As the third quarter of 2025 comes to a close, we have seen a strong performance from all major asset classes. Easing trade tensions, artificial intelligence, and growing expectations for monetary policy easing by the U.S. Federal Reserve kept optimism up. September showed a continuation of the trend. The month defied its historical reputation as a weak month for equities, delivering the strongest performance in 15 years.
Emerging Markets ended the month with the highest performance of 7.2%, based on the MSCI Emerging Markets Index. This was driven by continued positive trade negotiations between China and US, Chinese stimulus, as well as AI optimism. Canada’s TSX composite ended the month at 5.1%, benefiting from high sector composition in Materials, Energy, and Financials. In the US, the S&P 500 rose 3.6% in September, bringing its year-to-date gain to nearly 14%. Nasdaq Composite surged 5.6%, fueled by AI optimism and strong tech earnings. After a strong performance this quarter, developed international regions showed a more subdued gain in September, with the MSCI EAFE index finishing at 1.9%. North American small-cap stocks also ended the month with strong gains, benefiting from expectations of further fiscal stimulus and rate cutting.
North America bond markets posted moderate gains in September, with both the Bank of Canada and Federal Reserve keeping a dovish stance. Overseas, bonds were slightly down with hawkish signals from the Bank of Japan and inflation and government debt concerns in the UK. Credit spreads continued tightening globally.
Oil prices pulled back in September with expected surpluses and gold prices experienced another strong month, gaining 11.4%.
Stocks and Commodities
China extended it’s outperformance into September from earlier in the third quarter, with the MSCI China index gaining 7.4%. This was led by Chinese technology stocks, with the Hang Seng Tech Index extending its rally, driven by increased AI investment and supportive domestic policies. Major Chinese firms accelerated product rollouts and capital expenditure in AI infrastructure, benefiting from government incentives aimed at strengthening the semiconductor industry. Additionally, easing trade tensions with the United States and optimism surrounding China’s “anti-involution” policy, which seeks to reduce hyper competitive business practices, supported markets.
Japan’s Topix index continued it’s rally higher by almost 2% in September, locking in a strong gain of 11% for the 3rd quarter. Markets were supported by a weaker Yen, a ratified U.S.-Japan trade agreement which reduced tariffs on Japanese exports from 25% to 15%, resilient domestic economy data, and ongoing positive corporate governance reforms.
While not leading the pack, the US maintained a healthy performance in September, with the S&P 500 gaining 3.6% and the Nasdaq Composite gaining 5.6%. The Fed cut rates for the first time of the year by .25% on September 17th and signed a continued dovish stance, on the back of a weak employment report for August. US headline inflation accelerated from 2.7% year-on-year to 2.9% in August but the tariff pass through has remained more modest than feared. However, valuations remain elevated, surpassing long-term historical averages. While robust corporate earnings have supported these higher multiples so far, there is growing concern that profit margins could come under pressure if cost inflation persists or if retaliatory tariffs begin to impact input prices and supply chains.
In Canada, the TSX composite has seen a notable boost from upward earnings revisions across multiple sectors over the 3rd quarter. This marks the most significant 12-month upgrade to earnings per share (EPS) forecasts since 2022. The composite ended the month at 5.1%. The Materials sector finished the month with a huge gain of 18.9%, on the back of the momentum seen by gold and other precious metal prices. Gold related stocks within the S&P/TSX Composite Index have experienced a remarkable rally, climbing 97% year to date. As a result, gold now represents over 11% of the index’s total market capitalization, marking its highest share since reaching 11.5% in 2012. This is significantly above the long-term historical average of 4.7%, which has held since the mid-1970s. Financial and energy stocks also contributed to the gain this month, with 4.5% and 5.6%, respectively.
The FTSE 100 in the UK had a modest gain of 1.8%. A weaker sterling supported earnings for large-cap companies, which derive approximately 75% of their revenues from overseas markets, however inflation remains a concern.
In Europe, the MSCI Europe ex-UK index ended the month at 2.1%. German equities dragged down the overall index. France saw a modest recovery as former Prime Minister Bayrou was ousted and replaced with the current Prime Minister Lecornu on September 9th.
Bonds
US bonds posted gains across the board in September. The US Investment grade corporate bond universe posted the biggest gain at 1.4%. The Federal Reserve moved to a dovish stance, with the Fed cutting rates for the first time of the year. The markets focus moved from inflationary pressures to concerns about slowing economic growth. This was reinforced by signs of labor market cooling with the U.S. economy adding an average of 29,000 jobs per month from June to August, a sharp drop from the 99,000 monthly average in the preceding quarter. The Bureau of Labour Statistics (BLS) also revised its payroll employment growth figures lower by a much larger than expected 911,000 in the 12 months to March 2025.
Canada experienced the same positive sentiment, with both government and corporate bonds experiencing gains of around 1.5%, and gains experienced along all parts of the yield curve. The Bank of Canada also decreased rates by .25% on September 17th . The Market is expecting another rate cut in October. The unemployment rate in August reached 7.1%, levels not seen since during the post-pandemic recovery. This mirrors conditions in 2016, a period when Canada was emerging from the economic downturn caused by a previous collapse in oil prices. At that time, the Bank of Canada’s overnight rate was set below 1%, reflecting a highly accommodative monetary policy aimed at supporting growth.
The European Central Bank kept its key interest rate unchanged at 2% in September, following seven consecutive cuts before July, as inflation remained under control. This was aligned with market expectations, which don’t expect any future rate cuts. The tone of the ECB’s accompanying commentary leaned hawkish, emphasizing the eurozone’s economic resilience despite ongoing trade tariff pressures, as well as regional debt concerns. This contributed to a small rise in bond yields across the region. The most pronounced bond market reaction occurred in France, where the ousting of Prime Minister Bayrou triggered a sharp sell-off in long-dated sovereign bonds. The resulting volatility led to a widening of French credit spreads, culminating in Fitch Ratings downgrading France’s sovereign credit rating from AA- to A+, citing fiscal risks and political instability.
The UK government bond market came under pressure in September as persistent inflation, political uncertainty, and concerns over fiscal credibility drove yields higher, with 30-year gilts briefly reaching their highest level since 1998. Despite a .25% rate cut in August, the Bank of England held rates steady in September, citing stubborn services inflation that remains well above its 2% target, and signaling no further cuts are expected this year. Political instability, including the resignation of the Deputy Prime Minister at the beginning of the month, added to market volatility. Meanwhile, economic data painted a mixed picture: while manufacturing and labor market indicators softened, resilient consumer spending and strength in the services sector offered some support.
Japan’s bond market came under pressure in September due to a combination of political instability and shifting monetary policy signals. The resignation of the prime minister heightened concerns about Japan’s fiscal outlook. These developments contributed to a sell-off in long-dated Japanese Government Bonds, pushing yields higher. Inflation remained above the Bank of Japan’s 2% target, and nominal wage growth was strong during the month, reinforcing expectations of policy tightening. Although the BoJ held its policy rate steady at 0.5%, its September meeting revealed a split within the board, with two members voting in favor of a .25% hike. This unexpected hawkish tilt added further upward pressure on yields, and the markets are pricing in an 80% probability of a rate increase before year-end.
Emerging market bonds posted overall strong gains, supported by the U.S. Federal Reserve’s interest rate cut and resilient global economic growth, despite trade tariff concerns. Sovereign and corporate debt, both in local currency and USD, performed well, with high-yield issuers leading the rally. Argentina lagged due to political and fiscal concerns.
Conclusion
Global opportunities are still present, shifting away from the US dominance and US tech concentration that have led returns until recently. Diversification across regions continues to be a key strategy. Bonds continue to offer valuable income and protection, especially if the U.S. job market weakens. However, with markets already expecting significant interest rate cuts from the Federal Reserve, there’s a chance that inflation could rise again, particularly if new tariffs are introduced. Because of this, investors should also be considering a place for real assets in their portfolio.
