Global Equities Hit Record Highs

06/10/25

US and European equity markets have broken into record territory as investors balance hopes of monetary easing with the realities of stretched valuations and an uncertain macro backdrop. While the drivers differ across regions—with technology leading in the US and financials and commodities powering Europe—the story is one of resilience and optimism. The key question now is whether earnings and policy will sustain the momentum into year-end.

US Equities: Record Highs Built on Narrow Leadership

The S&P 500 and Nasdaq Composite have surged to all-time highs, powered by optimism around artificial intelligence, semiconductors, and the expectation of lower rates. The Federal Reserve’s September rate cut confirmed the shift away from restrictive policy, yet officials have repeatedly stressed that further easing will be gradual. This measured stance contrasts with market pricing, which still anticipates another 25 basis point cut by year-end.

Despite policy caution, the economic backdrop remains constructive. Labour markets are cooling without collapsing, consumer spending has held up, and services activity continues to signal resilience. Together, these dynamics have reinforced the ‘soft landing’ narrative.

Technology remains the gravitational force behind the rally. The Nasdaq’s gains have been led by semiconductors and software megacaps, with the AI theme drawing disproportionate flows. However, leadership remains narrow. A setback in just a few names could reverberate across the broader market, highlighting the fragility of this advance.

Valuations underline the challenge. The S&P 500 now trades at roughly 22.5 times forward earnings, one of the most expensive levels in two decades. This leaves little room for disappointment as Q3 earnings season approaches. Technically, the index has established 6,500–6,520 as critical support, with momentum intact above 6,700. The Nasdaq, meanwhile, must hold 22,100–22,200 to keep its breakout structure intact.

European Equities: Rotation into Cyclicals Extends the Rally

In Europe, the STOXX 600 and FTSE 100 have also touched record levels, though the rally has been fuelled by very different forces. Rather than technology, European markets have found leadership in banks, miners, and defence companies. This reflects the region’s sector composition and investors’ preference for cyclicals as growth fears ease.

Recent economic data has been supportive. Eurozone services PMIs reached an eight-month high, with Germany improving even as France lagged. The European Central Bank has so far kept policy unchanged, but political pressure for further cuts is mounting. Italian officials in particular have urged renewed easing, and markets are now pricing in a mild easing path extending into 2026.

Banks have benefitted from robust balance sheets and strong capital returns, miners have gained on firmer commodity demand, and defence firms have ridden the wave of higher government spending. This breadth gives the European rally a sturdier base than the tech-driven US advance. From a technical perspective, the STOXX 600 has reclaimed the 550–555 resistance zone, now a key area of support. The Euro Stoxx 50 remains in a steady uptrend, with successive swing highs providing strong footing.

Earnings and Policy: The Next Phase of the Story

The next stage for equities will be dictated by corporate earnings and central bank clarity. In the United States, analysts expect earnings growth of roughly 8–9 percent in the third quarter. With valuations stretched, delivery is critical, particularly for technology and semiconductor firms. In Europe, banks and industrials will be in focus as investors look for confirmation that their leadership can be sustained.

Policy remains an equally important driver. In the US, any indication that the Fed is unwilling to match market expectations for additional cuts could temper enthusiasm. In Europe, the question is whether the ECB can tolerate stagnation without re-engaging in easing. Markets remain biased toward accommodation in both regions, but the timing and pace are uncertain.

Risks to the Rally

Despite the strong momentum, risks remain elevated. In the US, the government shutdown has delayed key data releases, creating the risk of abrupt market reactions when information returns. Inflation pressures, particularly in services, remain stubborn and could limit central bank flexibility. In Europe, geopolitical risks and energy dependency cast a shadow, while in the US fiscal standoffs continue to threaten confidence. Above all, the narrowness of US leadership means that any disappointment from megacap technology could destabilise the entire market.

Outlook Scenarios for Q4

The bullish scenario is one where inflation cools further, central banks validate expectations for gradual cuts, and earnings in both regions exceed expectations. In this environment, the S&P 500 could extend comfortably beyond current highs, the Nasdaq would maintain its leadership, and the STOXX 600 would benefit from ongoing sector rotation.

The base case envisions more modest progress. Inflation moderates slowly, central banks remain cautious, and earnings broadly meet expectations. Markets in this case would likely grind higher but with greater volatility, as valuations cap the upside while investor positioning limits the downside.

The bearish case would be triggered if inflation proves stickier than expected, forcing central banks to hold back on easing, while earnings fall short of forecasts. In this scenario, the S&P 500 could retreat toward its 6,500 support, the Nasdaq could slide back to its September breakout band, and the STOXX 600 could slip below 550.

Conclusion: Momentum with Fragile Foundations

Global equities have broken higher, but their foundations are fragile. The US rally remains dependent on a narrow set of technology leaders, while European gains rely on policy flexibility and cyclical rotation. Valuations are rich, and central banks are cautious. The coming weeks will test whether earnings can justify the optimism and whether policy paths align with market hopes.

For now, the trend is higher, but the path forward is conditional. The story of Q4 will be one of resilience tested by reality, as equities attempt to sustain record highs in a world still shaped by uncertainty.

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