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The macroeconomic landscape evolved positively for growth-oriented assets in the third quarter. This was largely driven by increased capital expenditures in artificial intelligence (AI) and defense and shift towards more accommodative monetary policies. Central banks, including the Federal Reserve, European Central Bank(ECB), and Reserve Bank of Australia (RBA), all responded to softening labour market conditions and indications that tariff-induced inflation pressures will likely be less than previously feared by adopting more dovish stances. Stabilising global government bond yields backdrop, tightening credit spreads, and low equity market volatility, in turn, reinforced and fuelled investor sentiment as the quarter progressed. Indications of a U.S. and AI led global productivity revival also boosted sentiment and expectations of future growth.
Figure 1: The US is leading a global productivity revival
Corporate earningsfurther supported the positive outlook. During the Q2 2025 earnings season,over 80% of S&P 500 companies exceeded consensus estimates and maintainedstrong guidance. The technology sector continued to lead, with hyperscalerssurpassing expectations in terms of AI-related investment alongside robustrevenue and free cash flow growth. This suggests a fundamentally driven rallyand capex cycle, distinct from speculative trends seen in previous eras, mostnotably the Tech Bubble of the early 2000s.
Traditionaleconomic metrics may not fully capture the extent of the current capex cycle.Investments in semiconductors and cloud services are often classified asintermediate goods meaning they are excluded from conventional final GDPcalculations. Goldman Sachs estimates that AI-related investments andassociated productivity gains could contribute an additional 0.5-0.7% a year toreal GDP growth; a significant increase considering historical trend U.S. GDPgrowth of 1.5-2% a year. This underscores the importance of I as a long-termdriver of economic and investment outcomes.
Geopoliticalcompetition is influencing the economic cycle as industrial policies in theU.S. have prompted reactionary investments in China and Europe, particularly inareas related to national security and strategic technology. This has led to asynchronised fiscal impulse across major economies. Despite persistent tariffuncertainties, the net effect of the 2025 global policy mix has been acombination of strong growth and moderate inflation, which is a favourableenvironment for risk assets.
Looking forward,growth assets remain a focal point, with opportunities for benchmarkoutperformance spread across Australian and global equities and private credit.Within growth alternatives we have a preference for gold and private selectequity managers. We maintain a neutral duration exposure. We are alsomonitoring developments in private credit markets closely while maintaining amodest exposure in a combination of listed and unlisted holdings.
From a cyclicalstandpoint, the investment themes we are currently focused on include small andmid-cap equities, momentum-driven equity strategies, U.S. banks, U.S.industrials, rare earths miners, and uranium. We also see opportunities forcompelling active and diversifying strategies in gold, quantitatively drivenand long/short equity approaches, private equity, and global healthcare.
The primary risksto our investment thesis include a potential slowdown in AI-driven capitalexpenditures, a delayed onset of tariff-induced inflation as we head into 2026and narrow equity market breadth. Further labour market deterioration couldalso challenge the current market trajectory. Recent distortions in U.S. labourmarket data, compounded by the disruptive effects of Trump’s trade, fiscal andimmigration policies have made assessing U.S. labour markets more challenging.The inflation outlook is similarly hard to forecast, due to the frontloading ofimports in response to tariffs, which could lead to accelerated inflation inthe coming years.
Overall, themacroeconomic and investment environment presents a blend of supportive andcautionary signals. Accommodative monetary policy, robust corporate earnings,and AI-driven productivity gains offer a constructive backdrop. However,persistent uncertainties around labour markets, inflation dynamics, and marketconcentration argue for a measured approach. We currently see a modestlyrisk-on stance as appropriate, provided portfolios remain well-diversifiedacross asset classes, geographies, sectors, managers, and investment styles.
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