Reflections of the CIO...

During September the concurrent positive impacts of a US interest rate cut, and rampant Artificial intelligence (AI) related spending, was enough to keep the US economy motoring ahead and investor sentiment firmly in the ‘risk on’ camp.[1] Equity markets roared in the US and in the riskier Emerging and Asian markets, with only the UK and Europe standing out as notable laggards, reflecting a lack of new, local catalysts for the latter.

Riskier corporate bond markets also performed well, but the safer, steadier government bond markets were much quieter. Problems remain with longer term funding for governments, especially those perceived as having weak balance sheets and weak leaderships, such as the UK and France.[2][3]This issue is unlikely to disappear any time soon and, as such, continues to linger in investors’ subconscious as a possible signpost to tougher times ahead.

Another mixed market signal came from gold, which delivered a very strong performance propelled by consistent central bank buying and the cut in US interest rates.[4] As this central bank buying is most likely related to a fracturing in geopolitical relationships, it also serves as a potential warning sign for future US economic turmoil as well as a signal investors are feeling more nervous about traditionally safe US assets.[5] Similarly, given that the US interest rate cut was prompted by concerns about a weak labour market, there is a suggestion that the forward economic outlook may not turn out to be as strong as the current period. If this proves to be the case, it represents a growth risk that markets have largely ignored in recent months and one that remains mostly unpriced as we head into the final quarter of the year.

Perhaps the most interesting feature which we can see as we look ahead, is that equity market indices are now highly concentrated around a small number of companies benefitting from the spending surrounding the emergence of AI services. In the US, as much as 43% of the equity market capitalisation could be directly linked to this theme.[6] This clustering around one dominant market theme has taken place against a general collapse in equity and bond market volatility, a change which could easily be read as an increase in investor complacency.

The AI rollercoaster may indeed keep on rolling and end up delivering substantial benefits to the economy, perhaps impacting as much as the steam engine, electricity or internet technologies did, but that does not necessarily mean that every company spending so generously now will be able to earn a balanced return on their investment.

The growing risk which we can see is that the structural growth paths of the AI related companies could easily be interrupted by more cyclical forces which govern broader markets. Modest slowdowns in economic growth could easily prompt spending slowdowns from corporations, clipping the momentum of AI related expenditure and pulling the loftier expectations embedded in share prices back down to earth. It would not be the first time that a powerful market theme stumbles before eventually delivering.

With the pre-emptive interest rate cuts in the US signalling that the current economic expansion may be on less sure ground going forward, the optimism increasingly embedded in stock market valuations (and in credit market spreads as well) needs to be carefully monitored. We continue to view the outlook as more ‘glass half full’ than ‘half empty’, supported by solid global economic expansion, strong corporate and household balance sheets, and the added tailwind of lower interest rates. However, we do expect market performance to moderate, particularly when compared to the strong pace of recent years.

With thanks for your continued support,

The Saltus Asset Management Team, October 2025