It was a particularly strong quarter for markets, with tariff news taking a welcome back seat. Instead, it was the impact of Artificial Intelligence (AI) related spending frenzy which dominated the financial headlines, as well as corporate earnings.
The third quarter was also a period where markets in Asia and emerging markets dominated returns. Some of this dominance was related to AI spending, as the likes of Korea and Taiwan, with their semiconductor-makers or related infrastructure manufacturers benefitted. However, political developments in both Korea and Japan also stimulated overseas investors interest in these markets, as new, more stable governments provided a supportive backdrop, either through a policy of improved corporate governance or by being perceived as business friendly.
In the US, the economy continued to defy any negative impact of tariffs, with GDP continuing to grow in excess of 3%, although this was most certainly influenced by a high level of AI-related capital expenditure. This fed through into corporate earnings, which remained strong, particularly among those businesses involved in the AI theme, such as Nvidia. Worries over the impact of tariffs on inflation also dissipated, to the extent where the US Federal Reserve cut interest rates for the first time this year and further cuts are expected this year.
In the UK, whilst the economy appears to exhibit increasing signs of stagflation, i.e. low growth and high inflation, the FTSE 100 index continued to demonstrate why its constituent companies are regarded as only partially connected to the performance of the UK economy as it hit new highs, breaching the 9000 level for the first time. Mining companies and banks provided much of the impetus.
Bond markets as a whole stabilised after the tariff led volatility of Q2, as fears over government borrowing levels dissipated somewhat. However, longer dated government bond yields continued to be elevated, as investors seemed unwilling to commit to this area of the market, which has also been negatively impacted by central banks unwinding their own holdings simultaneously.
This was particularly evident in the UK, where greater doubt exists over the effectiveness of government fiscal policy and control over inflation than elsewhere in the G7. Corporate bonds continued to do well, despite fears in the sector emerging towards the end of the quarter following a couple of large, high profile, borrowers defaulting on their loans. However, these were thought to be company specific rather than symptomatic of a wider issue amongst corporate borrowers.
The wider and more diverse nature of returns internationally meant that all our globally focussed portfolios were able to benefit, signalling another positive quarter for investors. As we look forward, the world seems to have accepted that higher duties on products into the US, in the form of tariffs, are here to stay, and most countries, other than China, have capitulated to President Trump’s will. The tariffs are already having a positive impact on the US budget deficit; however, they will not be sufficient to compensate the US Treasury for the reduction in taxes implemented through the President’s ‘One Big Beautiful Bill’.
It may well be that any positive impacts that AI has on US productivity could reduce the impact of these cuts through higher economic growth and thus higher tax receipts. However, time will tell on this front.
The same can be said for AI infrastructure spending. At some point, investors will reasonably expect to eventually manifest itself in improved company earnings across the market, rather than just having an immediate effect that this is having on those businesses such as Nvidia and Oracle, who currently benefit by providing the metaphorical picks and shovels in the AI gold rush.
Rockhold Asset Management September 2025