Optimistic that growth will remain decent and multiple rate cuts are still to come, equity markets posted strong results for September 2025. As can be seen in the graph below, estimates for both GDP growth (white line) and inflation (yellow line) in the U.S. have been steadily inching higher. Just as tariff-related inflation, actual or assumed, doesn’t seem to matter to markets, neither do the facts that AI-driven capex and spending by the top decile of the population account for almost all economic growth. As the market dynamo Prince once sang, markets just want to “party like it’s 1999”!
In August, equities once again followed the rule of ‘don’t fight the Fed’. Ahead of Chair Powell’s Jackson Hole speech on August 22nd, markets, not the Fed, were pricing in multiple rate cuts. That optimism for easier policy, despite a still resilient economy, drove cyclical stocks to outperform defensives (white line) relative to the expected December 2026 Fed Funds rate (red line).
Please remind me what DeepSeek was all about. Wasn’t it supposed to upend the proverbial apple cart and cause the hyperscalers to take a hatchet to their forward capital spending programs? That was January 2025, while the far-right side of the bar graph below displays the capital spending in billions of US$ of the hyperscalers for the recently reported quarter. AI-driven capital spending has returned with a vengeance as Meta, Microsoft, Amazon, and Alphabet spent $155B during the first half of 2025. According to Britain’s The Guardian newspaper, this sum is greater than what the U.S. government has spent on education, training, employment and social services fiscal year-to-date.
By the last trading day of Q2, the S&P 500 had clawed back the almost $10T it lost between its pre-tariff high on February 19th and its April 8th tariff-inspired low, plus $500B on top of this recouped loss, closing the first six months of 2025 with its fifth new closing high of the year (and 15th since the U.S. election). The M7 accounted for 44% of this bottom-to-top recovery and as the M7 group is the ‘poster child’ for both large cap and growth factors, the graph below explains their outperformance during the Q2 recovery in equities. Starting on the left, from January 2024, the right side of this 18-month indexed graph makes it pretty clear that large cap growth was the only place to be of late, prior to the ‘junk rally’ that joined the party in early June, with the ‘high beta’ and ‘most shorted’ factors outperforming the M7 during that time.