MARKET INSIGHT – September 2025

MARKET INSIGHT

Prime Partners’ monthly analysis of global economic and financial market news.

To choose is to give something up

As the last days of summer draw to a close and the second-quarter corporate earnings season comes to an end, we can say that this period has been a good one for the financial markets in 2025. The major stock indices have risen in recent weeks, but have not skyrocketed, despite solid corporate results, especially in the technology sector, and Jerome Powell’s speech in Jackson Hole, which now opens the door to a first rate cut in September.

Beyond these positive factors, the last few weeks have not been all good news, far from it. The US economy is now showing clear signs of slowing down, although the labor market has not yet really deteriorated. Another major concern in the United States is the initial inflationary impact of tariffs, which are now affecting the prices of many products.

The French language is rich in subtleties and allows for infinite variations and other stylistic effects for those who master it. Thus, Balzac wrote, “To choose! That is the flash of intelligence. Are you hesitating? That says it all: you are mistaken.” (L’Illustre Gaudissart, 1833). Although it is unlikely that Jerome Powell and his colleagues at the Federal Reserve will be poring over the writings of the famous French author during their meeting, the fact remains that they are faced with a choice that they too probably want to be seen as a flash of intelligence.  The current configuration of the US economy is unprecedented. Indeed, economic slowdown goes hand in hand with inflation, the latter being created exogenously by the introduction of tariffs by the Trump administration. The central bank must therefore choose between supporting the country’s economic momentum by lowering interest rates or keeping them high in order to combat rising inflation. Added to this dilemma is the constant pressure from the US president, whose vitriolic statements about the Fed chairman have become commonplace. Donald Trump recently took this pressure a step further by announcing the immediate dismissal of Lisa Cook, one of the Federal Reserve governors who had voted in recent months to keep interest rates unchanged. Ms. Cook intends to continue her term in office.

We anticipate a hundred basis points of rate cuts over the next nine months, until the end of the current Fed chair’s term

As we have been writing regularly in this newsletter for several months, inflation and employment in the United States are the two key parameters to monitor when managing asset allocation and gauging market behavior. As time passes, the degree of uncertainty surrounding tariffs and the financial markets’ reaction to them has diminished. In other words, the rules of global trade are becoming clearer and investors are adapting to them.  One effect of this has been to increase the concentration of the S&P 500 index, whose weighting of a few large technology companies now gives it a status fairly similar to that of its European counterparts in terms of bias. Welcome to the world of concentrated equity indices, whose performance is no longer necessarily an accurate indicator of a country’s economic health. When assessing the outlook for the S&P 500, it is now useful to bear in mind that the US economic environment is no longer the only factor to consider and that the performance of companies such as Nvidia and Microsoft, to name but two, has become an essential parameter.

Jerome Powell’s speech following the Jackson Hole symposium was eagerly awaited. Between weak economic momentum and looming inflation, lower interest rates appear to be one of the last catalysts for the equity market this year. This will likely begin in September and then become more data-dependent. We anticipate a hundred basis points of rate cuts over the next nine months, until the end of the current Fed chair’s term.

Still on the American side, we are closely monitoring consumer behavior, and recent statements by some major CEOs have been instructive in this regard. Between a job market in “no hire, no fire” mode and consumer prices trending upward, American consumers are becoming even more selective in their spending. Indeed, the CEOs of several airlines, as well as the head of Walmart, stated when publishing their results that they were seeing greater difficulties among their customers with the lowest purchasing power, as well as a shift towards entry-level products for certain purchases. This is hardly surprising given the latest economic data, but it does provide concrete confirmation of the US slowdown.

If we now turn our attention to the other side of the Atlantic, the news may seem, at first glance, less eventful, as Europe does not have a “chief agitator” of the caliber of the US president. It should nevertheless be noted that, despite a clearer economic outlook and, all in all, decent prospects, the situation in France may once again become problematic following the vote of confidence requested by Prime Minister François Bayrou. If he does not prevail, which is highly likely, France will once again experience a period of political uncertainty that the markets have already begun to sanction. This is not at all good news for the EU, whose economies suffer from a very different mix of sectors than that of the US, with technology playing only a minor role, unlike segments that are heavily impacted by the new tariff reality or the persistent apathy of Chinese consumption. We are of course referring here to the most cyclical sectors, such as luxury goods, automotive and chemicals, where Europe has many flagship companies.

On a positive note, however, Ms. Lagarde’s task seems simpler than Mr. Powell’s, and the political context in which the ECB operates is also unlike that in the United States.

Obviously, the downward trajectory of the dollar is a supporting factor, but a combination of other elements explains the very strong performance of emerging markets in 2025

Finally, a few words about China to round off this brief overview of the world’s three major regions. Like the United States, the Chinese economy and local stock market indices paint a mixed picture. There has been little economic change since the end of Covid and the bursting of the real estate bubble. Housing prices continue to fall and consumption remains weak. In addition, US tariffs coupled with overproduction of certain goods, such as solar panels and electric cars, have indirectly led to a sharp increase in Chinese government debt, as the state is heavily subsidizing entire sectors of the country’s industry. Despite this unfavorable context, equity markets have risen significantly this year and still appear to offer good upside potential. Once again, the explanation lies in artificial intelligence, where China appears to be able to compete with the US giants in the sector, even proclaiming time and again that it can do without American technology, particularly in the field of semiconductors. At this stage, it seems likely that the major Chinese technology groups will be able to keep up with the breakneck pace set by Silicon Valley, but without, presumably, being in a position to really take the lead in the near future.

Against this backdrop, our portfolios performed well in September, buoyed by exposure to US equities, but also to emerging markets and, of course, gold. With stocks becoming increasingly expensive in recent weeks, without any corresponding reduction in uncertainty, particularly with regard to geopolitics, we too are favoring the status quo.

The upcoming third-quarter earnings season will provide valuable insights into the health of the US economy and should confirm, or not, our constructive yet always diversified approach to managing our portfolios. After this September 2025, as Barbara said sixty years ago, “never has the end of summer seemed so beautiful.”