2025-10 Global DM Monthly Recap

Market Narrative

Macro

The October market narrative is characterized by a conflicted bull market, where strong investor optimism is juxtaposed with significant, well-defined risks.

• Bullish sentiment is running high, driven by a robust macroeconomic outlook. According to the BofA Global Fund Manager Survey, investor sentiment reached its most bullish level since February 2025. This is underpinned by:
  • Fading recession fears: Recession concerns have dropped to their lowest since February 2022, with a net 69% of investors believing a global recession is unlikely.
  • Shifting economic scenarios: The "soft landing" scenario remains the base case for 54% of investors, but the "no landing" scenario has surged in popularity, now expected by 33% of participants, an 8-month high.
  • Aggressive investor positioning: Cash levels have fallen to a low of 3.8%, triggering a "sell" signal according to BofA's rules, indicating investors are heavily allocated to risk assets.
• Strong fundamentals support the optimism. The Q3 2025 earnings season for the S&P 500 has been impressive, marking the fourth consecutive quarter of double-digit growth.
  • Blended year-over-year earnings growth is reported at +10.7%, with revenue growth at +7.9%.
  • Future earnings estimates for Q4 2025 through CY 2026 have all been revised upwards compared to last month.
• However, this bullishness is counterbalanced by significant underlying anxieties and stretched valuations:
  • Record overvaluation: A record net 60% of FMS investors believe global equities are overvalued. The S&P 500's forward 12-month P/E ratio stands at 22.9, significantly above its 5-year (19.9) and 10-year (18.6) averages.
  • Bubble fears are now front and center: For the first time, the "AI equity bubble" is considered the biggest tail risk by 33% of investors. A record 54% believe AI stocks are currently in a bubble.
  • Asymmetric market reaction: The market is punishing negative EPS surprises far more harshly (average price drop of -6.4%) than it is rewarding positive surprises (average gain of +0.3%). This suggests a nervous, fragile market beneath the bullish surface.

Policy

The policy environment reflects the same tension seen in the macro narrative, with currently favorable liquidity conditions set against expectations of a "higher for longer" interest rate regime.

• Liquidity conditions are perceived as highly favorable. A net 59% of FMS investors rate liquidity as positive, the best reading since September 2021. This loose financial environment is a key support for risk assets.
• Despite this, expectations for higher long-term interest rates are solidifying.
  • A net 28% of FMS investors now expect higher long-term rates in 2026, the highest level since June 2022.
  • This aligns with persistent inflation concerns, as 64% of investors still anticipate a "stagflation" environment (below-trend growth, above-trend inflation) over the next 12 months.
• This policy tension creates a direct risk, with credit markets identified as the primary vulnerability.
  • There is a dramatic shift in concern towards the private markets. A striking 57% of investors now believe Private Equity/Private Credit is the most likely source of a systemic credit event, a massive jump from 26% last month.
  • This highlights the market's anxiety that higher policy rates could expose vulnerabilities in less regulated, leveraged corners of the financial system, potentially triggering a credit crisis that spills over into public markets.