected). Gold prices are rising, which could be about higher bond yields or lingering nerves. Higher gold prices are sometimes read as geopolitical stress, but we think it’s more a continuation of years-long momentum and uncertainty around risk assets.
That makes sense. Markets are trying to work out whether the US’ mixed-to-weak economy is bad because it hurts profits, or good because it means more rate cuts – benefitting small and mid-cap companies. We think it’s good that markets are pausing to reflect; it sets up for well-founded gains when the outlook clears.
August 2025 Asset Returns Review
August was a pretty flat month with low volatility: global stocks gained 0.4% and bonds 0.5% in sterling terms. It started with another US tariff deadline and brief sell-off, but Washington’s trade deals eased some concerns. Markets were also helped by expectations of Federal Reserve rate cuts, after weaker US jobs data and a dovish speech from Fed chair Powell. But US stocks still lost 0.1% in sterling terms, due to a weaker dollar.
UK and European stocks climbed 1.2% and 1.3% respectively, thanks to improved business sentiment and suggestions of a ceasefire in Ukraine. An improved earnings outlook should help European equity regain some lost momentum from earlier in the year. For the UK and France, stocks fell into the end of August after a sharp rise in 30-year government bond yields. We don’t think this is a debt or inflation panic – contrary to the media – as the main driving force was higher real yields (which reflect growth expectations).
Japan led the way, gaining 4.8% after stronger data and a US trade deal. Japan is still benefitting from long-term corporate improvements. China wasn’t far behind (+3.1%) and is comfortably the best performer year-to-date (+20.4%). The Chinese economy is still struggling, but investors are betting on a turnaround.
Low volatility would normally boost risk appetite, but markets fell flat instead. We see this as a liquidity story: there was a strong liquidity flow earlier in the summer – which made it easy to buy risk assets – but it’s tapering off. Much of this is related to the running down (and now building up) of the US Treasury General Account. Liquidity isn’t yet contracting but it might in September. Investors will need more economic growth to get excited about, if markets are to move higher.
European Earnings Update
UK and European stocks have outperformed the US in 2025 – but company earnings are still lagging. Looking at the Q2 earnings releases, JP Morgan found that Eurostoxx 50 companies’ EPS fell 2% year-on-year, while Eurostoxx 600 (which includes UK companies) EPS dropped 1%. Revenues were hit worse, reflecting the challenging economic environment.
Earnings did beat analysts’ expectations by 3% for both the narrow and broad indices, though. With tariffs and continued weakness in global manufacturing, last quarter was always going to be tough – and it wasn’t as bad as it might have been. Banks were the biggest source of earnings growth, while energy and automotives struggled.
With US earnings staying strong and Europe’s staying weak, the rotation of capital from US to European assets we have seen this year looks harder to justify. JP Morgan analysts think investors got ahead of themselves on European growth and are now realising it – hence why US markets have outperformed recently.
But European profits are better than expected and the sectoral breakdown (strong banks and weak energy prices) is a positive for growth. More importantly, 2026 earnings expectations have moved up – compared to a weakening of 2026 projections in the US.
US earnings strength is heavily concentrated in the biggest tech companies; other US companies have similar EPS performance to Europe’s. But US stocks have higher valuations. Higher valuations are fine if you expect earnings to outperform, but that’s no longer what the analysts are saying. That should mean European valuations catch up – which can only happen if stocks outperform. The earnings outlooks could change again of course (US companies have a habit of proving the doubters wrong) but the current outlook suggests improvement in Europe.
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Marcus Blenkinsop
8th September 2025