Global Equity Market Commentary – 3Q 2025

The global bull market extended its run as small cap markets advanced for the third consecutive quarter this year, with easing trade tension, a 25-basis-point rate cut by the Fed, and AI enthusiasm among the key takeaways. The MSCI World ex USA Small Cap Index gained 7.2% USD, outperforming the large cap MSCI World ex USA Index which was up 5.3% USD. The US Dollar Index rose 0.9%.

Asia was the top-performing region with Japanese equities hitting new highs as second quarter GDP came in at 1.0% versus expectations of 0.4%. Foreign investment flows into the market accelerated on easing tariff concerns and ongoing corporate governance reform. Results were mixed across Europe as most markets lagged the Index following last quarter’s notable gain. Washington’s surprise 39% tariff announcement weighed on Switzerland; Sweden declined due to weak local business activity; and the UK was down on persistently high inflation. Canada and Australia were standouts thanks to sizable gains in mining stocks. On a sector level, Information Technology, led by equipment and semiconductors; Materials, mainly mining; and Utilities were the top performers. Consumer Staples was the only sector to end the quarter lower.

The list of risks beyond the equity markets looks much the same as in prior quarters. From France’s fiscal challenges to the ripple effects of US tariffs—spurring trade diversion and secondary tariffs between China and regions such as Mexico and the EU—along with ongoing geopolitical tensions and currency and bond market pressures, few issues appear close to resolution. This month, however, we set those concerns aside to focus solely on equity markets.

On the surface the strong returns in 2025 should be pleasing, but the foundation of the market rally is becoming worrisome. Increasingly, returns are being driven by a group of narrowing themes: Canadian and Australian precious metal miners rallying on the gold price, European defense companies seeing order books explode higher, or Japanese IT firms catching the AI spending wave. However, we’re concerned that the market is not worried enough about the macroeconomic factors driving this growth, nor the long history of companies failing to translate rapid revenue growth into shareholder friendly cash flow and earnings. Gold prices hitting records due to concerns about fiat currencies and fiscal profligacy, spreading global conflict, and deterioration in post- war security guarantees driving defense spending, and a massive spending campaign by a historically cyclical industry without any clear revenue model all seemed to be “mixed” blessings, at best. It is not that the individual company stock price rallies are irrational, just that the drivers of those rallies might not prove sustainable or even positive in the long term.

We have taken a different path. There are attractive businesses being ignored by this bull market, although most are still generating solid absolute returns. These companies may seem “boring” because they don’t align easily into the current market zeitgeist or boast an exciting growth story. Looking for stable revenue from necessary and repeatable products or services, managements focused on investor-friendly capital allocation and shareholder returns, and valuations which allow investors to meet their own required return hurdles should never be “out of favor” but on a relative basis that is clearly the case currently. However, rather than a negative, this is exciting. Great companies are being “left behind” by the Index but are still providing returns in excess of our underwriting assumptions. For investors struggling with FOMO and feeling they are “forced” into keeping up, this may be one of the most difficult market environments we have experienced in a generation. Our advice is to stick to the fundamentals, accept the solid absolute returns, and avoid the trap of short-term relative gains turning into long-term regret.

Although international small cap markets are on track for a very good 2025, many companies that fall into today’s preferred investment themes have a high level of price and business risk. While the market seems to be willing to accept this risk, we are not. Although this creates a relative performance challenge in the near term, we are confident that over the long term, strong business fundamentals will result in greater stock price performance.