Rate cuts and rising risks: staying invested in Q4

As we enter the final quarter of 2025, much is at stake.

Monetary policy is offering support to the global economy, as the Federal Reserve has restarted its rate-cutting cycle.

Weakening job and housing markets mean that financial conditions are still too restrictive, while a peak in inflation in the coming months should be contained.

That’s why the central bank needs to continue lowering policy rates. We expect two more cuts this year and then a pause. Ultimately, rates should reach an accommodative level of around 3% by end 2026.

Monetary policy is lending a hand to the global economy

For the global outlook, much depends on trade, and how much tariffs dent growth outside the US. While most tariffs are lower than initial threats, they look set to stay.

Additional US tariffs on China are likely to continue being postponed, as China’s rising tech capabilities and especially its dominance in rare earth exports give it leverage against the US. A trade truce with the US, stabilising inflation, and a steadier housing market are positives for the Chinese economy. However, momentum remains fragile and may not last without further government stimulus.

Fiscal concerns in developed economies are also in focus. Much attention is on France, and the cost of French debt will remain high, but the ongoing political deadlock shouldn’t trigger a financial crisis.

The outlook for the broader euro area looks somewhat stronger, thanks to a meaningful fiscal boost from Germany, among others. We expect no further rate cuts from the European Central Bank, nor in Switzerland, where inflation appears to have bottomed.

There is little sign of progress on the 39% US tariff on Swiss exports. As for new pharmaceutical tariffs, most large pharma companies may be shielded as they have already made substantial US investments. Overall, Switzerland has other means to support growth, notably its substantial fiscal firepower, and we expect the economy to weather the storm.

Markets remain resilient but major economic challenges demand vigilance.

US equities have repeatedly set new records, driven in part by technology stocks, optimism around artificial intelligence and capital investment. With US valuations now stretched, we have slightly reduced our allocation to US equities.

Crucially, the rally is broadening, and as we approach third-quarter corporate reporting season, we see improved prospects for healthcare. Here a lot of negative news is now priced in and earnings expectations are rising after months of policy uncertainty.

This return potential extends to Swiss stocks, leading us to increase our exposure to overweight levels.

Globally, we remain overweight in equities, with a preference for emerging markets over developed markets.

We focus on portfolio diversification, with a moderate pro-risk stance

In fixed income, we maintain our global allocations at overweight levels. Moderately lower US yields support fixed income across the board, but we see the strongest balance of risk and return in investment grade corporate bonds and emerging market hard currency debt.

In currencies, we keep a cautious view on the dollar. Although markets have long anticipated Fed easing, it comes as other major central banks are holding interest rates, or in the case of Japan, raising them.

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Finally, we have increased our allocation to gold. Gold has clear upside potential in an environment of lower growth, falling US real rates, a weak dollar, and fiscal concerns.

As the business cycle evolves, we focus on portfolio diversification and selective investment choices, with a moderate pro-risk stance.

Staying invested today means navigating changes with conviction and care, as the global order continues to evolve at a tremendous pace.