Investing & Performance | 7 October 2025
Monthly update: Rate Cuts, Resilient Earnings and the Rise of AI: A Market Perspective
With rate cuts returning, earnings holding firm and AI investment accelerating, we explore the key forces shaping today’s markets—and what they mean for investors.
1. Market Update: A Resilient Outlook Amid Shifting Policy
Global equity markets continued strongly in September, buoyed by renewed central bank support and resilient corporate earnings. The reintroduction of interest rate cuts by the US Federal Reserve (Fed) has signalled a clear willingness to act should labour market conditions weaken further. Meanwhile, the rapid integration of artificial intelligence (AI) across industries continues to underpin investor confidence.
Historically a weaker month for equities, September defied expectations. In the US, softer employment data and moderating inflation created room for the Fed to cut rates by 25 basis points, bringing the federal funds rate to a range of 4.00%–4.25%—the first reduction since 2024.
The Fed’s Balancing Act
Markets are now pricing in two further rate cuts by year-end, potentially lowering the Fed’s benchmark rate to its lowest level since October 2022. However, the Fed’s own projections suggest a more nuanced outlook beyond the short term.
Chair Jerome Powell acknowledged the complexity of the current environment, citing the dual risks of persistent inflation and a softening labour market. “There is no risk-free path,” he noted, highlighting the challenge of easing policy without reigniting inflation or, conversely, maintaining restrictive conditions that could unnecessarily weaken employment.
While August’s job creation slowed to just 22,000, broader economic indicators remain constructive. The US economy grew at its fastest pace in nearly two years in Q2, driven by robust consumer spending. Unemployment remains historically low at 4.3%, and corporate earnings have been notably strong—over 80% of companies exceeded revenue expectations in Q3.
AI: A Structural Growth Driver
The AI sector continues to attract substantial investment, with major players such as Microsoft, Alphabet, Amazon and Meta expected to spend over $400 billion this year.
Despite concerns of a potential bubble, only around 10% of US companies have meaningfully adopted AI, suggesting significant room for expansion. Backed by firms with the scale and capital to sustain long-term investment, AI appears well-positioned to remain a structural growth theme.
AI Adoption by US Firms
Lilian Chovin, Head of Asset Allocation at Coutts, comments:
“Significant investment in AI is boosting revenues and earnings across the technology sector. Despite concerns around its sustainability, we remain confident that the AI sector will continue to support markets going forward.”
2. WHAT DOES THIS MEAN FOR YOUR INVESTMENTS?
We continue to see global equities as an attractive opportunity, supported by robust corporate earnings and expectations of rate cuts. Our portfolios remain overweight equities, with a particular focus on the US, where AI-related tailwinds and resilient consumer demand are driving performance.
While global growth is moderating, this often creates a favourable environment for equities. Inflation remains contained, and policy conditions are supportive— all key ingredients for the potential grow of risk assets.
The US dollar has weakened against a broad basket of currencies this year, which has modestly impacted sterling-based returns. However, our selective currency hedging has helped mitigate some of this effect.
We also maintain exposure to liquid alternatives, which have outperformed traditional government bonds over the past year. As equity and bond markets become more correlated, this allocation provides valuable diversification within our multi-asset portfolios.
Our investment approach remains grounded in long-term fundamentals, active risk management and a commitment to delivering consistent value for our clients.
The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs.
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