September 2025 Review

• Official US interest rates cut for the first time this year
• The Bank of England holds rates, having cut in August
• Gold rises on raised geopolitical concerns and fears of US political interference in US interest rate setting
• Major currencies and developed bond markets exhibit relatively low volatility compared to previous months
• Equity markets, led by the US, look beyond geopolitical issues to post positive returns, aided by earnings and the prospect of lower interest rates

Inflated Inflation Risks

As expected the US Federal Reserve cut its official Fed Funds rate by 0.25% on September 17^th.  While there has been unrelenting pressure from US President Trump and US Treasury Secretary, Scott Bessent, Federal Reserve Chair, Jerome Powell, explaining the cut, the first of 2025, was cognisant that “the balance of risks has shifted”, referring to recent increases in unemployment and declining job vacancies.

The Bank of England’s Monetary Policy Committee (MPC) voted not to cut its official rate at their meeting on September 18^th, although two members of the nine-person Committee did vote to reduce base rates by 0.25%, from the current level of 4.0%.  The Committee cited inflation at 3.8%, being above target (2%), as a reason for not reducing the rate.  But is the MPC taking a blunt view of the UK’s inflation data and looking backwards not ahead?

The reason inflation remains elevated is due to the rise in essential items rather than discretionary spending.  In other words, things that people have no control over have been responsible for inflation remaining higher than the ‘Bank’ would like.  However, this is only a problem if the labour market is tight (too few workers compared to job vacancies)  so workers can demand higher wages.  This so-called wage-price spiral is something the ‘Bank’ seems concerned about, yet unemployment is rising, job vacancies are declining and the economy is struggling to deliver a positive outcome.

Of course, the Bank of England cut rates at its last meeting in early August, so may not have been keen to ease monetary policy again so soon.  However, as MPC member and one of the advocates of lower base rates, Professor Swati Dhingra, has referenced, the aforementioned dynamics of UK inflation may warrant a further  interest rate reduction at the next MPC meeting on November 6^th.  On the other hand, the MPC may choose to wait until after the Budget on November 26^th to see what measures the Chancellor, Rachel Reeves, is planning in order to adhere to her self-imposed fiscal rules.

Has the Elite Eight replaced the Magnificent Seven?

The artificial intelligence (AI) boom has been a boost to the share prices of most of the ‘Mag 7’ constituents but less so Apple and Tesla.  For investors focusing on AI capital expenditure, those two have been usurped by Broadcom, Palantir and Oracle.

Add Advanced Micro Devices and you have nine companies – choose your own epithet for nine.  Oracle was the earnings story of September.

We have seen some extraordinary price moves in some large US companies in recent times, particularly with reference to AI.  The post-earnings price move in the share price of Oracle was extraordinary. Oracle’s earnings report showed that their free cash flow had turned negative.  However, the announcement that “We signed four multibillion-dollar contracts with three different customers in Q1,” from CEO Safra Catz, sent Oracle’s share price soaring 40%, an extraordinary move for a company of its size. What also helped was Catz adding “We expect to sign up several additional multibillion-dollar customers, and RPO is likely to exceed half a trillion dollars.” To be honest, I had no idea what RPO meant, so I asked AI. Remaining performance obligation (RPO) represents contractually obligated sales not yet included in revenue.  Oracle is a global leader in cloud applications, database and AI technologies. It was founded in 1977, so not a new tech business.

One of the key influences on AI-related businesses has been the sheer volume of investment in the development of AI capability from software to infrastructure.  The following chart, sourced from HSBC and compiled by the Organisation for Economic Co-operation and Development (OECD), illustrates the spend by companies within the US, Europe and Japan.

US business investment has dwarfed that of the other two and goes some way to explaining the superior economic performance of the US over the past ten years.  Of course, much of this is already reflected in equity prices, earnings and valuations.  The big question is, even if the margin of investment is maintained, can it support current valuations without  upward revisions to earnings?  US equity indices are at all-time highs, so some caution is justified.  Eventually, investors will discover whether all the capital expenditure ultimately translates into even greater profits.

Your Money

Pier Portfolios continue to be conscious of high valuations in certain US equities and the associated risks from investing in them.  Pier has exposure to AI in both active (within Plus) and tracker form through all three Pier portfolio solutions and diversification ensures no single company represents an outsized risk.  Pier continues to favour reasonably priced global equities and a more balanced approach that dilutes the impact of a few large companies.  To mitigate the risks of rising bond yields (falling prices) in long-dated government bonds, bond investments have been kept in shorter maturities where there is less price volatility.

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