THINK DIFFERENTLY

Executive Summary

Q3 2025 Market Review

Q3 2025 saw positive returns across most major asset classes, with equities and precious metals leading gains. S&P 500 equities advanced +8.1% supported by a less-than-feared tariff escalation and the Federal Reserve’s pivot to monetary easing. Gold surged +16.8% in Q3, hitting a record high of $3,859/oz. This is the strongest quarterly performance in over a decade. US Treasuries also posted positive returns, gaining +1.7% as the 10-year yield fell -8bps, benefiting from the Fed’s dovish pivot. USD stabilized after its historic H1 decline, marking its first quarterly advance of the year.

Outlook

Baseline: a ‘just right’ backdrop for risk assets into year-end as the Fed begins a (cautious) rate cut cycle, provided recession is avoided.

The latest ADP employment report showed a drop of 32,000 private jobs – a ‘soft’ print which has cemented a near-certain 0.25% Fed rate cut in October, providing a supportive tailwind for equities.

An extended U.S. government shutdown, which has caused a void in official government data, could potentially raise near-term volatility, but markets have historically emerged unscathed from previous shutdowns.

We maintain an overweight equity positioning with downside hedges and a combination of defensive/alternative positions, such as Gold.

Goldilocks and the Three Bears

Today’s environment can be seen as ‘Goldilocks’: economic activity has cooled without tipping into recession, while inflation has eased enough for (most) central banks to cautiously cut rates. But there are potential risks to watch out for:

Bear #1: Growth shock: If AI demand cools (or earnings disappoint) or the job market cracks, today’s richer valuations leave little cushion – and could trigger a sell-off.

Bear #2: Policy uncertainty: The Trump administration has kept policy risk alive and can hit targeted sectors even if broader trade noise feels calmer ➜ diversify!

Bear #3: Interest-rate uncertainty: Fed cuts aren’t guaranteed if inflation stays sticky e.g. due to tariffs. A rapid jump in long-term yields on deficit/credibility worries could also pressure risk assets.

Shifting Income Dynamics

While the consensus is for yields to trend down, we are wary of long-duration bonds, given worries about U.S. deficits, growth and inflation. Position around the ‘belly of the curve’, i.e. short-middle maturity bonds, which can help harvest steady income for longer, without large price swings. Yields continue to be historically attractive to support the needs of income investors, but there is lower ‘extra compensation’ for taking more credit risk today. Active credit selection to identify better risk/reward income opportunities within higher-quality segments