Mercer market review 

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Global equity performance was positive in September across US, non-US developed, and emerging markets. EM stocks outperformed US and non-US significantly. Small cap underperformed large cap stocks slightly, while growth outperformed value as measured by the Russell 3000.

Bond markets delivered mostly positive returns, as yields fell for most maturities in the US and coupons remained high. Outside the US, yields rose slightly. As widely expected, the Fed cut rates by 25 bps in September, which was positioned as a ‘risk management’cut. Inflation remains somewhat above target but sufficiently low to allow the Fed to shift focus towards downside risks to growth and the labor market. 

Economic data was mixed. Manufacturing activity is slowing in most developed markets, with services holding up composite PMIs. US Retail sales increased 0.6% for August on a month over month basis and was above expectations. Jobless claims increased over the month, and the unemployment rate ticked up slightly. The slowing labor market was the primary factor in the Fed’s decision to cut rates. Non-farm payrolls were positive but sharply lower than in previous months, amid lower net immigration. US GDP growth for the second quarter was revised upwards to 3.8%, far above consensus expectations. Overall, the US economy remains resilient.

Headline inflation in the US rose 2.9% year-over-year in August, above expectations. Core prices rose to 3.1% over the trailing year, in line with expectations. Headline inflation in other developed markets was mixed; it remained at 3.8% in the UK, remained at 2.0% in the Eurozone, and decreased to 2.7% in Japan. Central banks in the UK, Eurozone, Japan, and China all kept rates unchanged.

More tariffs were announced this month while a trade framework with Japan was finalized. Hopes remain high on progress in trade negotiations with China as President Trump and President Xi are set to meet in late October. The Supreme Court announced it would hear arguments to the legality of the tariffs under the currently applied legal basis later in the year. Outside the US, the dissolution of yet another French government contributed to a downgrade of its sovereign debt. Geopolitical risk remains elevated in the Middle East and Russia, with Israel striking the terror group Hamas’s political leadership in Qatar, and NATO air defenses responding to Russian drone as well as fighter jet incursions.

The US dollar weakened slightly against developed market currencies in September. Oil fellby about 3% after declining the previous month and gold increased sharply in a risk-on month, partly driven by falling US yields and investors continuing to seek safe-haven exposure amid heightened levels of geopolitical uncertainty. Listed real assets underperformed broad equities. 

In this issue we cover:

Global equity markets posted their second strong quarter in a row, with US and emerging markets equites performing the best. Technology and growth sectors led the charge as appetite for AI names intensified despite ongoing concerns about elevated valuations. Political uncertainty eased somewhat as trade negotiations made progress, and tariffs have not had a major impact on growth and inflation. The One Big Beautiful Bill that was passed early in the quarter buoyed market sentiment further due to is numerous growth-enhancing provisions, most notably tax cuts and deregulations. The 2-year Treasury yield fell by ~12 bps from 3.72% to 3.60% as market priced in upcoming rates cuts, while the 10-year Treasury yield declined 8 bps from 4.24% to 4.16%. Credit spreads tightened during this risk-on quarter. These factors contributed to solid single-digit performance for bonds this quarter. Gold also rose as real rates declined and geopolitical events along with concerns over the federal budget deficit kept demand for safe-haven assets high. Oil prices dropped following OPEC+ announcements of plans for an increase in supply.The Bloomberg US Aggregate Bond Index returned 2.0% in Q3 as falling yields created a tailwind for fixed income. Tightening spreads helped credit, even if default rates ticked up slightly. The MSCI ACWI returned 7.6%. As a result, a traditional 60/40* portfolio was up 5.4%.