In the United States, macroeconomic momentum has shown signs of cooling as weaker labour market data, including sharp downward revisions to prior employment figures, have raised questions about the underlying strength of the recovery. Inflation, while still above the Federal Reserve’s long-term target, has moderated to levels increasingly seen as “acceptable” for policymakers. Against this backdrop, attention turns to next week’s FOMC meeting, where markets are broadly pricing in a 25bps rate cut. This adjustment is viewed as a pre-emptive move to support growth while ensuring that inflation expectations remain anchored. Investors will also be watching for signals on the Fed’s forward guidance, particularly how it balances cooling labour dynamics with the political scrutiny it faces over its independence.
Across the Atlantic, the European Central Bank opted to keep policy rates unchanged at its September meeting. The decision reflects both a more benign inflation trajectory and upgraded growth expectations for 2025, which provided policymakers with breathing space. However, despite the near-term pause, markets still anticipate further cuts later in the year as the ECB seeks to sustain momentum while navigating external headwinds from trade disruptions and global demand softness. Yet two of Europe’s largest economies have become sources of concern. In France, political instability and fiscal unease have driven sovereign yields sharply higher, to the point where some large corporates now borrow more cheaply than the state itself. Meanwhile, in the United Kingdom, gilt yields have surged to levels not seen in nearly three decades, intensifying scrutiny on the government’s fiscal stance and prompting calls for the Bank of England to recalibrate its quantitative tightening programme.

​So far, 2025 has been shaped by sharp swings in financial markets, driven by geopolitical shocks, shifting monetary policy expectations, and evolving macroeconomic conditions. The year began with strong risk appetite, fuelled by optimism over disinflation and AI-led corporate growth, but momentum faltered in April when the US announced sweeping “Liberation Day” tariffs, reigniting fears of a global trade war. Equity markets corrected sharply before stabilising in early summer, supported by resilient corporate earnings and easing volatility. Inflation has proven stickier than expected in most major economies, prompting central banks, especially the Fed and the BoE, to delay or temper rate-cut expectations. The US dollar weakened in the first half of the year, boosting gold prices to multi-year highs as investors sought safe-haven assets. Overall, 2025 has presented a complex mix of resilience and risk, leaving investors to navigate an unusually uncertain macroeconomic and geopolitical backdrop.
Inflation trends in 2025 have underscored the challenge facing central banks in the United States, the Euro Area, and the United Kingdom, with price pressures proving more persistent than policymakers had anticipated. In the US, headline CPI has eased from its 2022 and 2023 peaks but remains above the Federal Reserve’s 2% target. While core inflation has been slower to decline, driven by stubborn services and shelter costs. The Euro Area has seen a similar pattern, with headline inflation moderating on the back of lower energy prices but core readings staying elevated due to wage growth and resilient domestic demand. The UK has faced the stickiest inflation among the three, with both headline and core measures remaining well above target despite easing commodity costs—reflecting underlying pressures in the labour market and housing sector. As shown in Figure 1, inflation has come down substantially since 2023, the Euro Area is the only geography of the three that has maintained an inflation rate at or below 2% for multiple months. In contrast, the UK’s inflation rate has begun to soar again and remains well above 3% in recent months.
Interest rate policy has reflected these dynamics, with the Fed and the BoE both delaying widely expected rate cuts as inflation progress slowed in the first half of the year. The Fed has maintained rates at close to their multi-year highs, emphasising the need for sustained evidence of disinflation before easing. The BoE has lowered its interest rates more steadily in 2025 than the US, but the country has to balance cuts with currently rising inflation. In contrast, the European Central Bank has begun to signal a cautious easing path, supported by weaker growth data and a more pronounced decline in headline inflation across the bloc. Elsewhere, Japan’s policy shift away from ultra-loose conditions has stood in sharp contrast, underscoring the divergence in global monetary stances and adding a further layer of complexity to capital flows and currency markets in 2025.

​This year has been unprecedented for global equity markets, shaped by a turbulent mix of geopolitical tensions, trade disruptions, and persistently high interest rates. Markets began 2025 on a strong footing, with equities rallying sharply in the first quarter amid optimism over disinflationary trends and accelerating gains in artificial intelligence. Investors poured into technology-heavy indices, driving major benchmarks to record highs by late January in the US. In Europe, equity markets also saw significant early-year outperformance, particularly in industrial and export-oriented sectors, as investors sought exposure beyond the tariff-sensitive US economy. However, sentiment shifted abruptly in early April when sweeping tariff announcements reignited fears of a global trade war. This triggered a swift and deep correction across global equities, erasing much of the year’s gains in a matter of days. Despite these shocks, markets proved resilient. The combination of easing inflation pressures and expectations of eventual monetary loosening helped restore confidence from mid-May onwards. The Fed maintained a cautious stance, with key policy rates remaining at multi-decade highs through the first half of the year that reflects continued concerns over wage growth and services-driven inflation. In this high-rate environment, equity risk premia compressed while real yields rose, creating headwinds for broad-based market participation. Nonetheless, AI-linked firms emerged as clear beneficiaries of the recovery rally, with strong earnings momentum, capital investment, and public enthusiasm fuelling a powerful resurgence in tech leadership. By mid-year, global equity markets had largely retraced their post-tariff losses, though underlying volatility remained elevated. While sector performance was more muted outside of technology, investor flows rebounded strongly, with active strategies seeing renewed interest amid greater dispersion in asset performance. At the same time, currency movements added complexity, particularly with the notable weakening of the USD in the first half, which bolstered non-dollar asset returns and contributed to divergent regional outcomes. Taken together, the 2025 equity market narrative so far has been one of sharp dislocation followed by a tentative recalibration, driven by the structural momentum of AI, tempered by tight financial conditions, and under constant pressure from an increasingly fragmented geopolitical landscape. The S&P 500 index started the year strong reaching new all-time highs beyond 6,000 before falling briefly below 5,000 following ‘Liberation Day’. By mid-May 2025, the index recovered fully and reached new all-time highs above 6,200 by mid-July 2025, as shown in Figure 1.

​Since President Trump announced a pause on tariffs in early April 2025, equity markets have rallied significantly. As shown in Figure 1, the S&P 500 rallied by more than 15% in the past five weeks and closed last week with a positive performance in 2025. Despite this rally, market participants remain hesitant, as uncertainties regarding the long-term effects of tariff policies linger. Goldman Sachs, while acknowledging the positive momentum, still projects a significant chance of recession, having recently reduced their recession probability from 45% to 35% following the tariff pause and recent trade developments.