Entering an uncertain September

01 September 2025

AT A GLANCE

Last week favoured defensive assets, with no positive surprise from corporate earnings or inflation
Markets may require more visibility on growth, inflation, the Fed and even tariffs to take a direction
Our September monthly committee may consider protecting some of this year’s solid returns so far

Last week was mixed on global markets. Gold continued to outperform, and overall global bonds benefitted from slightly lower US treasury yields. Stocks, by contrast, had a modestly negative week across developed and emerging regions. The dollar was steady and oil prices slightly gained.

The week was relatively light in terms of data but there was nothing to surprise investors. Inflation in the US as measured by the PCE indices progressed in line with projections, reinforcing expectations for a Fed rate cut in September. Q2 GDP growth was revised slightly higher, and a robust increase in growth at +4.8% suggests solid consumption ahead. Put together, this both supports a 25bps rate cut this month and no commitment for the path ahead, which will undoubtedly be data dependent. The week ahead will indeed provide lots of top-down data, from global PMIs and US ISMs to the always important monthly US jobs report.

The corporate news flow was richer. Nvidia’s guidance was below the most optimistic predictions, China’s tech giants had various fortunes, but the week starts with a massive rally for AliBaba which clearly intends to close the AI gap with the US.

Talking about China, one of our equity overweight for months, the just released August PMIs were reassuring. Meanwhile, President Xi met with India’s Prime Minister Modi and the two leaders agreed to deepen their diplomatic and economic relations, another unintended consequence of US tariffs, which face another legal challenge from a US appeal court.

We will hold our monthly investment committee this week and decide whether we should keep our current positioning, which delivers great returns so far, or start trying to protect them a bit.

Have a great week

Rate cut(s) ahead, for good and bad reasons

Cross-asset Update

The month of August just came to an end and gave us more of the same: a rally spurned by investors and marked by ever more bloated valuations and economic indicators providing contradictory messages. Overall, there is some emerging signs of weakness in the cycle, though they do not seem to be significant enough to justify an overly defensive stance in portfolios. And Jay Powell reassured all of us at Jackson hole, suggesting that the Fed is open to resume rate cuts, though in a somewhat limited fashion due to tariff-related price pressures. Preventative cuts are much more effective at sustaining bull markets than reactive easing, so in the absence of recessionary conditions monetary easing expected to be started in September should be a net positive. Indeed, on occasion of Powell’s speech at the Symposium on August 22nd the equal-weighted S&P 500 broke out to new all-time highs, and small and mid-caps had a very strong session as well. The month of August as a whole had a pro-cyclical bias, with small and mid-caps topping US market returns, and ex-US stocks outperforming US equities by more than 2%. Materials was the best sector in the United States, and after Jackson Hole energy followed suit. Market breadth, measured by the percent of stocks in the relevant benchmarks above key moving averages, was strong as well, confirming broad participation in the current rally. The release of advance business confidence surveys saw the manufacturing PMI shift from weaker to stronger both in the United States and in Europe, and globally the composite PMI rose to the highest level for the year. In general, PMIs rose across countries and sectors, that should spur some upward revisions of real economic growth rates. The US labor market may not be as strong as it seems, though, being in a “curious balance” to use Powell’s words, meaning that both labor demand and supply are falling at the same time, the former possibly on some tariff’s strain, the latter as Washington carries out deportation policies on immigrants. Overall, we would tend to see the glass still as half full, although equity valuations remain quite a concern.

So, should we be concerned for the month of September, the worst alongside October when one looks into the seasonality of returns? The fly in the ointment that could be a trigger for some profit taking is a new MIT study that revealed that 95% of organizations get zero return from using AI tools. That could in turn raise doubts about broad AI adoption, hence the returns on investment of the current heavy expenditure for the building of data centres. The tech sector is a heavyweight and valuations are extreme, making it vulnerable to profit taking. Apart from an unexpected economic shock, we do not see anything else looming large that could cause a deeper retracement in equities. And in the absence of major imbalances in the economy, dips should be seen as buying opportunities.

Rate cut(s) ahead, for good and bad reasons

Fixed Income Update

We are a week into Chairman Powell’s green light for the September Fed rate cut. The US Treasury yield curve has steepened with 5s30s up by +15 bps. There were several Treasury bond auctions last week with strong investor demand. The 5-year remained the favourite part of the curve. End user demand for the auction rose to 91.2%, the highest since January 2023. Dovish Fed speak kept pressure on the front-end part of the curve. The Senate Banking Committee is scheduled to conduct a confirmation hearing for Stephen Miran this week on Thursday, which raises the likelihood of his confirmation prior to the September FOMC meeting. The long end of the curve remains marred by questions on Fed independence and the inflation/growth dynamics. Market is pricing 54bps of rate cuts by the end of this year. This week remains data rich. The US August payrolls report is released this Friday. Early estimates show economists expect a gain like July’s 73,000 jobs, along with a rise in the unemployment rate.

Although the currency backdrop proved challenging, investment grade (IG) credit demand continued to show notable resilience throughout the first half of the year. Notably, June’s TIC data on foreign purchases capped off a robust six months, dispelling earlier concerns as net foreign purchases reached $34 billion. This surge has brought the year-to-date net purchases of USD corporates to an impressive $186 billion—the highest first-half tally since 2015, according to GS. Furthermore, every major region maintained a net buying position in USD corporates over the first half, reaffirming the widespread appetite for corporate debt at still-compelling all-in yields.

Broad credit level spreads remain tight across segments. However, investors seem to prefer better quality over higher yields. A GS report showed that the spread ratio between the average and median bond in both indices is now above the 85th percentile over the past 10 years, demonstrating that, while half of the index, which is BB-rated, has again reverted to this year’s tights, the more distressed segment of the HY market has not seen similar relief. This year BB bonds have outperformed CCC rated issuers. Given limited funding cost relief and the weaker growth environment we continue to like the quality names in the HY bucket.

Total YTD GCC USD issuance is just shy of $80bn indicating strong momentum for the segment. The spreads remain very tight below 100bps despite oil prices staying below $70 per barrel. Last week saw three bond sales from the KSA banks as the financial institutions in the Kingdom bolster their capital base. BSF and SAB priced Tier 2 bonds at an attractive spread of 200 and 220bps printing $ 1bn+. Alinma issued a perpetual sukuk priced at 6.25%, which was roughly 30bps above the prevalent secondary market prices. We expect spreads to compress in these names from current levels.

Rate cut(s) ahead, for good and bad reasons

Equity Update

Last week global equities drifted lower as markets shifted from themes to tangible delivery and treated guidance as the main driver of price action. MSCI ACWI fell 0.4%, with developed markets down 0.3% and emerging markets off 0.6%. In the United States, the S&P 500 slipped 0.1% as a pullback followed a heavy run of AI updates. Earnings season is essentially finished, with 98% of the S&P 500 reported and aggregate EPS growth tracking 11.9% versus 4.8% expected at the start. The beat was clear, but markets became more selective. Nvidia reported strong results yet guided current quarter revenue to about 54 billion dollars and announced 60 billion dollars of buybacks; guidance came in shy of the highest hopes and the stock fell about 3% on Friday, though it remains up roughly 30% year to date. Dell reinforced the same message from another angle, pairing robust AI server demand with margin pressure from mix and logistics; the shares fell 9% on Friday and weighed on hardware. The net effect was wider dispersion across semiconductors, equipment and cloud infrastructure, with markets rewarding clear earnings traction and trimming exposure where unit economics or outlooks looked less convincing. Breadth narrowed as the week progressed, but it was more consolidation than a change in trend, with leadership rotating within mega cap technology and quality growth.

Europe lagged as policy and sector headlines cut into confidence. MSCI Europe fell 1.9% with banks and technology underperforming into the close. A firmer German inflation read added caution around domestically exposed names that saw lower risk appetite in rate sensitive pockets. Across the continent, earnings revisions held up better than many feared earlier in the quarter, yet leadership narrowed and sponsorship thinned heading into September. By week’s end, European indices had trimmed monthly gains, with financials, software and select consumer cyclicals pacing declines and a handful of defensives and energy names offering only partial ballast.

Asia was mixed to softer, with price action driven more by positioning and company news than by fresh macro releases. MSCI China fell 0.8% for the week as Hong Kong’s technology cohort was choppy. Company headlines set the spread of outcomes. Alibaba rallied on progress in AI related products and a 26% jump in cloud revenue, which steadied sentiment around the platform cohort even as top line growth remained uneven. BYD fell after a profit drop that underscored intense price competition in electric vehicles and reminded markets how selective the recovery is across China’s consumer and industrial pockets. Supply chain policy stayed in the spotlight as the United States moved to revoke waivers that had allowed Samsung and SK Hynix to ship certain chipmaking gear for use in China without repeated licensing, a complication for memory capacity planning that added another variable for parts of the AI stack in the region. Japan also eased, with TOPIX down 0.8% as a firmer yen and profit taking after a strong August weighed on exporters, banks and insurers, while trading houses were a relative bright spot. Region wide, leadership rotated and breadth narrowed, but markets continued to reward tangible delivery on earnings and strategy over promise, leaving the near-term bias toward stock specific catalysts and continued dispersion across themes tied to AI, policy and domestic demand.

Rate cut(s) ahead, for good and bad reasons

Written by:

Maurice Gravier Chief Investment Officer , [email protected]
Nawaf Alnaqbi Head of Equity Strategy , [email protected]
Satyajit Singh Fixed Income Analyst , [email protected]
Giorgio Borelli Head of Asset Allocation , [email protected]

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