Investment Viewpoint: Positive news with a note of caution

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Markets and macro insights with Bernard Swords, Chief Investment Officer

How have markets been performing in the third quarter?

• Equity markets had a strong third quarter, with global shares rising nearly 8% in euro terms.

What drove market momentum?

• Markets were buoyed by continued optimism about artificial intelligence (AI), especially investment from major tech companies like NVIDIA and Meta. Alphabet (parent company of Google) also benefited from a favourable outcome in an antitrust case, avoiding a potential break-up of its monopoly.
• In the US, policy developments boosted market performance. The Federal Reserve shifted its stance on interest rates, introducing a cut of 0.25% after previously suggesting there would be no change. The move was prompted by signs of weakness in the labour market. Meanwhile, trade tensions eased, with the US settling on import tariffs of around 15%, which was considerably lower than what had been intimated earlier in the year.

What was the overall picture for the US economy? 

• Contrary to expectations, growth picked up towards the end of the quarter, helped by strong consumer spending and increased investment linked to AI.
• The labour market has shown signs of stalling, a development which we are monitoring closely.
• Currency markets remained stable, suggesting the US dollar may no longer be significantly overvalued.

What was the distribution of sector and regional performance? 

• AI investment dominated performance. Technology, communication services, and consumer discretionary spending (mainly Tesla) were the top performing sectors, accounting for nearly two-thirds of market gains. These factors confirm that the rally was narrow in scope and concentrated in focus.
• Regionally, Asia Pacific led the way, thanks to strong tech stocks in China, while Europe lagged behind, due to limited exposure to AI and a strong euro, which affected earnings.

What is Goodbody’s position going forward?

• Goodbody is adopting a cautious position. We want to see how the new tariffs affect the US economy and whether the weaker job market starts to impact consumer spending.
• While Goodbody has not changed its overall asset allocation, we’ve taken a more defensive approach within equities. Increasing our exposure to utilities, we have reduced holdings in financials and industrials to lower the cyclical risk in portfolios.
• Goodbody remains neutral on the AI-related sectors like technology and communication services.

What important news emerged last week? 

• The US Federal Reserve released the minutes from its latest policy meeting. The tone was slightly more cautious than expected, with many members indicating that they would be comfortable with keeping interest rates unchanged for now. While there are concerns about the labour market, these do not appear strong enough to prompt aggressive rate cuts. Overall, rate reductions are still likely, but they may come more slowly than current market expectations suggest.
• In the euro area, retail sales data showed very modest growth of just 0.1% month-on-month, reinforcing the view that the economy is struggling to gain momentum.
• On a more positive note, tensions in the Middle East have eased, with a ceasefire between Hamas and the Israeli government appearing likely. This has led to a notable decline in oil prices, which have fallen by nearly 7% over the past two weeks.

Assessment of Q3 with Elizabeth Geoghegan, Head of Fixed Income

How have fixed income markets in the third quarter, are there any similarities between the year to date trends and the trends seen in the third quarter?

• Year to date, US yields have been falling whilst European core rates have been rising. Within corporate bonds US corporate spreads have been relatively unchanged whilst European corporate spreads continue to tighten. When looking at yield curves, curves in the US and Europe have steepened, albeit due to different drivers. The third quarter mirrored the year-to-date trends in fixed income markets.
• Performance wise, it has been a positive year thus far and third quarter for fixed income markets. Naturally, the falling rate backdrop in the US has led to outperformance of the US relative to Europe. However European fixed income markets have still generated small positive gains, with the EuroAgg Index returning just over 1% year to date and gaining 0.17% in the third quarter. The positive performance against a backdrop of rising yields can be attributed to high starting yields, along with higher credit spreads which will also help to buoy the broader market.
• Looking on a more granular level, European corporate bonds outperformed European government bonds. The European Corporate Bond Index gained 0.94% in the third quarter whilst the European Government Bond index lost -0.24%. Corporate bonds benefitted from tighter spreads and were also insulated from higher core rates due a lower duration profile. Within government bonds, the index was weighed down by negative returns from long duration bonds. Long duration bonds with maturities of 15 years or more, experienced significant rises in yields in the third quarter driven as markets extrapolated concerns surrounding debt sustainability of sovereigns after Fitch downgraded France following political volatility.

The week ahead: what to watch out for

Key data releases are scheduled, including inflation and retail sales figures from the US. However, these may be delayed depending on the outcome of the government shutdown. China is set to release trade data, and the euro area will publish industrial production figures.