Week ended October 17, 2025: up, down and all around

I started drafting this update Friday morning in London, with U.S. futures massively down.  And then – like magic – the U.S. stock market opened slightly better, bounced around all morning, and then headed higher during the afternoon.  These are crazy times! 

Above are some of the headlines that have appeared the last two days in #Bloomberg and the #FT.  Over-valued equities and concerns about A.I. have been present for some time, but the last two headlines regarding credit losses and bank liquidity are the most problematic for me. 

Before we delve into those more challenging issues, the base concern is that stocks – particularly in the U.S. – are richly valued and seem to never go down, raising concerns about a bubble forming.  The escalation in valuations is most visible in the tech sector, particularly the stocks of companies that in any way can latch onto an A.I. narrative.  However, not everyone is negative.  At the top of the list are retail investors who, time and time again, ride to the rescue on down days by “buying the dip”.  Yesterday was a perfect example.  Retail is not alone though in feeling more positive.  Towards the end of the week, I listened to an investment outlook session featuring Fahad Kamal, Chief Investment Officer of #Coutts & Co (U.K. private bank / wealth manager), and also watched several interviews on Bloomberg TV with investment managers.  Most of these professionals acknowledge a richly priced market but are not willing to ring the alarm on a potential bubble.  These professionals are not alone – there are plenty of other investors and pundits (and probably the entire Trump Administration) that are able to justify current stock prices much better than this “nervous nellie” (i.e. me).   So it raises the question: what are more bullish investors seeing that perhaps others – including myself – are not?

Let’s start with the fact that the Fed has started a new easing cycle, with the policy rate expected to be lowered another 25bps at the next FOMC meeting (late October).  Moreover, the “big beautiful bill’ – as bad as it is for U.S. deficits and debt – will deliver a boatload of fiscal stimulus.  Therefore, the U.S. economy will get a dose of double-barrelled stimulus from accommodative monetary policy and fiscal policy.   Optimists believe that these mega-stimulus measures will stabilise the jobs market and lead to more robust U.S. economic growth.   Corporate earnings continue to chug along, generally meeting expectations and showing few if any visible signs as far as margin compression or growth effects resulting from the Trump tariffs. Oil prices also remain at relatively attractive levels, another form of de facto economic stimulus.  And the mighty U.S. consumer – the engine of U.S. economic growth – is not doing too badly either, continuing to spend for the time being.  Looking further out, A.I. is expected to deliver massive improvements in productivity in the future, further bolstering the U.S. and other economies around the world.

So what’s not to like?  The bull case is the glass half full view, although mine is more of the glass half empty: 

• US trade policy remains unpredictable and highly volatile, and tariffs are a de facto form of fiscal constraint.  Evidence suggests that consumers are bearing most of the cost of the tariffs (a form of stealth tax), with the combination of U.S. and foreign companies absorbing the rest (not great for future earnings);

• U.S. deficits are projected to continue to increase, and the U.S. debt situation is worsening quickly;

• Congress remains gridlocked as far as decision making, with polarization making decision-making difficult even when the government is not shut down (as it currently is); and

• The amount of investment needed to fuel the A.I. eolution/ transition will be substantial with the magnitude and timing of the payoff far from certain.  How A.I. will affect the jobs market is equally difficult to predict.

These concerns have been visible and are perhaps arguably reflected in the prices of assets already, although my personal view is that they are being under-estimated.  However, my real concerns – reflecting my work in capital markets for several decades – are mainly around credit deterioration and financial market liquidity, the sorts of issues that can bring markets to their knees in a nanosecond. 

Jaime Dimon, CEO of JP Morgan, spoke to his bank’s credit exposure to bankrupt Tricolor on Tuesday on the analysts’ call following the release of JP Morgan’s strong 3Q25 earnings report, saying:

“My antenna goes up when things [meaning bankruptcy of Tricolor] like that happen,” the Wall Street veteran said. “And I probably shouldn’t say this, but when you see one cockroach, there are probably more. And so we should—everyone should be forewarned on this one.”

Many took Mr Dimon’s comments as a swipe at private credit funds, which are chipping away at traditional bank lending.  However, no sooner than Mr Dimon created a stir in markets with his comments did two mid-sized U.S. banks – Zions and Western Alliance – announce loan losses related to fraud (which I believe are un-related).  Perhaps the cockroaches are appearing, with credit – as is almost always the case – speaking the truth.  Could this confluence of credit-related events be the catalyst that leads stock investors into the abyss?  Time will tell if these credit events are one-off and isolated, or are the tip of the iceberg which will lead to something much worse. However, this old timer can’t help but believe lending standards have gotten more lax as banks and private credit funds, awash with liquidity, duke it out to deploy large gobs of their available cash. 

Perhaps an equally important concern is that banks are increasingly turning to borrowing from the Federal Reserve under the standing repo facility (SRF), rather than from each other in the interbank market.  According to an FT article, there was a two day run this past week in which the SRF was tapped at its most prolific rate since the early days of the pandemic.  The FT article went on to say that this is related to the Fed’s wind-down of QT, which is set to end soon anyway. However, a more sinister view shared by yours truly is that banks borrow from the Fed rather than from each other when they stop trusting each other.  I can easily draw a connection between uncertainty regarding recent credit events and banks being less willing to lend to one another because they are uncomfortable about the asset quality of their peers.

Having said all this, these concerns could conceivably be in the rearview mirror in a flash, and risk appetite could ramp back up when investors that savour dip buying rock up and FOMO re-takes centre stage.  It’s not at all unfeasible given the patterns since the pandemic, and certainly in the last year or so.  However, I continue to have doubts.  Perhaps my problem is that I have a long memory and a lot of experience watching markets fluctuate over several decades, including many dark periods of time.  And this is accompanied by a gut feeling that this one-way direction of travel higher seems to be getting out of hand.   Having said that, I presented the case for the bulls earlier in this update, so I am able to see both sides.  It’s simply impossible to say where markets might go next – only time will tell.  

Reflecting my concerns and nervousness, I stay long stocks (as always) but am strapping on plenty of market hedges via out-of-the-money SPY and QQQ put options expiring between November and March 2026.  I am also not at all afraid to lighten on some of the tech runners, seeking to generate income in the meantime through short-dated covered calls.  I have never been one to sell everything and go to cash, because two things are certain: i) stocks always drift higher over long periods of time, and ii) trying to time markets is a fool’s game.  So after I ensure that I have ample liquidity on hand, I try to protect my portfolio dynamically the best I can.  Then I close my eyes and roll with it.  

Markets

U.S. stocks started the week by partially clawing back their losses from the Friday before, and then proceeded to bounce around most of the week albeit – shockingly (ha ha) – ending the week higher again. There’s nothing new there, although volatility remains elevated albeit better than it was mid-week, when volatility (VIX index) saw recent highs. Something tastes afoul in spite of the ongoing performance of U.S. stocks. Global stocks were more mixed but generally down, with Asian stocks leading the way. The “asset of the year” – gold – continued its ascent, up another 6.2% WoW (61% YtD). The US Dollar weakened this past week after showing some fortitude the last few weeks. US Treasuries were slightly better bid although they traded in a relatively narrow range most of the week. The 10y UST yield fell below 4% during the week, but ended at 4.02%. Corporate bond spreads (through Thursday) were slightly better WoW, tightening in the first half of the week but widening towards the end of the week as equity market volatility rose.

Below are updated tables for the week ended October 17, 2025. 

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