The Return of Risk-On Sentiment: What Investors Should Do Now

The financial markets have entered a new phase of optimism, marked by a resurgence in risk-on sentiment. After a year of geopolitical turbulence and trade policy uncertainty, investors are recalibrating their portfolios to capitalize on a reaccelerating global economy. The third quarter of 2025, in particular, has been a turning point: emerging market stocks surged 10.1%, U.S. large-cap equities gained 8.1%, and commodities like gold hit record highs, according to the Q3 2025 returns report. This shift is not merely cyclical but reflects structural changes in monetary policy, technological innovation, and global trade dynamics. For investors, the challenge now is to strategically reallocate capital to harness these trends while mitigating lingering risks.

Understanding the Drivers of Risk-On Sentiment

The euro area's newly developed risk appetite indicator-a composite of equity indices, volatility metrics, bond spreads, and exchange rates-has been instrumental in tracking this shift, according to the J.P. Morgan review. By Q3 2025, the indicator showed a sharp rebound in risk tolerance, driven by two key factors: the partial rollback of U.S. tariffs and the Federal Reserve's first rate cut since December 2024. The Fed's 25-basis-point cut in September 2025 weakened the U.S. dollar, boosting emerging markets and commodities, the J.P. Morgan review found. Gold, for instance, soared to $3,780 per ounce, functioning as a hedge against fragmented global markets, according to that same review.

Meanwhile, the AI boom has been a tailwind for technology stocks, with global corporate earnings exceeding expectations by the largest margin since 2021, as noted in the J.P. Morgan review. The MSCI World Value index outperformed its Growth counterpart by 1.9 percentage points, signaling a rotation toward value-driven sectors. In Japan, cyclical industries benefited from higher commodity prices and AI demand, while European markets remained mixed, with France lagging due to political instability, according to the Schroders quarterly review.

Asset Class Performance and Opportunities

The data paints a clear picture of divergent returns across asset classes. Emerging Market Stocks led the charge with a 10.1% gain in Q3 2025, supported by a U.S.-China trade truce and China's plan to triple chip supply by 2026, according to the Q3 2025 returns report. U.S. Small Caps also outperformed, returning 7.6% for the quarter, driven by rate-cut expectations and strong earnings, per that report. Commodities, after a mid-quarter dip, rebounded with a 4% gain, while REITs returned 3.6%.

Fixed income markets, however, remained cautious. The Bloomberg Global Aggregate – Corporate index gained 1.2% in August 2025 as investment-grade spreads tightened, the J.P. Morgan review observed. U.S. Treasuries rose 0.9% on rate-cut speculation, but global aggregate bonds returned only 1.5% in Q3. This suggests that while equities and commodities are in favor, bond investors remain wary of inflation and policy uncertainty.

Strategic Reallocation Strategies

Given these dynamics, investors should consider the following reallocations:

1. Increase Exposure to Technology and AI-Driven Sectors: The AI boom has created a structural tailwind, with global demand for semiconductors and cloud infrastructure accelerating. U.S. and Asian tech stocks, particularly those with exposure to AI hardware and software, offer high-growth potential, as discussed in Schroders' review. This view is also supported by backtest results.

2. Tilt Toward Emerging Markets: While geopolitical risks persist, the U.S.-China trade truce and dollar weakness have created opportunities in China, Taiwan, and Korea. However, investors should avoid markets like Brazil and India, which face political and tariff-related headwinds, as highlighted by Schroders.

3. Rebalance into Commodities and REITs: Gold and silver remain hedges against policy fragmentation, while REITs benefit from inflation-linked cash flows and a weaker dollar, per the Q3 2025 returns report.

4. Maintain a Cautious Approach to Bonds: With inflation still a concern and central banks in transition, high-quality corporate bonds and short-duration fixed income may offer better risk-adjusted returns than long-term Treasuries, according to the J.P. Morgan review.

Navigating Risks and Uncertainties

Despite the optimism, risks remain. European political instability, U.S.-China trade tensions, and the potential for further rate cuts in 2026 could reintroduce volatility, the J.P. Morgan review warns. Investors should also monitor the eurozone's moderate growth trajectory and Japan's reliance on global demand, as noted by Schroders. A diversified portfolio with a mix of equities, commodities, and high-quality credit can help balance these risks.

In conclusion, the return of risk-on sentiment presents a unique window for strategic reallocation. By leveraging AI-driven growth, emerging market rebounds, and commodity rallies, investors can position themselves to capitalize on a reaccelerating global economy-while remaining mindful of the fragility of current conditions.