Global equities rose 7% during the third quarter to end September 17% higher year-to-date and at a new all-time-high. The rally has been particularly strong since the start of April with the MSCI All Country World Index gaining almost a third – its strongest five-month return in two decades – to shrug off continued global trade uncertainty and geopolitical tensions.
Despite a sluggish start to 2025, US equities have been strong – the S&P 500 index gained 8% in the third quarter and is up 14% year-to-date – and continue to be led by the Magnificent 7 which have surged over 60% since their April lows[1]. Other markets have been even more impressive this year, particularly Europe (+25%), Korea (+44%), China (+19%) and Brazil (+34%), and sector returns have been similarly broad with all MSCI global sectors in positive territory as both cyclicals and defensives have performed[2].
Investor confidence is also high with the latest Bank of America Global Fund Manager Survey showing sentiment at its most positive since February, underpinned by expectations for aggressive Fed easing – nearly half of respondents expect four or more rate cuts in the next 12 months – and a sharp jump in global growth expectations.
The strength of the market rally and investor bullishness is striking given the challenging macroeconomic backdrop this year, notably trade and tariff volatility, weak employment data and persistent inflation. There also remain significant geopolitical headwinds with conflicts in Ukraine and the Middle East still to be resolved and US tensions both with its international allies and internally from the government shutdown and moves against the Federal Reserve.
Solid fund performance
Although our funds had a challenging third quarter in relative terms, I am pleased to report that all bar one are ahead of benchmark year-to-date, largely due to strong stock selection by the portfolio teams. As well as being supportive for stock pickers like SKAGEN, the market broadening has seen value keep pace with growth globally this year and away outside of the US our investment style has now consistently outperformed over the last five years.
Actively selecting relatively cheaper stocks also offers downside protection against higher valuations in some markets, for example the US where multiples remain skewed by the prominence of big technology companies. The tech sector now represents a third of the S&P 500’s total weight – higher than the dot com bubble – lifting the index’s forward P/E ratio to 23x, which is 40% above its 35-year average (16.5x) and a level where subsequent 10-year returns have historically always been negative.
AI mania (and FOMO) remains a key driver of market sentiment and potential downside risk, particularly as US markets are increasingly at the whim of more volatile retail investors and returns on the huge investments made by technology companies are still to be realised with capex by the five major AI hyperscalers predicted to grow over 50% to nearly $450 billion in 2025[3].
Valuations outside of the US look far less demanding despite the broad rally. European earnings multiples (15.4x) are only slightly above the long-term average (14.6x) and remain around a third cheaper than the US with above-average discounts across most sectors. Emerging markets also offer good value with multiples in line with 35-year averages and most countries (except India and Taiwan) at the lower end of historic ranges. Developing countries are also becoming less dependent on the US, while continued dollar weakness could spur further emerging market outperformance, reminiscent of 2001-2003 following the bursting of the dot-com bubble.
Cautious optimism
While a top-heavy market – tech dominance means that the US still represents almost two-thirds of the global index – alongside macroeconomic and geopolitical uncertainty present obvious risks, these can be mitigated by good stock selection and diversification. Major corrections have historically coincided with Fed tightening or recession, neither of which appears imminent, and the market rebound since April has echoes of previous V-shaped recoveries (1998, 2020) which suggest the current rally could have further to run if conditions remain supportive.
Monetary policy looks set to remain accommodative in most regions, notably the US, while cheaper debt and deregulation are also accelerating capital expenditure and M&A activity across sectors and company sizes. Household balance sheets are similarly healthy, and cheap energy is benefitting both corporates and consumers.
Harder to quantify – but potentially even more powerful – are the productivity gains from AI beyond the technology sector as it permeates across governments, sectors, companies and populations. All these are supportive factors underpinning forecasts for positive earnings development in most regions this year and double-digit growth in 2026. Despite the ‘wall of worry’ continuing to loom large, I am optimistic that our portfolios and the companies within can scale even greater heights.
All figures in USD as at 30/09/2025 unless stated.
[1] Bloomberg Magnificent 7 Total return Index.
[2] KOSPI, Shanghai Composite, MSCI Europe (USD) and MSCI Brazil (USD) indices.
[3] Source: Bloomberg, LP Morgan Asset Management.