Market insights, August 2025
Geopolitics, tariffs, monetary policy, and AI all made for a lively month for investors in August.
In many ways, an unusual period of dislocation is emerging as stuttering economies and fractious political events run parallel with rising equity markets.
In some quarters there is mounting speculation that a stock market bubble might be brewing. That theme was given extra impetus in mid-August as tech stocks wobbled in the face of investor doubts about the true potential of AI.
If you haven’t yet read it, our recent article, ‘Are we in a tech bubble?’, is certainly worth checking out. We discuss the arguments for and against, and conclude that while a pause or correction in the current rally is quite likely, US equity markets and tech at present retain a key role in a diversified portfolio.
Geopolitical tensions persist
From a geopolitical perspective, the big story of the month was Trump’s appetite for deal-making with Putin. Unfortunately, the much-hyped negotiations in Alaska fell flat.
As the Ukraine-Russia war continues, so too so does the global trade war, with India finding itself caught in the middle of both. Towards the end of August, the US slapped a 25% levy on Indian goods and services, on top of a 25% reciprocal tariff.
The hefty weaponisation of tariffs was America’s attempt to stop India from buying cheap Russian oil, and in turn, from helping to finance Russia’s war effort. In the aftermath of the Alaskan damp squib, the US decided to turn the screw without (yet) targeting Russia directly.
Conversely, Canada rowed back from trade hostilities with the news that it would remove retaliatory tariffs on US goods. Their climb down was intended to repair neighbourly relations which had soured significantly in recent months.
Meanwhile, the temporary truce between the US and China was extended in August, with both sides agreeing not to up the ante while they negotiate a longer-term solution.
A downward trajectory for rates
Despite an easing of trade tensions since April’s Liberation Day, there were more signs last month that US tariffs are taking a toll globally.
Weakening economic growth (which would normally lead to rate cuts to stimulate growth) runs side-by-side with tariff-linked inflationary concerns (which lend themselves to keeping rates high). It leaves central banks walking a tight rope and fearful of mis-stepping.
For many New Zealanders, the major economic development of the month was the Reserve Bank’s decision to cut the OCR to 3%.While the move was widely expected, the bank’s subsequent commentary signalled a sharp shift in mood that paves the way for potentially two more cuts this year.
For a while now, the RBNZ has been in wait-and-see mode, opting to take a conversative stance towards rate cutting. However, patience has clearly run out in the face of a creaking domestic economy and struggling jobs market. The priority has shifted from taming inflation (which remains a core objective) to stimulating growth.
A similar mindset was adopted in the UK, with the Bank of England also opting for a 0.25% base rate cut in August. Despite UK inflation sitting at 3.8%, uncomfortably above the BoE’s 2%target, the cracks in the economy were too big to ignore.
Both the UK and its neighbour France are under considerable strain linked to high borrowing and rising government bond yields. The month closed with France’s political set-up looking precarious as concerns of a government collapse mounted, further testing the resolve of bond markets.
While there was no rate cut news from the United States, there was still significant drama as Trump made a move to oust Federal Reserve governor, Lisa Cook. This escalation ran parallel with his ongoing criticism of soon-to-depart Fed Chair, Jermone Powell.
The more Trump intervenes in the independence of the Fed, the more negative pressure it puts on the appeal of US assets and the US dollar.
US-tech stocks get a reality check
From an asset class perspective, it was US-listed stocks that made the headlines, but not for the reasons that we’ve become accustomed to recently.
A scathing report by the Massachusetts Institute of Technology (M.I.T) on AI’s return-on-investment potential, followed by surprisingly candid admissions from Sam Altman of OpenAI, saw tech stocks sell-off modestly.
While there is a growing debate about whether the over exuberance of investors has created a tech bubble, the market moves in August were more likely part of a natural market correction. At some stage, the AI ‘hype train’ was always going to have to slow down, and more time is needed to understand the true potential, and therefore the true value, of emerging technology.
At the end of August, all eyes were on the latest earnings report from Nvidia. Seen as a bellwether of the broader AI trend and currently holding the position as the world’s most valuable company, Nvidia’s performance is heavily scrutinised. In the end, their robust quarterly results went some way to restoring the faith of AI enthusiasts. However, the stock price took a small hit as doubts remained about its commercial activities in China. The chipmaker has found itself as a pawn in a complex game of chess between the world’s two biggest economies.
For bond investors, persistent levels of global uncertainty continue to feed through to markets. The rising levels of government debt that we referenced earlier, coupled with doubts about various governments’ ability to exercise fiscal constraint, continue to weigh on investor’s minds.
Final thoughts
In a volatile and unpredictable year, events in August stayed true to form. The financial resilience of Nvidia went some way to calming investor nerves regarding AI. That said, the door has certainly opened for a broader re-set in expectations linked to AI.
As counterintuitive as it may feel, it is not worth paying too much attention to day-to-day news headlines. This has been a year of dramatic events, but the real value for investors stilllies in longer-term investment strategy.
More market volatility is to be expected in the final quarter of 2025. However, that is not always a bad thing. There are still investment opportunities to be had, even when markets are choppy.
Photo credit: Naina Vij, Unsplash
