The cautious optimism that has characterised stock markets in the second half of the year continued in October. Global markets advanced during the month, supported by resilient company earnings and easing inflation across major economies. The US S&P 500 index reached new highs, led by the technology giants and artificial intelligence (AI) related stocks. Meanwhile, European and Japanese stock markets also delivered gains after better-than-expected economic data. Emerging markets were mixed, with gains in India and Brazil offset by weakness in China amid renewed property sector concerns.
Bond markets were more subdued. In broad terms, bond prices declined slightly. However, government bond prices edged higher. The US Federal Reserve (the Fed) and the European Central Bank (the ECB) emphasised that their next steps on interest rate cuts will depend on economic data.
Commodities were broadly positive. Industrial metals rallied on renewed optimism about investment in green energy projects, while gold and silver benefited from geopolitical uncertainty and declining returns from government bonds in real terms (after inflation has been taken into account). We sold our multi-asset funds’ remaining holdings in gold because we believe some of the catalysts behind the precious metal’s strong performance have now faded and speculative buying has risen dramatically.
Looking ahead, investors enter the final months of 2025 balancing optimism about a ‘soft landing’ – a gentle slowing of economic growth, without a recession – with concerns about high stock market valuations, particularly in the technology sector, and geopolitical risks. We believe diversification remains crucial, as investors navigate slowing growth and other risks as we look ahead to 2026.
UK
It was a strong month for the FTSE 100, with the index registering gains of 4.1% during October as it hit a new high. September’s inflation rate came in below the expectations of most investors, holding steady at 3.8%. Inflation in the services sector remained broadly in line with the previous month, while inflation for goods came in below estimates, due to increased discounting compared with the same month last year.
This positive news caused markets to price in 0.60% of interest rate cuts, up from an estimate of 0.40% in early October. This resulted in UK Government bonds posting their best monthly performance in nearly two years. It also gives Chancellor Rachel Reeves slightly more room for manoeuvre, although she will still face some difficult decisions. It is safe to say the Budget on 26th November will be very closely watched.
Europe
The European stock market also rose. The MSCI Europe (excluding the UK) index was up 2.9% during the month, with companies marginally beating expectations by the halfway point in the quarterly earnings season. Inflation came in 0.1% lower than the previous month at 2.1%, which was in line with most forecasts. Interest rates remained unchanged at 2.0%, with ECB Governor Christine Lagarde striking a positive but cautious tone, stating: “We are in a good place, though not yet ready to declare victory.”
US
The US government shutdown continued through the month. It has had a significant impact on economic data releases, leaving investors without key information regarding, most vitally, the state of the labour market. At the end of the month, the Fed cut interest rates by 0.25%, the second cut of 2025, in a well signalled and widely anticipated move. Policymakers cited “increased downside risks to employment” as one of the main reasons for the cut. However, Fed Chair Jerome Powell signalled that another rate cut in December was not a “foregone conclusion”.
US stock markets had a strong month with the S&P 500 Index returning 4.9%, with AI-related companies performing well. At the time of writing, around 70% of US companies have so far beaten forecasts for third-quarter earnings.
Japan
Japanese shares extended their rally in October with the TOPIX index, which is comprised of about 1,800 companies, up 4.3% over the month. Investor sentiment was buoyed by political developments, with Sanae Takaichi confirmed as the country’s first female Prime Minister, triggering expectations of government stimulus measures and investment in defence. This ‘Takaichi trade’ encouraged inflows from overseas investors, while planned corporate governance reforms and share buybacks provided further support for the stock market.
Asia Pacific (excluding Japan)
Stock markets in Asia-Pacific (excluding Japan) extended gains in October, with the MSCI regional index up 6.3%. Performance was again led by technology companies, driven by AIrelated optimism and strong inflows from overseas investors. India posted solid gains after positive data about economic activity, despite weakness in the services sector and slowing export orders.
Southeast Asian stock markets had a mixed month. Thailand and Vietnam outperformed after strong economic activity data, while stocks in Indonesia and Malaysia failed to make progress, amid weaker overseas demand. The interest rate environment remained broadly supportive for stock markets.
Emerging Markets
Stocks in emerging markets extended their winning streak during the month with the MSCI Emerging Markets Index up 6.7%, marking a tenth consecutive monthly gain, which is the longest run since 1993. This performance has been supported by a weaker US dollar, US interest rate cuts, and strong inflows from overseas investors. AI-driven demand and tech exposure remained key drivers, with Taiwan and Korea leading performance.
Elsewhere Latin American stock markets struggled, with Mexican shares falling amid currency weakness and a 0.3% contraction in economic growth. Meanwhile, Brazil’s stock market lost momentum because of slowing growth and tariff uncertainty.
Bonds
Investors had been expecting interest rate cuts by the Fed in November and December. That was until the November rate-setting meeting when Chair Jerome Powell made it clear the Fed was keeping its options open for the December meeting, which appears a prudent move. He likened the situation to “driving in the fog”, with differing views among members of the ratesetting committee about the state of the economy. Meanwhile, in the UK, lower-than-expected inflation figures increased expectations of interest rate cuts, causing UK government bonds to outperform.