Questions about artificial intelligence’s (AI’s) development, the Federal Reserve’s (Fed’s) policy outlook and the fiscal sustainability of developed market governments occupied investors’ minds in November 2025. We see these as important questions that will set the tone for the new year as well.

Running a marathon at Usain Bolt’s pace

Usain Bolt’s 100m world record is 9.58 seconds. To finish a marathon at this pace would take 1 hour and 7 minutes, compared with the actual marathon world record of 2 hours and 35 seconds. No one would think that running 42km in just over an hour is realistic. While the development of AI should be seen as a marathon, markets tend to move at the speed of a 100m sprint, pricing in all the potential gains and risks of future years immediately. This raises the question of whether the surge in AI hyperscalers and related companies is running ahead of fundamentals or forming a bubble, as some investors are questioning.

The third quarter of 2025 highlights the continued dominance of technology and financials in driving S&P 500 earnings growth, with AI-adjacent sectors posting growth rates above 20%. The tech giants and AI hyperscalers remain central, but earnings surprises are broadening across the technology landscape.

Cloud revenue growth remains robust at 27% year-over-year, and the top seven tech companies have delivered double-digit earnings per share (EPS) growth since 2023. AI adoption is accelerating: 50% of new code at a leading search engine firm uses AI, 10% of businesses are integrating AI into production, and 44% of firms are paying for AI subscriptions.

However, risks persist. Competition among chipmakers and AI platforms is intensifying, and supply chain constraints—especially in power and resources—could limit growth. The sector also faces questions around transparency, value distribution, and potential cannibalization of existing businesses. While AI is expanding its reach, 90% of global shopping still occurs in-store, highlighting untapped opportunities.

We remain optimistic about the medium-term adoption of AI and its potential for monetization. However, competition in the quarters and years ahead could mean that some current entrants and hyperscalers may lose out. This requires active selection to identify potential winners. Moreover, supply constraints and over-expansion of balance sheets are also issues to watch. Staying competitive sometimes requires more than just the best products or the brightest minds—a robust balance sheet could be key as well.

Market swings around the Fed’s rate cut path

As investors review the investment case for AI, market beta performance is being driven by the Fed’s policy outlook. For context, the futures market was pricing in a 68% chance of a 25 basis points (bps) rate cut at the December meeting; this fell to 27% on November 20 and rebounded to 81% by the end of the month.

What caused this swing in market expectations? Following the October Federal Open Market Committee (FOMC) meeting, when the Fed cut the policy rate by 25bps, Fed Chair Jerome Powell struck a cautious tone about rushing into another rate cut immediately. This was because official jobs data was delayed by the government shutdown, making it hard for the Fed to make decisions without sufficient data. Meanwhile, some FOMC members also thought the risk of inflation had not completely disappeared, so holding steady was probably the best strategy.

Then, the delayed release of the September jobs data gave both hawks and doves something to cheer about. The economy added over 110,000 jobs, but the unemployment rate rose to 4.4%. This indicated that the economy was in better shape than in previous months, but the increase in labor supply could cap upward wage pressure. The government shutdown meant there would be no jobs numbers for October, and the November data would be released after the December FOMC meeting. This implies that the Fed will be discussing monetary policy in December with September as the latest jobs numbers. This persuaded the hawks to advocate for holding policy rates steady, adding to the sell-off pressure in equities in mid-November.

However, several FOMC members, such as Governors Chris Waller and Michelle Bowman, and NY Fed President John Williams, have expressed their views in favor of cutting rates due to weakness in the job market and poor small business confidence. These speeches turned market expectations around, leading to a higher chance of a rate cut in December, which in turn brought back some positive momentum for the stock market.

Try to please everyone, then please no one

In our 2026 Market Outlook, we emphasize the importance of fiscal discipline for investors and governments alike. Some developed market governments are walking a fiscal tightrope. They need to balance meeting voters’ expectations and staying in power while reducing fiscal deficits to prevent a rise in borrowing costs, as bond investors demand a higher risk premium on these government bonds.

In the UK, Chancellor Rachel Reeves presented a closely watched budget amid a 30-billion-pound shortfall and limited fiscal headroom. Between raising taxes, cutting spending, and borrowing more, she opted for raising taxes. Yet, she avoided increasing the largest sources of revenue (income tax, value-added tax (VAT), and national insurance contributions) and instead focused on extending income tax threshold freezes and increasing property taxes. While bond yields fell following the speech, reflecting investors’ approval, it remains unclear how the government can facilitate strong growth and productivity.

Japan, meanwhile, has announced a Japanese yen (JPY) 21.3trillion (USD 112billion) stimulus to address inflation and support households. Measures include energy subsidies, cash handouts, and tax relief. However, this will push Japan’s already high debt (230% of GDP) even higher. In contrast with the UK, long-dated Japanese government bond (JGB) yields rose, with the 30-year yield at a record high. What is also worrying is that the narrowing of the USD-JPY bond spread failed to strengthen the JPY.

Many developed economies are facing similar challenges. Aging demographics are putting more pressure on social services and health care, with a narrower tax base due to a rising dependency ratio. Productivity growth in many of these economies is also slow. That said, there are some success stories. Some European economies like Italy, Spain, Portugal, and Greece have improved their fiscal positions through reforms following the sovereign debt crisis in 2012. This resulted in sovereign rating upgrades for all four economies in the past two years. This illustrates that fiscal sustainability can be improved, but it requires swallowing some bitter pills, which can be politically challenging in some cases.

Global economy

• The U.S. government shutdown ended mid-November, becoming the longest shutdown in U.S. history after lasting 43 days. The resulting delay to data releases for October and November numbers has created a partial data vacuum, leaving policy makers without some official data points heading into December. The lack of data has also caused uncertainty over the next Fed policy move. The Fed minutes for the October meeting show officials split over a possible December rate cut.
  (GTMA P. 28, 29, 31)
• China’s economic data releases during November proved disappointing, with continued softness seen in domestic activity. Industrial production and fixed asset investment came in lower than expected, while real estate activity remained weak and consumer sentiment was subdued. The official manufacturing PMI reading improved but was still below 50 for a fifth straight month of contraction. There was some positive news in the form of partial resolution to the U.S.–China trade tensions, resulting in the U.S. pulling back from its threat of additional 100% tariffs and China suspending some of its export controls.
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• Japan saw the approval of a major stimulus package from new Prime Minister Takaichi, but the size of the policy action had markets worried over the implications for Japan’s fiscal health and deficit levels. The Bank of Japan now appears poised for a rate hike in December after a speech by Governor Ueda, which brings forward market expectations from a January move. The European Commission raised its eurozone growth forecast for 2025 to 1.3% from 0.9% on the back of front-loading in exports and stronger-than-expected investment numbers.
  (GTMA P. 18, 19)

Equities

• Global equity markets were overall flat in November, with the MSCI AC World Index at -0.1% in U.S. dollar (USD) terms. Developed markets gained slightly, with the MSCI World Index up 0.2%, while emerging markets saw negative performance, with the MSCI EM Index down 2.5% for November. Much of the first half of the month saw a sell-off due to tech-related weakness. Investors pulled back as AI-related sentiment became more volatile, with ongoing concerns over stretched valuations and the possibility that AI-associated themes were in a bubble.
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• In the U.S., the S&P 500 was flat with a 0.1% price return. The tech sector was the major culprit. Despite strong earnings and revenue beats from the 3Q25 reporting season, the results failed to drive markets further upward, reflecting investor expectations and concerns over lofty tech valuations. The NASDAQ was down 1.5% over the month.
  (GTMA P. 50)

Fixed income

• U.S. Treasury (UST) yields were down over the month, with the 10-year yield falling 8bps and 2-year yields falling 10bps. With the end of the U.S. government shutdown and some dovish comments from Fed officials shifting expectations for a December rate cut back to being highly possible, U.S. Treasuries saw modest positives.
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• Spreads on both investment-grade and high-yield bonds narrowed modestly, as the string of robust earnings results reassured corporate fundamentals, with global investment-grade and high-yield bonds returning 0.5% and 0.6% in USD total return terms, respectively.
  (GTMA P. 64, 65, 66)

Other financial assets

• Oil prices continued to drop during November, with WTI down 5.4% and Brent down almost 4%. Oversupply once again drove the decline, with OPEC+ approving another December output hike. Gold continued to creep upwards, gaining 4.5%. Falling U.S. yields and still-strong central bank demand continue to drive prices.
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• The U.S. dollar DXY Index edged down 0.3% in November, as the U.S. saw dovish surprises while other developed markets saw hawkish surprises. The Japanese yen was again the weakest G10 currency, falling 1.3% against the U.S. dollar to the 156.05 level. Most Asian currencies were also slightly lower over the month.
  (GTMA P. 73)

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