In September, the U.S. Federal Reserve joined other major central banks in cutting rates during 2025 – ultimately cutting three times this year. U.S. Treasury yields initially rose on the announcement but ended Q3 lower than where they began. The U.S. 2s10s spread widened to 54 bps from 46 bps at the start of the quarter, signaling a modest steepening of the curve. Market participants were pricing in further easing, set against a backdrop of a softening U.S. labor market (unemployment rising to 4.4% in September from 4.1% in June) and tentative signs of improving growth prospects, as investors demand slightly more term premium for longer maturities.
Global corporate spreads tightened, with Bloomberg Global HY OAS narrowing from 3.32% at the end of Q2 to 3.07% at the end of Q3, suggesting risk appetite remained strong. Equity markets continued their rally: the Nasdaq-100® (NDX®) gained 9.0%, outperforming the S&P 500 (8.1%), MSCI ACWI ex-U.S. (7%), and MSCI EAFE (4.8%), though it trailed MSCI EM (10.9%) and the Russell 2000 (12.4%). 82 of the Nasdaq-100 companies (86% of the index weight) beat bottom-line estimates, 83% of S&P 500 companies beat theirs, and the next-twelve-month EPS estimates for S&P 600 small caps climbed 6.6 percentage points from the end of Q2. The prospects of further Fed rate cuts, a softer USD, and improving fundamentals appear to be fueling optimism, suggesting asset managers may continue embracing a risk-on stance.
Yet institutional asset owners continued taking a more cautious approach in Q3, withdrawing -$195.5 billion from equity products in favor of fixed income (+$98.7 billion) and cash/capital preservation (+$74.1 billion) based on manager reported data to Nasdaq eVestment 60 days after quarter-end. Much of this likely reflects strong equity gains and the portfolio rebalancing that typically follows. Still, pockets of net inflows to equity remain, and two of the three most positively trending universes in the quarter were equity focused while two of the most negatively trending were fixed income focused.
Note that all figures in this report are based on manager-reported asset data within the first 60 days after quarter end.
