Global equity markets pushed higher again in the third quarter of the year, their sixth consecutive positive month (when measured in US dollar terms).
[1] Europe has pushed past its previous peak back in 2000, while Japan’s peak in 1989 has finally been surpassed. We are overweight equities, and our individual holdings have tended to be higher quality.
From our perspective, the reasons for this are clear: the long-term impact of tariffs, widening budget deficits, stubborn inflation, and unrelenting competition from China all continue to cloud the outlook for more cyclical and lower-quality earnings.
For now, markets have chosen to look past these concerns, with the strongest gains coming from high-beta cyclical companies, unprofitable technology names, and financials. The result has been an aggressive, liquidity-fuelled advance – one in which the more robust business models we tend to favour have lagged the wider market.
Europe’s domestic demand shift
In Europe, growth is softening as exporters work through orders brought forward to avoid US tariffs. Looking ahead, activity is likely to shift toward domestic demand, aided by higher defence spending. Headline inflation, at 2.2%, has remained relatively stable, though warning signs persist – German inflation surprised to the upside last month at 2.4%, [2] while core inflation across the Eurozone remains sticky at around 2.4%.
In short, the global economy looks set to muddle through 2026, but the outlook remains more challenging for cyclical sectors. Steepening yield curves, persistent Chinese competition, tariff spillovers, and sticky inflation all argue for robust business models and balance-sheet strength.
Could the UK be the canary in the coal mine?
In Britain, the Bank of England looks set to keep rates at 4% well into the new year, with core inflation still too high to allow meaningful easing. Growth should benefit from government spending and lower energy costs, but weak productivity remains a drag. All of this limits the Chancellor’s headroom as she prepares for the 26 November Budget – one that must respect fiscal rules without derailing Labour’s growth agenda.
UK bond markets are not wholly convinced, nearing the worst days of the Liz Truss budget crisis, while 30-year yields have seen a 25-year high that makes long-term funding expensive. Could the bond-market vigilantes return? Quite possibly. Yes, deficits are higher in France and the US, but the former can rely on ECB support, while the latter enjoys reserve-currency privilege.
As yield curves steepen and funding costs rise, the risk of a bond market shock grows. Any simultaneous de-risking of portfolios could hit the speculative assets that have led this year’s rally particularly hard. Hence our preference for maintaining a quality-focused portfolio.
Some signs of excess in global markets
While strong nominal growth underpins corporate profits, signs of excess are starting to emerge. September saw the largest leveraged buyout in history, as Silver Lake Management acquired Electronic Arts for $55bn. [3] Only a week earlier, Oracle issued $18bn of bonds to fund its cloud and AI expansion – an offering that was five time oversubscribed. Meanwhile, US margin debt hit an all-time high of $1.06trn in August. [4]
Equity risk appetite is rising. The Wall Street Journal reports that a quarter of all new ETFs launched this year are leveraged funds, [5] which amplify both gains and losses. The largest “2x” single-stock ETFs now track Tesla, Strategy Inc and Nvidia. These funds use derivatives to double the already volatile daily move in the underlying stocks.
Taken together, record margin debt, surging leveraged loans and excessive risk-taking in derivatives all point to growing market exuberance. Once again, this underlines the case for a quality bias in equity selection, despite the frustration of lagging the more speculative market moves.
Watch for a reversal in momentum
The extraordinary rally in global equities following Liberation Day has been dominated by momentum trades, and nowhere is momentum more evident than in AI-related stocks. At Sarasin, we selectively own profitable quality.
tech stocks as a key part of our thematic approach. It is fair to say though that many investors have begun to assume continuous, consensus-beating earnings as a given. Indeed, we have rarely seen such prodigious cash-flow growth alongside such vast investment in data-centre infrastructure worldwide.
Despite the signs of exuberance, the fundamental underpinnings of global equities remain sound. Consensus forecasts point to around 13% earnings growth over the next 12 months, while global dividends are expected to rise by almost 10%, in addition to near-record US share buybacks. While valuations are high, profitability and cash generation remain robust. [6]
A further re-rating may be possible in the aftermath of the tentative settlement in Gaza. Our positioning therefore is overweight equities, but with a continued focus on companies with higher returns on equity, stable earnings growth, and lower leverage. This approach may lag the market in exuberant phases, but we are confident it will reassert itself in the long run.
By Guy Monson, Chief Market Strategist at Sarasin & Partners
1 – https://www.trustnet.com/news/13459764/seven-charts-that-show-how-markets-moved-across-2025s-third-quarter
2 – https://www.destatis.de/EN/Themes/Economy/Prices/Consumer- Price-Index/_node.html
3 – https://news.ea.com/press-releases/press-releases-details/2025/EA-Announces-Agreement-to-be-Acquired-by-PIF-Silver-Lake-and- Affinity-Partners-for-55-Billion/default.aspx
4 – https://www.finra.org/rules-guidance/key-topics/margin-accounts/margin-statistics
5 – https://www.wsj.com/finance/investing/etfs-are-flush-with-new-money-why-billions-more-are-flowing-their-way-8d9cbfb7
6 – Macrobond, to 30.09.25
