Global equity markets enter Q3 2025 with heightened uncertainty following the Federal Reserve's decision to hold rates steady at 5.25–5.50% for the fourth consecutive meeting. While headline inflation has moderated to 2.8%, core PCE remains sticky at 3.1%, complicating the path to rate normalisation.
Our base case calls for two 25bps cuts in H2 2025, with the first occurring at the September FOMC meeting. This view is contingent on continued softening in labour market data and a sustained decline in shelter inflation over the next two monthly prints.
We maintain our overweight position in technology and healthcare, driven by resilient earnings growth and relatively defensive free cash flow profiles. Financials are upgraded to neutral following better-than-expected net interest margin resilience across the large-cap banks in Q1 reporting season.
Energy remains underweight on our models. Despite geopolitical supply risk, demand headwinds from China's slower-than-anticipated recovery continue to cap the upside for crude prices in our 12-month outlook.
| Sector | Rating | Q1 Return | 12M Target |
|---|---|---|---|
| Technology | Overweight | +18.2% | +8–12% |
| Healthcare | Overweight | +6.4% | +6–9% |
| Financials | Neutral | +9.1% | +4–7% |
| Consumer Staples | Neutral | +2.8% | +3–5% |
| Energy | Underweight | -1.3% | -2–+3% |
Duration risk remains the central concern for fixed income allocators. Our models suggest the current yield curve inversion — with 2s10s at -42bps — will begin to steepen meaningfully once markets price in the first cut with conviction. We recommend a modest extension of duration in investment-grade credit ahead of that inflection.
High yield spreads have compressed to 310bps over Treasuries, near the tight end of their 12-month range. We see limited additional spread compression from here and recommend reducing HY exposure in favour of BB-rated crossover credit, which offers more attractive risk-adjusted returns in a soft-landing scenario.