2025 Q3 Market Outlook: Shaken, not stirred
The global economy has confronted a series of shocks this year, U.S. economic forecasts have been revised lower, but downgrades have plateaued, and importantly, it is expected to avoid recession in 2025.
Q: Could the threat of US tariffs result in further uncertainty for global financial markets?
With the Trump administration stepping back from punitive tariff announcements, peak trade policy pessimism is in the rearview mirror. However, there remains potential for economic scarring as trade barriers will likely stay higher than at the year's start. This impact is a headwind on U.S. growth. Trade policy uncertainty is likely to remain elevated. The administration will likely use tariffs as a negotiating tool, making tariff noise a permanent feature of the economic backdrop.
Tariffs on China, Mexico, Canada will remain near current levels. For China, the impact should be mild and manageable, but tariffs will be quite punishing for Mexico and Canada. 
Q: How might tariffs affect U.S. inflation and Federal Reserve policy?
Tariffs could result in a significant inflation impact, we expect tariffs could deliver a one-time inflation shock of around 1.5%, primarily in core goods prices.
While the Fed believes these impacts won't cause second-round effects, it recognizes the risk of persistent inflation pressures. Near-term inflation expectations are gaining attention. The Fed may navigate a narrow path, with trade uncertainty alongside resilient jobs data influencing its decisions. With the economy providing little reason for urgent and significant cuts, we continue to expect the Fed to resume rate cuts in Q4, followed by a further three cuts next year.
Q: Is the US dollar in structural decline more than cyclical weakness?
In China, a strong growth performance in the first half of 2025, combined with policy potential, has led forecasts to remain fairly robust. Europe fiscal action is driving a rise in 2026 growth forecasts. Shifting global dynamics have prompted investors to question U.S. exceptionalism, reflected in the dollar drop into a three-year low. While the Fed’s ability to cut rates aggressively this year is limited, other major central banks are easing policy. This has pushed foreign yields lower relative to U.S. yields—a trend that typically strengthens the U.S. dollar. However, this historical relationship has recently weakened.
Although the dollar remains the primary safe-haven currency, its share of global FX reserves has been in structural decline. A multipolar currency system could gradually challenge the dollar’s dominance, especially if the Euro area is able to maximize its productivity potential over the coming years. However, no other market offers the depth and liquidity similar to USD assets and capital markets.
Q: How should investors think about asset allocation?
U.S. equity markets have fully recovered, with the S&P 500 reaching a new record high in late Q2. Technology, particularly the Mag 7, was the primary driver of this rebound. However, continued gains in the S&P 500 are anticipated, driven by earnings following economic growth. While large-cap valuations look stretched these are supported by solid fundamentals, small caps look attractive.
Earlier this year a surprise rebound in Chinese tech, Europe’s turn toward expansionary fiscal policy, and growing concerns about the U.S. outlook triggered a rotation toward ex-US markets. In Europe, valuations are now elevated, requiring clear evidence of strengthening earnings to extend outperformance, while in emerging market, the picture is also one of wide variation. While China and Latin America remain relatively cheap, India’s valuations look stretched but demographics driven structural growth case for India remains intact, South Korea is expected to benefit from supportive domestic policies by new administration. 
Bond market volatility surged in mid-Q2. Ten-year U.S. Treasury yields dropped below 4% before rising to 4.6% and retreating to 4.25% at quarter's end. Breakeven yields remain well-anchored, while real yields are elevated, reflecting increased risk premiums from Treasury supply and fiscal sustainability concerns. The steepening yield curve suggests a shift toward shorter-duration Treasurys. Strong corporate fundamentals, solid balance sheets, and elevated profit margins keep the corporate credit environment constructive. While credit spreads widened initially, they quickly reversed. Elevated yields attract investors, with high-grade corporate balance sheets and high yield offering compelling value, aided by a weaker dollar for local currency emerging market debt.
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