Marc Foran, CIO

September 30, 2025

Q3 2025

Global markets continued to trend higher during the third quarter, with both equity and fixed income posting positive returns. Investor sentiment was buoyed by strong corporate earnings that exceeded expectations and signals from the US Federal Reserve that future rate cuts were the most likely path going forward.   

MACRO

During Q3, tariffs remained top of mind for investors, particularly after the Trump administration’s August 7 implementation of reciprocal tariffs, albeit at rates below those initially signalled in April. At the same time, the US economy began to show signs of weakness following a period of relatively resilient data despite deteriorating consumer and business confidence. We believe that US economic data is starting to reflect the consequences of a weakening labour market (rising unemployment, fewer jobs), rising consumer delinquencies (particularly auto loans), and rising costs of living (inflation, slowing wage growth). Meanwhile, Canada continues to exhibit weak growth with Q3 GDP coming in at an anemic 0.6% while unemployment rose to 7.1%. Both Canada and the US cut interest rates by 25bps in September while signalling additional rate cuts for Q4 and early 2026. In Europe, the economy continued to be weak, particularly in sectors such as manufacturing (affected by tariffs), although inflation showed signs of stabilizing. Overall, the global economy remains on a slow growth path with rising recessionary fears while trade tensions and geopolitical conflicts create a high degree of uncertainty and reduced confidence. 

Despite the deterioration of economic conditions, global markets generally rallied across asset classes, sectors and regions, particularly for large US megacap technology stocks and low-quality growth-oriented companies (that is, those with negative cash flows and/or with a requirement for additional capital today but with expectations of cash generation in the future). While it may seem counterintuitive that economic weakness would translate into higher equity prices, history has shown time and time again that investors ascribe greater importance to future expectations rather than to near-term results (for example, the impact of expected changes in government and regulatory policies on corporate fundamentals). Thus, despite continued fundamental weakness among cyclical and consumer-sensitive companies, we believe buoyant market expectations are pricing in i) continued acceleration in AI infrastructure spending, ii) a limited long-term impact from or reversal of tariffs, whose legality is currently being reviewed by US courts and iii) expectations for an increase in stimulative policies, such as reduced interest rates or deregulation of US financial institutions. Should these expectations fail to materialize, global markets could experience a negative repricing of risk and consequently a reduction in share prices.  

PUBLIC EQUITIES

Global equities generally rallied in Q3 across regions, with the MSCI ACWI increasing 9.8% in the quarter. In North America the S&P500 was up 10.4% while the TSX increased 12.5%. Both Europe and Japan equity markets also rose during the quarter, with the former up 5.8% and the later 10.3%. In addition, positive corporate earnings reports generally outpaced expectations. For the MSCI ACI, the weighted average EPS of constituents was up 11% relative to the same time period (Q2) in 2024. This was achieved even as corporate revenue growth rates continued to decline, up just 3.5% year over year. The primary drivers of earnings outperformance were i) higher-than-expected capex spend on AI infrastructure, which helped fuel sales and margin expansion at semiconductor companies, and ii) increasing productivity and sales of high-margin business lines among the Magnificent 7 (for example, Amazon’s AWS service). Excluding these companies, EPS growth overall for global equities was a more subdued 4%.  

Given elevated market expectations, global equities are generally trading at lofty valuations, particularly in the US and Japan, which are near the all-time highs seen during the 2000 technology bubble. Excluding large megacap technology stocks, global equities are trading at more reasonable levels, particularly in regions such as Europe and across smaller and medium-sized companies. For example, while Japan’s Nikkei 225 index is trading at 23.2x, the MSCI Japan Small index trades at just 14.5x; in the US, the S&P500 trades at 23x while the MSCI US Small Cap index trades at 18x. 

PUBLIC FIXED INCOME

Global fixed income securities generally rose in Q3 as global central banks signalled a more accommodative policy stance. The Bloomberg Corporate Investment Grade Bond Index rose an impressive 4.3% , outpacing gains made last quarter. In the US, corporate bond spreads rallied, continuing trends seen in Q2 and leading to a 4.4% increase in the Bloomberg US Aggregate Index while US treasuries saw yields decline across the curve with short-dated maturities experiencing the greatest yield contraction. Of note, US treasury yields contracted despite the issuance of a whopping $1.06T in new debt. This was the second largest quarterly issuance in history – the largest was during COVID — up significantly from $65B issued in Q2 and $369B in Q1.  

In Canada, short- and medium-term treasury bills followed a similar yield contraction path as the US, although the longer end of the curve saw yields widen somewhat as investors focused on the rising federal government debt to support Carney’s spending programs. In Europe the Bloomberg Euro-Aggregate Corporate Index rose 2.8%; however, of note was the steepening of German and French yield curves on the back of political turmoil (like the collapse of the French government in September) and increasing concerns of higher government spending due to anticipated stimulus and to meeting NATO defense spending commitments . These spending concerns added to future inflation / credit deterioration concerns). 

PRIVATE MARKETS

Deal activity rebounded sharply in Q3, with both the number of deals and amount invested increasing both quarter over quarter and year over year. In the US, the number of deals during the quarter rose nearly 4% from Q2 and was up 12% relative to Q3 2024 with growth equity stage deals constituting a rising portion of overall activity. The market remained focused on larger deals, which has resulted in dollar amount invested rising 28% relative to Q2 and 38% relative to last year. Deal activity was also robust for VC investments, although interest has been significantly skewed to AI-related deals, which constituted one-third of all US VC activity and two-thirds of dollars invested during the quarter.  

It was a different story in terms of the number of exits, with both PE and VC still near pandemic lows, although the number of PE deals did increase slightly from Q2, breaking a four-quarter downtrend. With exits remaining at low historical levels, the average number of years an investment is held on the books remained elevated at six years. While that number has improved over the last few quarters, it remains well above the pre-pandemic median of 5.2 years. We believe that buoyant public equity market valuations have created an improved environment for exits to occur (either via IPO, sale to a private sponsor or sale to a corporate acquirer), particularly for the valuation-rich technology sector (and in particular AI), as evidenced by the rebound in technology IPOs reaching levels last seen in Q4 2021. Exits for non-tech sectors remained rather subdued. 

We remain highly concerned with the funding activity trends in female-led companies. The number of VC deals has declined to the lowest levels in a decade, now capturing only 5.1% of year-to-date deal activity vs. 5.3% last quarter and continuing to constitute just 0.8% of total deal value (also the lowest level over the past 10 years). We believe the lack of funding to female-led companies and founders represents a tremendous opportunity for impact investors to profit from owning well-run companies at fair valuations while simultaneously addressing and combating systemic gender bias that exists in how private markets allocate capital. Of note, several studies from notable firms, such as Boston Consulting Group’s 2018 study with MassChallenge regarding female-owned startups, have shown that female-led companies outperform their male-led peers due to factors like a more collaborative culture, superior internal communication among teams, greater emphasis on risk management and higher employee retention.  

Last quarter we commented that private credit markets were flashing warning signs due to elevated business uncertainty, renewed fears of inflation negatively impacting corporate margins (driven by tariffs), and rising business defaults (which according to Fitch are at 7-year2025 vs. the seven-year average of 5.4%). We note that this hasn’t yet stopped investors from increasing allocations to the asset class, which has increased available capital and caused yield spreads to fall. Furthermore, lending standards have also declined, with more lenient terms being offered as private credit funds compete with each other for deal flow (especially related to private equity buyout financing). During Q3, concerns surfaced regarding the poor quality of underwritings led by the notable bankruptcies of First Brands (car parts supplier) and Wolfspeed (silicon carbide company), and, post-quarter, Tricolor (subprime auto lender) and Clearside Biomedical (medical devices). We expect that fears of negative private credit events will result in an increasing emphasis on credit quality and underwriting (reversing the trend of Q3) particularly if the global economy continues to show signs of slowing. As we’ve discussed over several quarters, we see attractive opportunities for impact investors particularly with products that provide financing for high-quality projects and/or under-served groups. We continue to recommend a nimble approach to private debt allocations, with a keen focus on higher quality credits that can withstand periods of economic stress. 

OUTLOOK

Investor sentiment continued to be positive during Q3. However at the time of writing this report (November 2025) investor concerns regarding valuations particularly in megacap technology and AI companies have started to materialize. Furthermore, economic data has continued to show weakness and an increasing number of companies are citing poor consumer trends and/or demand challenges due to rising costs (largely tariff driven). For a number of quarters we have maintained a measured risk approach to investing in the current market, including recommending that investors underweight economically sensitive areas of the economy and avoid frothy valuations. At the same time, we believe that nimble investors can benefit from temporary market dislocations and increased volatility during pullbacks using these events to increase positions in long-term high conviction holdings. We share our asset class views below which remain unchanged from last quarter.

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