Rates and bond yields moved higher, but resilient growth, strong earnings and continued AI investment kept equity markets broadly supported.
Global markets
Global equity markets delivered mixed returns during September. The global economy remained relatively resilient, supported by solid labour markets, ongoing consumer spending and continued business investment. Technology-led indices generally performed better, underpinned by strong AI-related earnings momentum and capital spending, while more traditional and economically sensitive sectors were weaker as rising bond yields and tighter monetary policy weighed on sentiment. The result was a widening gap between technology beneficiaries and the broader market.
Geopolitics remained an important source of volatility. The United States and China extended their trade truce, although the strategic contest increasingly centred on artificial intelligence and technological leadership. Tensions with Iran also moved oil prices through a relatively wide range (Brent traded roughly between US$90 and US$110 a barrel) as markets assessed proposals to reduce risks around the Strait of Hormuz. Energy therefore remained the key link between geopolitics, inflation and central-bank policy.
The month was unusually busy for monetary policy. The Federal Reserve increased interest rates by 0.25 percentage points, while the Bank of Japan also tightened policy as it continued to move away from decades of ultra-loose monetary settings. The European Central Bank raised rates for the second time this year, citing renewed energy-driven inflation risks. Meanwhile, the Bank of England held its policy rate unchanged, although three of nine policymakers voted for an increase. Despite higher interest rates and bond yields, economic activity across most major economies remained reasonably resilient (as evidenced by PMI readings). These decisions reinforced the message that inflation had improved from its peaks but had not yet been fully contained.
One of the defining market moves during September occurred in bond markets. The US 10-year Treasury yield rose to 5.3%, its highest level since 2007, while the 30-year Treasury yield reached 5.6%, its highest level since 2002. The move reflected resilient economic growth, persistent inflation pressures and expectations that interest rates may remain higher for longer. Rising yields created headwinds for many traditional sectors and contributed to the divergence between technology-led markets and the broader equity market.
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United States markets
The US economy continued to outperform during September, although market performance was mixed beneath the surface. The S&P 500 declined 0.5%, while the technology-focused Nasdaq gained 1.9% and the Dow Jones fell 4.3%, reflecting the continued divergence between technology leaders and more traditional sectors.
Business surveys pointed to the strongest output growth since 2021 and consumer spending remained robust. Headline inflation remained elevated, but core inflation was more contained, suggesting that much of the renewed pressure was concentrated in energy and transportation rather than spreading evenly across the economy. Consumer confidence remained unusually weak relative to the strength of employment, spending, earnings and financial markets, highlighting a continuing disconnect between reported sentiment and observed activity.
The Federal Reserve increased its policy rate by 0.25 percentage points to 3.75%–4.00%, its first increase in three years. The decision was unanimous and Chair Kevin Warsh emphasised that inflation had remained too high for too long. Most committee members expected at least one further increase before year-end, keeping the path of policy dependent on incoming inflation and employment data.
Artificial intelligence remained the strongest corporate theme, and continued to broaden during September. Investor enthusiasm increasingly extended beyond the largest technology platforms and into the wider ecosystem supporting artificial intelligence, including digital infrastructure, semiconductor supply chains, networking and data-centre investment. This reinforced the view that AI spending remains in the early stages of a multi-year investment cycle rather than being confined to a small number of high-profile companies.
Valuation remains one of the key debates for investors. On a traditional price-to-earnings basis, the S&P 500 trades broadly around its long-run average on a forward basis. However, valuations appear more reasonable when adjusted for expected earnings growth. Strong profit growth expectations, particularly across technology and AI-related businesses, have kept growth-adjusted valuation measures below historical averages. While investors are rightly focused on elevated market valuations, the relationship between price and expected earnings growth remains more supportive than headline multiples alone would suggest.
That does not remove valuation risk, but it helps explain why equities remained resilient as bond yields rose: earnings expectations continued to grow faster than the increase in the cost of capital.
European & Asian markets
European equities weakened during September, with the FTSE 100 down 2.0% and the EURO STOXX 50 down 2.4%. Both remained positive year to date. Growth was modest but positive, while higher energy prices lifted inflation and complicated the policy outlook. The European Central Bank raised rates for the second time this year, while the Bank of England held at 3.75% despite a 6–3 vote that showed growing concern about inflation.
Japan continued to stand out, with the Nikkei 225 gaining 0.7% in September and 32.7% year to date. Performance continued to be supported by the country's strong exposure to technology and semiconductor companies, which remain important beneficiaries of ongoing AI infrastructure investment. The Bank of Japan raised its policy rate to 1.25%, continuing the gradual unwind of decades of ultra-loose policy.
Chinese equities were weaker: the CSI 300 fell 5.8% during September and the Hang Seng declined 3.7%. Economic releases remained mixed. Industrial activity and export orders showed signs of improvement, but the domestic recovery remained uneven and consumer demand was less convincing. The extension of the US–China trade truce reduced the immediate risk of escalation, although competition over technology and artificial intelligence remained unresolved.
Australian markets
Australian shares weakened during September, with the S&P/ASX 200 falling 3.2% and moving 0.4% lower year to date. Stronger-than-expected growth and a resilient labour market gave the Reserve Bank of Australia room to increase the cash rate to 4.6%, its fourth rise of the year. Policymakers said further increases remained possible, but also acknowledged that policy was already restrictive and that the cumulative effect of earlier tightening was still working through the economy.
Confidence indicators showed the pressure on households and businesses. The ANZ-Roy Morgan consumer-confidence measure fell as higher living costs and the prospect of additional rate increases weighed on households. Business confidence also remained below long-run averages, although firms reported some improvement in their own financial position and investment intentions.
The economy remained distinctly two-speed. Infrastructure, technology and mining investment continued to support activity, while households faced higher mortgage costs and subdued confidence. Employment rose by ~40,000 jobs in August, but unemployment also rose to 4.6%, the highest since late 2021, as workforce participation increased and part-time jobs accounted for much of the gain. This combination of persistent inflation and softer domestic sentiment left the RBA balancing the need for price stability against the risk of placing further pressure on consumers.
New Zealand markets
The S&P/NZX 50 Gross Index declined 0.6% in September but remained 1.0% higher year to date. New Zealand’s recovery continued to broaden, although the underlying data still pointed to an uneven, two-speed economy.
New Zealand's economy grew 0.2% in the June quarter, following 0.9% growth in March. The result was stronger than expected and highlighted the economy's resilience in the face of higher oil prices and global uncertainty. Growth was supported by construction and exports, particularly meat and dairy, although consumer-facing sectors remained weaker. Overall, the economy continues to recover, but the improvement remains uneven.
Business activity indicators were encouraging. The Performance of Manufacturing Index eased from 54.3 to 53.1 in August but remained comfortably above the 50-point expansion threshold, with growth becoming broader across industries. The Performance of Services Index also improved, rising from 50.6 to 51.2 and lifting its three-month average to the highest level since mid-2023. Together, the surveys were consistent with annual economic growth of around 2%, although the recovery remained gradual rather than broad-based.
Household confidence remained the softer part of the picture. The September source pack reports the ANZ-Roy Morgan Consumer Confidence Index at 97.6, broadly unchanged and still below its long-run average. Households reported modestly better personal finances, but spending intentions remained subdued. Inflation expectations provided some encouragement, with the two-year measure declining to 4.5%, its lowest level since March 2025.
Business sentiment however was considerably stronger. The ANZ Business Outlook showed headline confidence easing slightly from +53.7 to +51.9, while firms’ expected own activity held at +47.9. Inflation expectations were broadly unchanged at 3.25%, with manufacturing and construction performing relatively well while retail and services remained softer. The survey continued to point to a constructive but bumpy recovery.
The Reserve Bank of New Zealand increased the Official Cash Rate to 2.75%, but its more balanced and data-dependent message reduced expectations of an aggressive tightening cycle. Higher oil prices and global yields remain risks, while soft labour-market conditions, spare capacity and subdued housing activity argue for a measured approach.
Corporate updates were encouraging. Fonterra reported strong underlying momentum across its ingredients and foodservice businesses, an important result for New Zealand given dairy’s contribution to export earnings and regional incomes. The result also indicated that earnings generated since the Mainland divestment had recouped the earnings given up through the sale earlier than initially anticipated. Almost $20 billion has flowed back to farmers, shareholders and unit holders, providing meaningful support to regional New Zealand. Amongst the retailers, Hallenstein Glasson also delivered substantial profit growth and The Warehouse returned to profitability.
Portfolio positioning
September strengthened our view that the AI opportunity extends well beyond the best-known technology platforms. Demand is flowing through to memory, optical networking, semiconductor equipment, cloud infrastructure, power and data-centre construction. Exposure across this broader ecosystem can provide a more diversified way to participate in the theme.
At the same time, higher bond yields increase the importance of valuation and cash generation. We remain focused on companies with durable competitive advantages, strong balance sheets and the ability to translate investment into sustainable earnings. Active selection matters most when the gap between winners and losers is widening.
Looking ahead - market outlook
Markets enter October with growth still resilient but policy settings more restrictive. Investors will be watching whether softer inflation and employment indicators are enough to stabilise bond yields, or whether central banks need to tighten further.
Oil remains an important wildcard, particularly for inflation expectations. However, the global economy is less energy-intensive than it was during earlier commodity shocks, and corporate earnings have continued to absorb higher financing costs. The central question is not simply how high rates move, but whether profits can keep growing faster than the cost of capital.
For long-term investors, the backdrop remains constructive but selective. Diversification, quality and valuation discipline remain essential, alongside exposure to structural themes that can continue to grow through a changing economic cycle.