Market outlook: Fourth quarter 2025

13 August 2025 by National Bank Investments

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As markets settle after a turbulent spring, Q4 begins with cautious optimism. Strong corporate earnings have lifted U.S. equities, but geopolitical risks and shifting policies keep investors alert. While tech leads the way, other sectors struggle to keep pace.

Goldman Sachs Asset Management (“GSAM”), portfolio manager of the NBI SmartData U.S. Equity Fund, shares its outlook for the quarter, focusing on how data and market sentiment are shaping active investment strategies.

Read the portfolio manager’s comments for this strategy included in certain NBI Portfolios and NBI Private Wealth Management profiles.

Market review

The second quarter of 2025 saw U.S. large-cap equities, as represented by the S&P 500, achieve substantial gains, rebounding strongly after an initially challenging start. Markets experienced volatility in early April due to larger-than-expected tariffs announced by the Trump administration and geopolitical concerns in the Middle East. However, a recovery ensued in May and June as trade tensions eased and corporate earnings reports came in robustly, leading the S&P 500 to reach new all-time highs.

Sector performance during the quarter exhibited considerable dispersion. Information Technology and Communication Services sectors led with significant gains, driven by renewed investor confidence and strong earnings, particularly from mega-cap technology companies. In contrast, sectors like Health Care and Energy experienced declines. Notable industry-specific surges included Semi & Semiconductor Equipment and Software. The "Magnificent 7" technology stocks significantly outperformed the broader S&P 500, buoyed by continued earnings growth and significant investment in AI infrastructure.

Outlook and challenges

Looking ahead, the market continues to face persistent uncertainties across several fronts. Evolving trade policies remain top of mind, with potential reciprocal tariffs and their broader economic implications creating an unpredictable environment. Geopolitical relations, interest rate trajectories, and broader government policies contribute to a complex landscape that can trigger market volatility. While the initial market response to policy uncertainty has been largely risk on or risk off, we think the longer-term reaction will be far more idiosyncratic, creating clearer winners and losers within the market. Such an environment, marked by volatility and potential for continued dispersion in returns, underscores the critical need for a data-driven, active investment approach.

Investment opportunities

Despite the challenges, several key investment opportunities emerged from the market dynamics. The continued expansion of Artificial Intelligence (AI) presents a significant growth avenue, with strong demand for AI services and ongoing data centre build outs underscoring the potential for companies involved in AI infrastructure and software. The strong recovery of the AI Data Centres investment themes, fuelled by earnings growth and sustained investment, indicates that valuations in this space may be justified. Furthermore, the quarter's significant sector dispersion and market volatility create opportunities for active management and strategic stock selection.

Such an environment presents significant opportunities for data-driven active investors who possess the scale and capabilities to leverage data sets and advanced techniques like AI. The ability to identify companies with less favourable sentiment or those facing fundamental mispricing can lead to outperformance, especially in sectors experiencing headwinds. This necessitates the use of sophisticated analytical tools, including sentiment analysis, which can provide insights into market sentiment and identify emerging trends by analyzing various data sources, such as news articles, social media, and financial reports. Industry rotation signals, derived from rigorous data analysis, also offer avenues to capitalize on shifting market trends. Active managers, equipped with deep research platforms and the willingness to cast a wide net, are better positioned to navigate these complexities and identify the best outcomes for their clients by taking into account wider macroeconomic, social, and geopolitical factors, alongside company fundamentals.

The strategy

The success of the NBI SmartData U.S. Equity Fund stemmed from identifying opportunities through sentiment analysis, leading to strategic underweighting in sectors like Energy, Financials, and Health Care due to identifying less favourable investor sentiment from our alternative data sources. The fund also capitalized on fundamental mispricing via proprietary industry rotation signals, yielding additive underweight positions in specific pharmaceutical and biotechnology companies.

However, certain aspects detracted from performance. The Themes & Trends and High-Quality Business Models pillars faced headwinds due to positioning within Information Technology, specifically underweights in companies that benefited significantly from strong AI demand.

Overall, our investment process is based on investment themes including Fundamental Mispricing, High Quality Business Models, Sentiment Analysis and Market Themes & Trends. We evaluate stocks in the S&P 500 Index daily with a focus on these attributes to identify companies that we believe offer the best prospects for growth. Overall, the fund’s investment strategy is defined by a blend of strong economic intuition, data-driven analysis, and collaborative teamwork. Our research and portfolio management teams work closely to identify and implement differentiated sources of alpha. This combination of quantitative rigour and qualitative insight, honed over 35 years, enables the fund to actively adapt to changing market dynamics and deliver consistent, all-weather investment experiences.

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