Market Outlook - October 2025

• • Markets are nowadays obviously predominated by selective perceptions: chances offered by further rate cuts and Artificial Intelligence keep pushing stock markets on and on, in particular the U.S. stockmarket. The long list of risks – trade conflicts, geopolitical tensions, sticky inflation, political and social uncertainties, a troubled U.S. labor market and weak data from the real estate market – has not yet harmed neither the S&P 500 rebound nor Nasdaq tech papers.  
  • “The ever climbing gold price alone signals a certain need for hedging seen by investors in this situation,” DWS Chief Investment Officer Vincenzo Vedda states. No doubt, U.S. equities are expensive. However, expectations of two-digit, IT-driven earnings growth could still justify these high valuations. Corporate bonds, the risk assets among bonds, have proven to be remarkably resilient. They benefit from high demand. It is, above all, retail investors, British pension funds and French insurers, which are massively invested here. Yield spreads of European investment-grade credit versus sovereign bonds have therefore narrowed to 77 basis points – 100 basis points are one percentage point.
    
    
  • “This is a level last seen in 2018,” Vedda continues. With these valuations in mind, some caution seems advisable here. “A potential stock market correction could have negative effects on the risk tolerance of investors.” Yield spreads could widen and prices fall correspondingly. Imagination and reality – the gap between them on capital markets will play a decisive role in further performance. Setbacks cannot be ruled out.

Topics driving capital markets

Economy: sluggish economic growth expected in the United States and the eurozone

• Poor leading indicators – real estate, consumer sentiment – but good hard economic data. These are the keywords to describe the current situation in the United States. All in all, the growth outlook for the United States remains muted (2026: 1.3 percent).
• The unstable political situation in France is a burden not only for the country itself but for the European Union as a whole. Our forecast for eurozone growth for 2026 is a moderate 1.1 percent.

Inflation: Significantly more pressure in the USA than in the eurozone    

• Increased or potentially even further rising inflation remains an important topic in the USA although tariffs have not yet completely translated into higher prices. In 2026, inflation might climb to around 3.0%.
• For the eurozone, we expect an inflation rate of 2%, thus significantly lower than in the USA. The main drivers are rising prices in the services sector. Slower wage growth, however, dampens inflation.

Central banks: further rate cuts in the USA expected  

• After cutting rates to 4.00 to 4.25% in mid September, the Federal Reserve has hinted at further rate cuts by year-end. The main reason is the markedly weakening labor market.
• In the eurozone, we forecast only one further rate cut. An inflation rate of 2.2% is close to the ECB target, economic forecasts have been revised slightly upwards.

Risks: escalating trade conflicts, increasing geopolitical risks  

• Escalating trade conflicts or inflation rates beating expectations could confine the Fed’s scope for cutting rates further and be a drag on markets.
• In Europe, further increasing geopolitical instability and fiscal risks – keyword France – could hamper long-term sentiment and the investment climate. 

#2 Equities

Investors should not be too greedy 

• “For several years, we have observed that   almost all corporations with the tough luck of   being identified as losers of Artificial   Intelligence (AI) are being systematically   penalized by the stock market. The alleged AI   losers might currently offer the greatest   chances on the stock market,” portfolio   manager Andre Köttner argues. Even if these corporations reported the very best figures in the past few years, stock exchanges simply ignored them. Although they managed to continue presenting two-digit sales growth and very high profit margins. There are prominent examples from software or IT service corporations here.
• Köttner also focuses mainly on corporations linked with AI or supposed to benefit from AI. However, he also sees partly critically high valuations – such as corporations valued at over hundred times their sales. Such high valuations did not even occur during the dotcom bubble at the end of the 1990s. And it is far from clear for many corporations whether their high investments will really pay. The capital market is fond of catchy narratives which, unfortunately, do not always match reality.   Another related issue: In the case of extremely highly valued corporations with quasi-monopoly positions, the question arises whether they are likely to keep this position and make extremely high profits in the long run.
• So how to deal with the risk of setbacks? Köttner’s strategies are always almost 100% invested in equities. He cannot hold higher liquidity or other asset classes. In order to reduce risks, he uses a so-called barbell strategy: On the one end of the barbell, there are corporations from the tech and AI sector. On the other end, there are, for example, assets from the healthcare sector or consumer staples – boring but predictable business models. There are several corporations in these sectors with rather moderate but reliably predictable growth outlooks and good margins which are expected to make money even in times of crises.  
• “Even in these times, we do not stop buying toothpaste, drinking coffee or undergoing therapies during illness,” Köttner argues. With a view to return prospects for the years to come, Köttner is rather cautious. Returns might be somewhat lower than in the previous years. All in all, the development of corporate profits will be the decisive factor. Köttner cautions:  “Investors should not be too greedy.”  

Use of AI in corporations slowing down

Share of corporations having used AI in their manufacturing processes within the last two weeks