Resilience and Recalibration: How Markets Found Their Footing In Q3 2025

An interview with Jesmond Mizzi Financial Advisors’ Andrew Borg on the shifting macroeconomic landscape, the surprising strength in equities and why discipline and diversification remain investors’ best defences as the year draws to a close

How would you describe the global economic backdrop in the third quarter of 2025?

Overall, global growth proved resilient, but not uniform. The U.S. economy showed some signs of slowing, while Europe and the U.K. showed indications of a modest recovery.

In the U.S., the picture was mixed: economic activity kept expanding, but job growth slowed and unemployment edged higher. Inflation, which had been cooling earlier in the year, ticked up again, creating what some call a “Goldilocks dilemma.” Growth wasn’t too hot or too cold, but inflation wasn’t yet where the Federal Reserve wanted it.

That combination prompted the Fed to restart rate cuts in September after holding steady for nine months. The central bank has so far managed to orchestrate somewhat of a soft landing, but the risk of a harder landing still looms.

Europe, on the other hand surprised to the upside, perhaps due to the lower initial expectations. The euro area is now on track for around 1.2% growth this year, supported by stronger domestic demand and some real wage growth as inflation moderated. Fiscal policy helped too, with countries like Germany unveiling significant new spending on defence and infrastructure. The European Central Bank, having already cut rates earlier in the year, is now in a wait-and-see mode.

So, in short: the U.S. is cooling, Europe is cautiously rebounding, and both are navigating late-cycle dynamics in different ways.

To what extent did government policy, especially in the U.S., affect markets in Q3?

Much of the uncertainty in Q3 came from the Trump administration’s sweeping policy changes, particularly on trade and fiscal matters.

Earlier in the year, markets were rattled by new import tariffs and unclear trade rules. Fears of a trade war were widespread, but by Q3 some of that began to stabilise.

As the administration struck deals with key partners, businesses started to get some more visibility on how they can operate within these new rules of the game.

At the same time, Trump’s “Big Beautiful Bill” introduced a blend of tax cuts and spending measures that gave investors some policy clarity after months of ambiguity. Still, the effective tariff rate has jumped from roughly 2.5% to around 15%. Economists generally agree that means slower growth and higher inflation, but the exact scale of the impact remains debated. So far, businesses have absorbed most of the costs, though it is possible that they will eventually be passed on to consumers. The chances of this happening increase if the present landscape becomes more permanent.

In Europe, politics added its own layer of noise. Fragility in countries like France and broader geopolitical uncertainty led to a kind of soul-searching, yet it also encouraged greater fiscal coordination, potentially supporting growth.

And beyond the U.S. and Europe, what were the key developments in China and other emerging markets?

China was very much in focus. After a difficult first half marked by a property downturn and weak domestic demand, we saw some stabilisation. Beijing stepped in with stimulus, focusing on local industries and infrastructure. Growth remained modest but steadier, roughly aligned with government targets.

The stimulus was not the massive, debt-fuelled push we saw in 2008, but a more targeted effort that helped restore confidence without overstimulating.

Emerging markets overall benefited from calmer global conditions and a weaker U.S. dollar, which makes dollar-denominated debt cheaper to service. Many EM economies saw improved sentiment and led global growth tables in Q3.

Japan also stood out, emerging as a key outperformer. Japanese equities surged as a weak yen, accommodative policy, and exposure to the global tech cycle, especially semiconductors, drew investor inflows.

After a volatile start to the year, Q3 signalled stabilisation across regions.

Despite all this uncertainty, equities did remarkably well. How do you explain such strong performance?

It was a surprisingly upbeat quarter for risk assets. U.S. stocks hit new all-time highs, powered largely by big technology names and solid corporate earnings. Investors essentially looked past weaker jobs data and focused on the positives: the Fed’s pivot toward rate cuts and a potential “soft landing”- a scenario in which the economy slows just enough to ease inflation without tipping into recession.

In Europe, equities rose but lagged behind the U.S., giving back some of the outperformance they saw earlier in the year.

By late Q3, most major equity markets were in positive territory. Leadership also broadened, as small-cap stocks in the U.S. actually outperformed large-cap growth names, signalling improved risk appetite.

That said, valuations have become stretched. The S&P 500’s forward P/E ratio is back at elevated levels. From here, either earnings must rise with expectations, or prices will have to adjust, leaving little room for disappointment heading into year-end.

What story did the bond markets tell?
Bonds tell a more cautious story. In the U.S., two-year Treasury yields fell sharply as investors priced in rate cuts, while 10-year yields held relatively steady, suggesting lingering concern about inflation down the road.

In Europe, it was the opposite story: yields rose across maturities as investors adjusted to the higher government fiscal spending and therefore, higher expected levels of debt. With the ECB having already cut rates, markets had not priced in imminent rate cuts like the US.

Corporate bonds continued to tighten, with narrowing credit spreads showing confidence in balance sheets and expectations of only a mild slowdown.

Gold has been another standout. What’s behind its surge toward $4,000 an ounce?
Gold’s rally tells a story of fear, hedging, as well as some element of speculation on the metal. Despite strong equity performances, investors kept buying gold, partly as protection against political and economic instability.

Several forces are at work: geopolitical tensions, central bank rate cuts, and persistent inflation concerns all make gold more appealing. A weaker U.S. dollar has amplified that effect since gold is priced in dollars.

Central banks themselves have been major buyers, diversifying away from dollar reserves. It might be premature to call this a “de-dollarisation”, but central banks have definitely become more wary of being overly reliant on US Dollar assets.

The fact that both stocks and gold were rising shows investors remain optimistic, yet also cautious.

As we head into the final quarter of 2025, what’s your advice for investors navigating the current environment?
The key principles are discipline and diversification. After a strong run in risk assets, investors should stay engaged but avoid chasing short-term momentum just for the sake of it. It’s important to participate in long-term themes such as technology and innovation, but it is also important to keep portfolios balanced and emotions in check. Active management can help identify opportunities and manage risk as conditions evolve. Ultimately, blending different asset classes, regions and sectors remains the best defence against uncertainty—discipline keeps you grounded and diversification keeps you protected.

This interview does not intend to give investment advice, and the contents therein should not be construed as such. The company is licensed to conduct investment services by the MFSA, under the Investment Services Act and is a member of the Malta Stock Exchange. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. Andrew Borg, CFA is Portfolio Manager at Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta. Further information can be requested on 2122 4410, or e-mail [email protected].