The views expressed are those of Anchor Capital Advisors, LLC (“Anchor”) and are subject to change at any time. They are based on our proprietary research and general knowledge of said topic. The below content and applicable data are in support of our views on said topic. Please see additional disclosures at the end of this publication.
Overview
The global economic and political environment is facing significant pressure and uncertainty, yet financial markets have remained notably stable. In April, the U.S. imposed sweeping tariffs that raised tariffs to their highest levels since the 1930s, with average rates now estimated at near 16%.[1] While some of the extreme uncertainty around trade policy has since moderated, the issue is far from resolved.[2] The full economic impact of tariffs has yet to be felt, raising the risk of slower global growth in the future. At the same time, major policy uncertainties linger. In the U.S., the One Big Beautiful Bill Act (OBBBA) has not fully taken effect and the Federal Reserve’s future leadership remains unclear. In Europe, fiscal stimulus programs are only beginning to unfold. China faces the challenge of reigniting investment and consumption. Geopolitical conflicts in Ukraine and the Middle East continue to cause strain.[3]
Yet, amid these headwinds, businesses and households have shown notable adaptability. Policymakers remain broadly supportive, and markets have steadied with valuations holding firm and volatility subdued.[4] Global equities and credit markets are largely behaving as though growth risks are minimal, with both asset classes advancing. As a result, many risk assets are trading at elevated valuations. For now, strong corporate fundamentals, accommodative government policies, and a steepening U.S. yield curve continue to provide support.[5] Moderating growth without recession risk remains supportive for corporate credit, while lower recession probabilities and accommodative government policies provide a constructive backdrop for equities.[6] Ultimately, slower growth is still growth, and markets are reflecting that reality with confidence, though certain areas now appear overextended. [7]
We continue to view U.S. markets as offering a more favorable investment environment than international peers. Although job growth has slowed to less than half last year’s pace, consumer spending remains resilient, and second-quarter GDP was revised higher.[8] Firms have largely paused hiring, but there has not yet been a meaningful increase in layoffs, leaving the labor market softer but still stable. The Fed has responded with rate cuts, and additional fiscal support is expected.[9] While Europe and emerging markets have advanced and outperformed in 2025 as U.S. growth has converged with global trends, the U.S. continues to benefit from structural strengths in market depth, liquidity, and quality. These advantages should help anchor global investment flows, even as international allocations gradually expand. [10]
TABLE 1 – ASSET CLASS PERFORMANCE (As of September 30, 2025)
Source: FactSet financial data and analytics
U.S. Equities
The third quarter was marked by sharp gains in more speculative areas of the market, including cryptocurrencies, meme stocks, lower-quality assets, and AI-related themes. This pattern has become a familiar feature of recent cycles, as investors are repeatedly rewarded for buying into increasingly brief pullbacks. The quarter also highlighted a broader trend in recent years: outsized gains concentrated in a small number of dominant growth leaders, most notably NVIDIA Corporation.
More broadly, U.S. equity valuations have remained resilient, rebounding strongly from the April sell-off despite tariff-related headlines and returning to elevated levels. This strength reflects a confluence of supportive forces, including Fed rate cuts, upward earnings revisions, a softer dollar, accelerating AI adoption, and potential tax benefits from policy initiatives such as the OBBBA.[1]
We believe that in recent years, headline economic statistics such as nominal GDP and employment have overstated the strength of the underlying economy compared with conditions faced by many companies and consumers. While certain sectors, most notably data centers and AI-related businesses, have remained resilient, masking broader weakness, earnings growth for much of the corporate sector has been flat or negative. [2] This concentration of strength is reflected in the Cyclically Adjusted P/E (CAPE) ratio for the S&P 500, which now stands near its 2022 peak, at levels surpassed only during the dot-com bubble.[3] By contrast, value indices and small capitalization stocks remain less concentrated and more reasonably valued, positioning them for potentially attractive future returns. Notably, following the dot-com peak, the S&P 500 generated no return for the subsequent decade (2000–2010). Ultimately, earnings momentum remains the primary driver of equity performance.[4] Looking ahead, a recovery in earnings across lagging areas of the economy could help broaden market participation and support sustained equity performance.
We see small-cap equities as well positioned for more durable outperformance as the Fed’s cutting cycle unfolds. While they outperformed large caps in the third quarter[5], a meaningful improvement in relative earnings revision breadth has yet to materialize. Additionally, a weakening labor market could accelerate a dovish shift in Fed policy, creating conditions for a more pronounced and sustained rotation into small caps.[6]
TABLE 2 – S&P 500 SECTOR RETURNS (As of September 30, 2025)
Source: FactSet financial data and analytics
International Equities
International equities have outperformed U.S. markets in 2025 as global investor sentiment broadened and capital rotated into non-U.S. assets. Europe’s recovery is likely to be slower, though fiscal measures and valuation discounts should provide some support as it unfolds. Even so, the outlook remains mixed. European governments, including Germany with its €1 trillion stimulus initiative, have signaled a commitment to strengthening economic capacity, but the impact of these programs will be gradual. The euro area economy continues to show signs of strain, with weakening data and an ECB that remains in a wait-and-see stance.[1] Under these conditions, a sustained recovery may not materialize until 2026, particularly given ongoing uncertainty around trade and tariff policy.[2]
Emerging markets (EM) have benefited from a supportive macro backdrop, including a monetary policy easing, lower oil prices, weaker U.S. dollar, and targeted fiscal support.[3] We maintain a constructive outlook on EM, as accommodative EM central banks, Fed rate cuts, and a softer dollar have historically provided powerful tailwinds for EM equities relative to developed markets. This year’s gains have been driven largely by valuation re-rating and currency appreciation, while structural improvements in governance and economic frameworks are strengthening fiscal positions and lower debt burdens.[4] Together, these shifts support more sustainable returns, and with earnings growth potentially accelerating, EM valuations remain compelling.
Interest Rates
At its September meeting, the Federal Open Market Committee (FOMC) cut the federal funds target range by 25 basis points to 4.00%–4.25%, marking its first rate reduction since December 2024. Policymakers noted that uncertainty around the economic outlook remains high and highlighted downside risks to the labor market.[1] The move was widely anticipated, reflected in falling Treasury yields over the quarter as investors recalibrated policy expectations.
Looking ahead, the potential restart of the Fed’s easing cycle, combined with headwinds to U.S. growth from tariffs and immigration policies, could push yields even lower. [2] Historically, bond yields tend to decline both before and after the onset of Fed easing. The Fed has reaffirmed its commitment to preserving labor market strength and signaled its readiness to adjust policy as needed, prompting investors to bring forward expectations for rate cuts. The upcoming appointment of a new Fed chair and FOMC members may further reinforce the administration’s preference for lower policy rates. The main risk, however, is that inflation proves more persistent, remaining above the Fed’s 2% target on a structural basis. [3]
Currency
The U.S. dollar (USD) has weakened steadily throughout the year, diverging from its traditional role as a safe-haven asset. For more than a decade, U.S. markets consistently attracted capital inflows in both calm and volatile periods, reinforcing the dollar’s role as the world’s primary reserve currency.[1] Looking ahead, the factors that underpinned dollar strength, most notably growth and yield differentials versus other economies, are fading.[2] With U.S. rates and growth converging toward global levels, the dollar is likely to remain under pressure.
Bonds, Real Estate, & Infrastructure
Consistent with the prior quarter, fixed income markets remained stable, showing little sign of investor concern. High-yield spreads have tightened alongside equity valuations, remain below long-term averages, and continue to indicate limited credit stress. Companies continue to enjoy access to capital markets, enabling refinancing or new issuance as needed. While credit markets may react to macroeconomic developments, corporate balance sheets appear broadly strong, leaving firms better positioned to manage a downturn than in previous cycles. In contrast, the prevailing risk-on environment contributed to underperformance in interest rate–sensitive asset classes such as real estate during the third quarter.[1]
Over the longer term, however, we see value in incorporating real estate and infrastructure into portfolios. These long-duration assets typically exhibit low correlations with public equities, offering diversification benefits, reduced portfolio volatility, and the potential for stable income generation.
Outlook
We expect the global economy to slow but avoid recession, with policy easing and resilient corporate fundamentals providing support. In the U.S., rate cuts and fiscal stimulus should cushion softer growth, while earnings broadening beyond mega-cap leaders will be critical for sustaining equity performance. Small caps and value stocks appear well positioned to benefit as financing conditions improve and market participation widens.