Economic Overview
Global markets posted strong gains in Q3 2025, backed by continued demand for all things artificial intelligence and technology, while also underpinned by solid corporate earnings and a rate cut from the Federal Reserve in the US. A large variety of assets saw strong rallies, with credit, digital assets and commodities, particularly gold and silver, doing well. The quarter saw President Trump continue his attack on the US Federal Reserve. Back in April, he threatened to fire Fed chairman Jerome Powell (not in his powers). And in August, Fed Governor Lisa Cook was the next target, with the President demanding her removal citing alleged mortgage fraud. President Trump believes the Fed is not cutting interest rates fast enough, which is hurting economic growth and costing billions in additional interest payments on government debt. Obviously, the Fed has a different perspective. Tariffs present a potential inflation risk and as policymakers keep an eye on the jobs market, they are unlikely to cut rates rapidly. The prospect of further near-term easing helped lift major markets, particularly for rate sensitive sectors such as small cap stocks and real estate.
In the US, GDP came in at an annualised rate of 3.8% for Q2 2025, with a late September revision upward from 3.3%, which was the strongest quarter since Q3 2023. The numbers were skewed by volatility due to tariffs which was reflected in trade and inventories. Imports sunk in Q2 by nearly 30% after a 38% spike in Q1 due to stockpiling. The big standout in Q2 was the investment in AI. Intellectual property investment grew by 15% and equipment by 8.5%, with some of these gains more than offsetting declines in construction and residential investment in housing. Q3 is also tracking positively with the Atlanta Fed’s modeling forecasting 3.8% growth, with personal consumption looking strong, highlighting ongoing resilience in consumer activity.
As of late September 2025, the U.S. had collected over $213 billion in tariff revenues, an historic high and highlighting the aggressive tariff policies under the Trump administration. The average effective tariff rate is 22.5%, with 30% on Chinese goods and a 10% baseline on most other imports. Steel and aluminum are the most heavily tariffed sector at 41.2%. As of yet, there has not been a substantial impact on prices. Mainly because the more significant tariffs only went into force on August 1, and companies had been preparing by stockpiling inventories from overseas.
The US labour market is showing signs of weakness. According to the Bureau of Labor Statistics 911,000 fewer jobs were added in the year ending March 2025, than initially reported. This was the largest downward revision since at least 2000. In August, headline unemployment rose to 4.3%, from 4.2% in July and the highest level since the pandemic. However, this is still well below the 50-year average of 6.1%.
Inflation increased in the August CPI number, bringing the year-on-year increase to 2.9%. Core CPI, which excludes the more volatile categories of food and energy, climbed 3.1% from a year ago, indicating that underlying inflation remains sticky. Food and energy drove much of the monthly headline number. Grocery prices climbed with higher meat, dairy, and produce costs. Petrol surged with seasonal demand and supply constraints. Shelter, the largest CPI component, increased 0.4% and remains a key driver. August CPI suggests while headline inflation remains below recent highs, core pressures persist. Overall, this complicates the Fed’s policy outlook, as it weighs further rate moves with signs of labour market softening.
And on that, as expected the Federal Reserve cut interest rates by 0.25% at its September meeting, with the new target range at 4.0% to 4.25%. Chair Jerome Powell described it as a “risk management cut,” aimed at supporting a softer labour market while addressing inflation that remains above the Fed’s 2% target. He also noted the current rate level as modestly restrictive. There are expectations of two further cuts this year, with one in 2026. Chair Powell however said that future decisions will be data dependent.
Finally, the recent decline in mortgage rates delivered some positive momentum into the housing market with a notable pick up in activity. Sales of newly built single-family homes surged 20.5% in August. While, the inventory of unsold homes declined 1.4% 7.4 months of inventory, down from 9 months in July.
Source: RBA 2025
In the Eurozone, the economy slowed sharply in Q2 2025 but there were some signs of a potential rebound in months ahead. According to Eurostat, GDP across the eurozone rose by just 0.1% quarter over quarter, down from 0.6% in Q1. While many had forecasted a contraction, the eurozone narrowly avoided one, thanks to resilient household spending, which rose 0.1%, falling exports, -0.5%, and a sharp drop in investment, down -1.8%, weighed on growth. Inflation held steady at 2% from June through August, aligning with the ECB’s medium-term target and at it’s September meeting, the ECB left interest rates unchanged for the second consecutive time, with the deposit rate at 2% and the main refinancing rate at 2.15%.
A recent trade agreement between the U.S. and EU did ease some uncertainty around tariffs. The European Commission’s Economic Sentiment Indicator rose to 95.5 in September, but remains below its long-term average of 100. Consumer confidence also inched up, but employment expectations declined. Real wages have begun to rise as inflation moderates, providing a boost to consumer spending. Unemployment remains near historic lows, and services sectors like tourism are booming. Foreign tourist arrivals surpassed pre-pandemic levels, with Europe seeing nearly 750 million visitors in 2024 and continued growth in 2025. On the political front, French prime minister François Bayrou was forced to step down after his package of budget cuts and tax increases failed to win support in parliament.
In the UK, annual inflation came in at 3.8% in August, the same reading as July, with pressures from food, energy, and utility costs keeping it close to 4%. Despite this, the Bank of England voted by a narrow majority in August to reduce the Bank Rate by 0.25% to 4%, which was the first cut since 2020. In September, the Bank of England also announced it would be slowing its programme of quantitative tightening, a move that could help lower bond yields and borrowing costs. On the political front, Prime Minister Keir Starmer’s Labour government continues to struggle, with just 22% of people in an August YouGov survey having a favourable opinion of him. An ongoing problem has been the issue of migrant boats crossing the English Channel which has resulted in asylum seekers being housed in hotels across the country. Many local communities have been deeply unhappy with the issue, and it has led to several protests in recent months.
In Japan, Q2 GDP came in at 2.2% on an annual basis, this was revised up from a 1% preliminary figure announced in August. GDP was also up 0.5%, on a quarterly basis, ahead of previous estimates of 0.3%. Core inflation, excluding fresh food but including energy was up 2.7% annually in August, which was lower for the third consecutive month, and at the lowest level since November 2024. However, the figure is still holding above the Bank of Japan’s 2% target, leaving expectations of a rate increase later this year. The BoJ has kept monetary policy unchanged due to some domestic challenges, but also international headwinds, specifically US tariffs. After its July meeting, the BoJ upgraded its forecast for growth to 0.6% for the 2025 fiscal year, which runs April 2025 to March 2026.
In China, the economic outlook is slowing, but there’s still a growth trajectory. Thanks to a strong first half it’s on track to meet its full-year GDP growth target of around 5%, but momentum has weakened in recent months. Manufacturing activity continues to contract. The official purchasing managers’ index (PMI) came in below the 50-point mark for the sixth consecutive month, which signals contraction in industrial output. Services, while more resilient, have also shown signs of slowing. Domestic demand remains fragile. Consumer prices have fallen, indicating deflationary pressures with the inflation rate coming in at -0.4% year on year for August. Exports have held up reasonably well, being a useful buffer for weak internal demand, but new US tariffs and global trade uncertainty pose risks. With this in mind, Chinese policymakers are expected to maintain a supportive stance, with additional fiscal stimulus and interest rate cuts. While the October Communist Party plenum is expected to outline the next five-year plan, with a focus on transitioning from export-led growth to a more consumption-driven model.
In Asia (ex-Japan & China) and Emerging markets, the US Fed’s 0.25% rate cut in September was seen as positive for emerging markets. Brazil’s central bank held its benchmark interest rate at 15% in July and September, citing the need to keep inflation on a path toward the target, as core inflation sat at 5.12% in August, holding above 5% since March. Year on year GDP growth in India came in at 7.8% for Q2, up on the 7.4% figure of Q1, which was the strongest figure for five quarters. Indian CPI continued to ease, hitting 1.61% year on year for July, before slightly edging back above 2% to 2.07% in August. In South Africa Q2 GDP grew by 0.8% in Q2, the strongest figure since Q2 2023, and a significant improvement on Q1’s 0.1%.
Back in Australia, data released in June showed GDP increasing by 0.6% for Q2, which was up on the revised Q1 figure of 0.3%. Year on year GDP growth end of Q2 sat at 1.8%, above expectations of 1.6%, making it the strongest yearly period since Q3 2023. GDP per capita, noted as a proxy for living standards, climbed back into positive territory, up 0.2% for the quarter, and 0.2% year on year. Inflation increased 0.9% in Q2 2025 and came in at 2.1% for the 12 months ending June 25, and above expectations of 2.4%. The April and May 25 monthly figures came in at 2.4% and 2.1% respectively. There was a surge of 24.6% in electricity prices, as State Government rebates gradually disappeared. Inflation also increased for clothing, 3% vs 2.3%, and communication, 1.9% vs 0.8%. Transportation prices also increased, 0.4% vs -1%, which was the first increase in seven months. Food inflation held steady at 3%. After a jump to 5.2% in the previous quarter, the household saving rate fell back in Q2 to 4.2%.
The RBA cut rates once in the quarter, after its August meeting, and in its statement noted “with underlying inflation continuing to decline back towards the midpoint of the 2–3 per cent range and labour market conditions easing slightly, as expected, the Board judged that a further easing of monetary policy was appropriate.”
House prices increased in every market over Q3 25, with Cotality (formerly CoreLogic) noting, “advertised stock levels are below average across every capital city adding to the momentum in home value growth.” The combined capitals were up 2.3% and combined regionals were up 1.8% for the quarter. Sydney was up 2.1% for the quarter and up 3% annually, according to Cotality. Darwin 5.9%, Perth 4% and Brisbane 3.5% saw the largest increases over the quarter. On an annual basis, Darwin was up 12.9%, with Brisbane and Perth up 8.8% and 7.5% respectively. Hobart was the worst performer across the quarter, up 0.1% and 2.7% for the year ending September. Melbourne was the worst annual performer, up 1.9% and 1% for the quarter. For rents, the national vacancy rate hit a new record low of 1.4% in September, with only 1.1% of Australian units and 1.7% of houses estimated to be vacant and available for lease in September.
Rents started to edge up across the quarter again, with Darwin still leading the way at 6.8%, Hobart at 6.0%, with Perth and Brisbane at 5.4% showing the strongest growth on an annual basis. Melbourne again came in at 1.2% and Canberra at 2.6%.” Rents increasing may not bode well for inflation, with Cotality noting, “given the large weighting rental costs have in the consumer price index, and the lead-lag relationship between Cotality’s rent value index and CPI rent measure, the recent re-acceleration in rents could have implications for inflation down the track.”
Market Overview
Asset Class Returns
The following outlines the returns across the various asset classes to 30 September 2025.
Global stocks again saw a strong quarter. The Australian dollar bounced between 64 and 67 cents USD finishing slightly higher for the quarter, while it was mostly flat against the Euro. MSCI World ex Australia (Hedged) was up 7.56% for Q3, while the unhedged index was up 6.14%, a 50/50 split of the two was up 6.86%. US large caps were up 8.12%, while US small caps moved up 12.39%. MSCI World Ex US in USD was up 5.33% for the quarter. Emerging markets also continued their good run.
The Australian stockmarket enjoyed another good quarter, as did Australian listed property, up 4.77%. Bonds were varied, depending on the country and the expectation of interest rate decisions. In the US where the Fed cut 0.25%, bonds initially moved up before closing out lower. The 10-Year US Treasury yield had a slight downward trend through the quarter, moving from 4.22% to finish at 4.15%. US 2-year Treasury Note yields edged downward during Q2, from 3.72% to 3.61%. In the UK, the 10-year Gilt yield fell from 4.48% to 4.70%. In Australia the 10-year yield edged up from 4.17%, to finish at 4.31%. While the 2-Year government bond yield climbed from 3.22%, to finish at 3.50%.
In the US, stocks made strong gains in Q3, as the S&P 500 and the Nasdaq both saw record highs. Mega-cap tech stocks and AI-related investments continued to dominate returns, but they were supported by robust earnings and capital expenditure in data centers and semiconductors. While earlier in the year returns were mostly dominated by those aforementioned companies, there was a broader sector participation as Fed rate cuts boosted sentiment. Over half of the S&P 500’s return came from profit growth, highlighting there are some strong fundamentals under the market, while as always monetary easing and strong consumer spending kept markets buoyant.
For Q3, communication services, 12.6%, and technology 12.2% led the way, while consumer staples -2.6% and healthcare 1.3% lagged. Year to date, communication services 25.1% and technology 21.3% remain top performers, with industrials and utilities also outpacing the S&P 500. Healthcare and consumer staples are the weakest sectors. The Magnificent Seven (NVIDIA, Microsoft, Alphabet, Apple, Amazon, Meta, and Tesla) have delivered a combined 18% price return year to date and account for roughly 45% of the S&P 500’s gain.
In the Eurozone, stocks again posted decent gains in Q3, but were really the global laggards for the quarter with the MSCI EMU up 4.27% in EU terms, but still up 17.67% year to date. In France, the CAC 40 was up 3%, while the German DAX was down -0.12%. The financials and healthcare sectors were the strongest over the quarter, while telecoms and communication services lagged. Bank shares were buoyed by some strong corporate earnings, but a lack of companies that are exposed to the AI theme played into the lower overall returns.
In the UK, stocks delivered a strong performance with the FTSE 100 seeing its best quarter since late 2022. The resilient global economy helped drive returns, while the weaker pound also helped companies with internationally focused businesses. Communication services and technology sectors were strong performers, due to the ongoing enthusiasm for AI. Basic materials also saw a rally, driven by higher gold prices. Additionally, the London Stock Exchange saw a resurgence in initial public offerings. Breaking down by size, the large cap FTSE 100 was up 6.7%, with the small and mid-sized companies lagging after outperforming their large counterparts in Q2. The mid cap FTSE 250 was up 1.79%, and UK small caps were up 1.81%.
In Japan, the stockmarket was up strongly again in Q3, with the TOPIX Index up 11.4%, the Nikkei 225 up 11%, which push both to record highs. Japanese market sentiment strengthened as US rate cut expectations firmed, while domestic political developments, including potential party leadership moves, increased risk appetite. Cyclical sectors outperformed with non-ferrous metals, energy, and semiconductor-related stocks benefiting from higher commodity prices and relentless AI demand. Importantly, the market was supported by robust corporate results, share buybacks, and dividend increases. While currency volatility and policy uncertainty occasionally weighed on trading, confidence in the earnings recovery and Japan’s ongoing structural reform underpinned performance.
Asia (ex-Japan) and Emerging markets were strong in Q3, with MSCI AC Asia ex Japan Index up 10.63% in Australian dollar terms, while the MSCI Emerging Markets Index was up 9.41%. Year to date, the pair are up 18.63% and 19.14% respectively. Egypt, Peru, China, and South Africa were the top-performing emerging markets over the quarter. In China, ongoing progress on US-China trade talks, and the continued focus on their anti-involution policy, was beneficial for market sentiment. In South Africa the market’s performance was fuelled by stronger precious metals prices. The Taiwan index market outperformed due to the ongoing strength in technology stocks, driven by continued demand for AI. Korea’s outperformance was also rooted in the technology sector. In contrast, India and many Southeast Asian markets, struggled due to modest non-tech gains and tariff pressures. The Philippines was the weakest market, well below its long-term average.
In Australia, the ASX 300 was up 4.99% in Q3, with the majority of sectors in the green. Those in the red were energy, down -1% as the oil price eased across the quarter, consumer staples down -1.38% as Woolworths took a tumble in the backend of the quarter, which was somewhat offset by a bounce from Coles. While healthcare was down -9.73% as the largest healthcare stock, CSL continued to be undermined by tariff concerns. The leader was materials, up 21.24% as the big miners all rallied from Q2 selloffs. The other sectors to outperform the index were utilities, up 11.44% and consumer discretionary, up 9.6%. Financials were up slightly at 1.31% as Commonwealth Bank spent most of the quarter coming down from its previous lofty peak, in contrast, the other three big banks (all less than half CBA’s market cap) spent the quarter climbing upward and offsetting the CBA falls. Finally, the ASX Small Ordinaries were up 15.31% for Q3 as the smaller resource companies saw good gains, particularly in the precious metals space. DroneShield and Eagers Automotive also saw strong price appreciation in the small cap space.
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With thanks to FYG Planners for this article