Charles Stanley Q4 Outlook: “Market volatility will be high and susceptibility to downside risks will be elevated should companies make any misstep”

Patrick Farrell, Chief Investment Officer at Charles Stanley, observes that global markets are approaching Q4 with cautious optimism, as investors weigh the potential of rate cuts and AI-driven growth against geopolitical tensions and slowing economic momentum. He warns that heightened volatility and stretched AI valuations warrant prudence, with diversification and flexibility remaining essential.

Patrick Farrell, Chief Investment Officer at Charles Stanley, comments: “Global markets head into the final quarter of 2025 with cautious optimism, as investors weigh the impact of anticipated rate cuts, resilient corporate earnings, and AI-driven growth against persistent geopolitical tensions, fiscal uncertainty, and signs of economic deceleration in key regions. In the fourth quarter of 2025, market volatility will be high and susceptibility to downside risks will be elevated should companies make any misstep.

“So, how should a portfolio be managed in such an environment? As ever, the key is to maintain proper diversification and flexibility within portfolios to nimbly take advantage of opportunities to add risk when they occur. Of course, it is extremely difficult to answer the $400bn question – which is really whether the AI frenzy is a stock market bubble or a major secular phenomenon. There are good arguments on both sides and our current thinking is that companies need to improve productivity and, as such, see the AI integration as a key driver of that initiative supporting the strong demand. The extreme amount of capital seeking to find the next great start up in this space is concerning, and certainly bubble-like, so it is important not to get caught up in speculation otherwise the riptide can pull you under without warning.

“Valuations of AI-linked stocks have soared, with companies such as Nvidia, Microsoft, and Meta accounting for the bulk of the S&P 500’s returns, earnings growth, and capital spending since ChatGPT’s launch. Analysts and august institutions – including the Bank of England, the International Monetary Fund, and JPMorgan – have warned that investor enthusiasm may be outpacing fundamentals, pointing to stretched valuations, circular investment deals, and a lack of clear monetisation in many AI ventures. The answer is that AI may be starting to froth up with some bubble-like tendencies which warrant caution, but remain focused on the key names in the AI environment that are positioning for the longer term.”