29 September 2025
As AI enthusiasm continues to dominate investor sentiment, US stock indices are pushing to fresh all-time highs. And with the Federal Reserve resuming its easing cycle amid ongoing evidence that the US economy has achieved a “soft landing” following its aggressive hiking cycle of 2022-23, parallels are being drawn to the mid-90s bull run in markets. Indeed, the similarities are striking. The US economy experienced a soft landing in 1995, just as the personal computer revolution and rise of the internet was transforming society and boosting productivity – similar to the potential impact of AI today.
But is that where the similarities end? Starting points matter. 1995 began with the 12-month forward PE of the S&P 500 at just above 12x, versus around 22x now. We also know that the latest 1990s was characterised by a potentially favourable macro backdrop of falling inflation and unemployment, and hyper-globalisation. A structural decline in bond yields contributed to a rerating of equity multiples. By contrast, today’s global backdrop of economic fragmentation is keeping inflation sticky and means the supply side is prone to shocks. With government finances increasingly stretched, bond yields are likely to remain high, and macroeconomic volatility is expected to continue.
Investors should take the potential impact of AI seriously. The current bull run could continue for a while. But with many of the tailwinds of the 1990s now acting as headwinds, could Alan Greenspan’s (premature) bathtub musings of “irrational exuberance” in 1996 be more relevant to today’s market environment?
Credit spreads – the gap between the cost of borrowing for governments and corporates – have narrowed to near-record lows this year. The spread on US investment grade (IG) credit, for example, tightened to 0.72% the week before, its lowest since 1996. High yield spreads are also close to long-run tights. And it’s a similar story in European credit too.
The credit rally has been a highlight of global investment returns this year. In part, it’s been driven by easy financial conditions, better-than-expected earnings, resilient balance sheets, and stable leverage. The limited impact of tariffs on company profit margins, so far, has also spurred confidence, and the recent decision by the Fed to cut rates despite elevated inflation could further fuel the positive backdrop.
For investors, narrow credit spreads can mean slimmer returns, but with US rates still relatively elevated, ‘all in’ yields remain attractive. Given that firms with stronger balance sheets can be more resilient to economic cracks, some fixed income specialists prefer high-quality investment grade (IG) to high yield.
The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management, Bloomberg, Macrobond. Data as at 7.30am UK time 26 September 2025.
There were no major surprises in the recent volley of interest rate decisions from major central banks. The US Federal Reserve restarted its easing cycle, while the Bank of England (BoE) and the Bank of Japan (BoJ) – like the European Central Bank (ECB) a few weeks earlier – kept policy on hold. But the decisions – and accompanying commentary – revealed diverging views on the outlook, and the near-term path for rates. In the US, new FOMC member Stephen Miran was the lone dissenter (favouring a 0.5% cut) in an otherwise unanimous vote for a 0.25% cut (to 4.00-4.25%) on labour market weakness. Despite elevated inflation, the market is pricing two more 0.25% US cuts by year-end, and two in 2026. Elsewhere, the BoE has been divided since the summer on the risks of elevated inflation and weak growth, with further UK cuts not now expected until 2026. A bigger surprise was at the BoJ, where the prior assumption of there being no rush to tighten policy was dashed by two dissenting votes, which put a rate hike this year back into play. |
One central bank closer to resolving these policy dilemmas is the ECB. After eight rate cuts, eurozone inflation is close to target and policy is in neutral territory – mission accomplished.
In sum, relatively low volatility, low intra-country correlations, and the continued tailwind of a weaker US dollar all support the positive outlook for Frontier equities.
This convergence could have meaningful market implications. Generative AI is expected to deliver around 25% of productivity gains over the medium-long run, according to academic research. If middle-income economies embed these AI tools faster than their developed peers, they may capture efficiency dividends sooner. This could support equity upside in emerging and frontier markets.
Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 26 September 2025.
Source: HSBC Asset Management. Data as at 7.30am UK time 26 September 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way.
Risk markets struggled to make headway. Fed Chair Powell emphasised two-sided risks on inflation and the labour market, dampening optimism for significant US rate cuts. The US dollar strengthened against a basket of major currencies, while gold prices reached new highs. 10-year US Treasury yields rose modestly, with the front-end losing ground with four 0.25% rate cuts now priced in by end-2026. US and euro area IG credit spreads widened slightly but remained close to record tights. In equity markets, US stocks broadly retreated, with weakness in tech stocks weighing on the Nasdaq. The Euro Stoxx 50 edged down, while Japan’s Nikkei 225 rose to another all-time high amid a weaker yen. EM Asia equities were mixed: South Korea’s Kospi declined, whereas China’s Shanghai Composite and India’s Sensex rose. In commodities, oil prices rallied amid lingering concerns over geopolitical risks.
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