Delivery: Profits Doing the Work
Companies once again delivered. U.S. businesses reported profit growth of 12% year-on-year — more than double expectations. Technology firms and banks led the way, supported by stronger U.S. economic growth (3.8% in Q2).
UK companies cleared a much lower bar, but bank profits remained strong (+17%). Emerging markets also rallied, with Chinese technology firms powering ahead.
Key point: Profits — not politics — drove markets higher in Q3.
Divergence: Not All Markets Moved Together
- Equity markets split: cyclical and growth sectors outperformed; defensives like utilities and staples lagged.
- Bonds split: corporate debt fared well; government debt struggled.
- Regions diverged: the U.S. grew strongly while the UK and Europe flatlined under inflationary pressure.
Most importantly, companies and households remained financially healthy, while governments strained under heavy debt loads.
Debt: The Elephant in the Room
Government debt continues to climb — now c.£3 trillion in the UK and c.$37 trillion in the U.S. Servicing these sums is increasingly expensive. It is no surprise, then, that government bond markets found little support in Q3.
The picture is more positive elsewhere: corporate debt remains manageable, and consumers have not overextended. Bond investors rewarded this discipline, with corporate bonds trading higher.
Outlook
The third quarter proved once again that profits drive markets and companies adapt quickly to challenges. After strong gains, valuations are higher and a period of consolidation would not be surprising.
We have positioned portfolios with:
- Exposure to equity markets offering better value,
- Selective allocations to shorter-dated bonds, and
- A focus on diversification to smooth returns.
In short: we remain encouraged by healthy companies, resilient consumers, and central banks with room to cut rates. While volatility will remain part of the journey, the long-term case for staying invested is as strong as ever.
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