As the summer months rolled in, global financial markets seemed to take a breather from the drama of trade tensions and political headlines. Instead, investors shifted their focus back to the basics: how companies are performing, how economies are growing, and the ongoing excitement around artificial intelligence (AI).
Economic overview: mixed signals across the globe
While most regions saw little change in economic growth, the United States raised some eyebrows. A major revision to job data revealed fewer new jobs than previously thought, and economic activity slowed during the summer. This led to increased concern about the health of the US economy.
The US dollar, which had been weakening throughout 2025, found some stability during the quarter. It even regained some ground against the British pound, which is important for UK investors with exposure to US assets.
Inflation: a growing concern
Inflation (how fast prices are rising) is becoming a bigger issue, especially in the UK. We’ve been watching this closely, and now it’s clear that inflation could reach double the Bank of England’s target before the end of the year. That means everyday costs could continue to rise, affecting everything from groceries to housing.
In the US, inflation is also creeping up. However, many companies are choosing to absorb these higher costs themselves rather than pass them on to consumers, likely due to uncertainty about the economy.
Bond markets react
Bond markets, which often signal investor expectations about inflation and interest rates, responded to these concerns. Yields on longer-term bonds rose in many countries, reflecting uncertainty about future inflation. In the UK and US, government spending plans added another layer of complexity.
In the US, the Federal Reserve (America’s central bank) responded to weaker job numbers by cutting interest rates in September, a move aimed at managing risk and supporting the economy. However, not all Fed officials agreed on the path forward, with some suggesting rates should fall below 3% by year-end.
Back in the UK, the Bank of England faces a tough balancing act. Inflation is proving stubborn, especially in areas like housing and services, making it harder to decide whether to raise or lower interest rates. This uncertainty caused the UK bond market to shift slightly, as investors tried to make sense of the situation.
Stock markets: AI and emerging markets shine
Global stock markets saw a shift in leadership this quarter. The US continued to perform well, driven by enthusiasm around AI and related investments. But it wasn’t the only star.
China stood out, with its tech sector attracting investors thanks to lower valuations compared to the US. Taiwan and South Korea also delivered strong returns, although India’s stock market lagged behind.
Closer to home, UK and European markets made gains, especially among larger companies. Japan’s market also picked up, helped by a new trade deal with the US and strong company fundamentals, including widespread share buybacks.
Looking ahead: what should investors expect?
The more positive mood over the summer has pushed many stock markets into double-digit returns for the year so far. However, UK investors with overseas holdings may have seen some of those gains reduced due to the weaker pound.
There’s an interesting contrast between stock and bond markets, especially in the US. While bond investors are worried about slowing economic growth, stock investors remain optimistic, focusing on AI innovation and increased merger and acquisition activity.
Bond markets often spot trouble before stock markets do, but they can also overreact. In the UK, bond investors are more focused on inflation and how it might be controlled without hurting the economy.
As we head toward the end of the year, expect more headlines about inflation, interest rates, and economic growth. But remember: not all noise is worth reacting to. Staying focused on long-term goals and maintaining a well-diversified portfolio is often the best approach.
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If you would like to discuss your investments in more detail, or require tailored advice specific to your situation, please get in touch by emailing financialplanning@pmm.co.uk or by calling 01254 679131.
The value of investments can fall as well as rise. You may not get back what you invest.
The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction.
