Blog post by Empower Wealth

The Selective Path: VanEck’s Oct 2025 Summary

Please Note: This report was created and provided by VanEck.

“Inside every cynical person, there is a disappointed idealist.” – George Carlin

It has not been difficult this quarter to peruse the financial press and read about lofty valuations, the AI boom and market distortions caused by the rise of select mega-caps.

At the same time, many market participants preached that the market is always right; many, it seems, now cynically wonder – is it still right?

Patience, we think, rather than cynicism, is the answer, and this year’s markets provide an example of that. For many years, we have reinforced that gold miners, relative to the price of gold, represented a value opportunity. For the last few years, as the gold price rose, its miners barely moved. At the same time, if the gold price did fall, its miners exhibited their leverage. 2025 has been different; miners are exhibiting operating leverage as the gold price rises. Gold mining equities were the best-performing sector over the past quarter, as they have been for this calendar year. The market gets there in the end. Idealists need not be disappointed.

The US Federal Reserve (Fed) cut rates this past quarter, as it tries to kickstart a faltering labour market. Cuts in response to economic weakness typically have markets on edge about the threat of recession. That does not appear to be the case this time, even bond markets seem to be anticipating a muddle through.

Elsewhere in markets, optimists seeking the youthful exuberance of small companies have been rewarded over the past quarter. Globally, communication services and IT were the standout sector performers.

Naturally, there are concerns about echoes of the AI rally and the late 1990s dotcom boom. But there are a few key differences, the current AI rally has given the market a second kickstart (US equities had been falling in 2022 until ChatGPT’s release in November of that year, and it’s been on an upward trend since then). The AI boom is more concentrated to the US.

What’s the same? No one knows the peak. Cynics are watching from the sidelines; smart idealists are being selective. In every market, there is an opportunity.

Locally, the materials sector performed best last quarter, as companies benefited from the rise in the gold price and a rise in lithium’s price (on the back of supply-side disruptions in China). Healthcare is a notable laggard, highlighting the danger of concentration (one company accounts for the fall, while the rest of the sector is mostly flat). It was an extraordinary August reporting period, 20% of S&P/ASX 200 companies experienced price moves of greater than 10% on the day they reported.

We remain idealistic, cautioning patience and selectivity. Long-term opportunities exist, but taking benchmark or herd-like investment approaches could be problematic. A pure MSCI World approach may have too much AI, a growth sector in which we think selectivity will be key. Concentration risk remains a feature of the Australian bourse. Opportunities within these markets may be accessed by diversifying elsewhere. Smaller companies take time to grow.

“The stock market is designed to transfer money from the active to the patient.”
– Warren Buffett

No room for error

Interest rate cuts don’t occur without a reason.

Sometimes, there’s a cheerful reason, like falling inflation allowing a central bank to stimulate economic growth and drive asset valuations further.

And sometimes there’s a grim reason, like a stalling job market requiring a central bank to start supporting the economy.

The Fed’s Personal Consumption Expenditure (PCE) deflator target is 2%. The actual PCE is 2.6% and it is rising. Core inflation is even higher. Yet the Fed is cutting. This should indicate the type of reason for the Fed’s September cut. The current Fed easing is an exercise in backstopping a sputtering labour market, rather than (to paraphrase former Fed Chair Alan Greenspan) spiking the punch to get the party really going. The combination of government sackings, tariffs, uncertainty and supply-side woes has led to a slide in employment growth to around a meagre 25,000 jobs a month.

Why is the jobs news worse than the growth news?

Because jobs aren’t just linked to production, they also feed household income, in turn fuelling future spending. No job growth leads to no income growth, which leads to no spending growth.

Employment is weak for two reasons, with only the first being the usual: softer demand. This time, softer demand is bumping into weaker supply, as immigration constraints soften population growth and the supply of labour.

So, it’s worth pondering, can the Fed simply stimulate the economy until growth heads back to its highs and employment growth pushes back up into the 100,000 to 150,000 band again? Not likely.

The Fed’s challenge

The Fed is in a corner because labour force growth has been so shrunken that the economy can probably only sustain a maximum of around 50,000 jobs a month while holding unemployment and wage growth steady. Unless, of course, the US Government abandons its immigration policy. And wage growth is already likely too high for a 2% inflation target.

So, the Fed has a tightrope to walk. It must sustain sufficient demand in a faltering labour market and therefore economic growth, with tariff-induced price gains leading to, uncomfortably, above-target inflation and further undermining real household incomes, all without triggering more inflation.

This tightrope act is embodied in the latest Federal Open Market Committee (FOMC) forecasts, which show the unemployment rate as roughly stable but GDP growth consistently less than 2%.

And while tariff-induced price rises should be a one-off, the Fed will still be bruised from its recent “transitory” fright and will avoid reference to, or put too much emphasis on, that term.

It might be time to pull out the dreaded “s” word: stagflation. That is, subpar growth that the Fed can’t combat due to stubbornly above-target inflation. In this scenario, the Fed will cut slowly and grudgingly. Not very far, though, because without labour force growth, the economy can only sustain 1% or so growth.

Of course, the outcome could be worse.

So far, softer employment growth has been due to stagnant hiring. If things get worse, firms may need to start laying off employees. At that point, it’s probably too late for the Fed to avoid, at least, a slowdown or a mild recession.

But we are not there yet.

Muddling through

The economy is like an aircraft: get too close to stall speed and it becomes more difficult to manoeuvre, and, at the same time, the cost of an error steadily rises. We think muddling through to a soft landing is the base case. However, a recession remains a possibility and the Fed will react accordingly, as it has in the past, with deep cuts.

On the bright side, an economic crash will give markets and President Trump the deep rate cuts they’re craving.

Unfortunately, in that instance, the market will also experience a deep cut in corporate earnings. Corporate earnings usually fall by between 20% and 40% during a recession. This is not priced into equities, which are at all-time highs, or credit spreads, which are at all-time lows.

Equities often rally at the start of a Fed rate-cutting cycle, but from where they are, there is not much room to move up. These rallies, in the past, have occurred because equities sold off in response to the gathering economic risks. Again, this had not occurred coming into this most recent rate cut.

And equity price recovery is conditioned on soft landings. Equity markets tend to not do well during recessions. US equities are at cycle peak price-to-earnings (P/Es), and some have predicted that they could fall 30% to 50% in a full-blown recession. And that’s before worrying about a credit event, for which the Bank for International Settlements has warned.

Bond markets, usually the first to predict a recession, haven’t done so now. The yield curve, which was inverted from the end of 2022 to 2024 for that soft landing, has flattened recently but not inverted. Bond markets, perhaps, hold hope that the Fed can muddle through another soft landing.

There are three growth outcomes: A return to robust growth, a muddle-through, or recession.

The best-case scenario of the robust economy, on the back of the spending US consumer (never count them out), is the least prospective outcome. Though its odds improved in the last week of September with strong GDP numbers. This scenario is also likely to be accompanied by stubbornly high inflation. A recession is perhaps a more probable outcome. The most likely outcome, we think, is that the US economy will muddle through a stagflationary environment.

A recession will rapidly become our central case if companies start widespread sacking.

Of course, there is always the “this time it’s different” (TTID) argument. It is difficult to be persuaded, especially with tariffs, AI and monetary policy weighing on markets.