Will Confidence Crack? - Q3 2025

Will Confidence Crack?

Confidence is everything, until it’s not. This past quarter was a textbook example of how investor confidence can endure in the face of mounting contradictions. To close the quarter, equities pushed to all-time highs and investment grade credit spreads retested multi-decade tights. Yet underneath the surface, fault lines in fiscal policy, global capital flows and economic data began to widen. While the emerging cracks have not yet eroded market confidence, the challenge ahead is that confidence rarely erodes gradually. Rather it tends to fall off a cliff.

Additional highlights

• Pension Solutions Monitor: Our analysis of market movements impacting US corporate defined benefit pension plans leads us to estimate that pension funding ratios increased over the second quarter of 2025. Based on market movements, we estimate the average funding ratio increased from 109.6% to 114.3%.
• Fixed Income Markets: Amid elevated uncertainty and increasing downside risks to growth, we believe US fixed income markets currently offer a unique opportunity for investors to earn attractive levels of income in high-quality segments of the market.
• Equity Markets: The market is undeniably bullish toward the US across sentiment, positioning, flows, technicals and internal indicators. Yet all these factors sit uncomfortably with us. Against this backdrop, we share a few observations on managing risk from here.
• MSCI Rebalance Predictions: The second-quarter rebalance occurred in a uniquely challenging environment given market turmoil. Maintaining an accuracy score of 82 under these conditions reflects the strength and adaptability of our methodology.
• Private Credit: We see reasons to have confidence that both major segments of the private credit market—investment grade (IG) and sub-IG—can continue to thrive.