FMI Global Equity Q3 2025: Growth Signals and Cost Efficiency in AI-Driven Market Expansion

Global equity markets staged a broad rally in Q3 2025, with the S&P 500 climbing 8.1% and small-caps surging nearly 12% amid strong AI-driven tech growth and cyclical sector rotations according to the quarterly review. Emerging markets led the charge at 10.6%, powered by Chinese and Taiwanese AI and semiconductor gains, while non-U.S. developed markets lagged significantly at 4.8% due to limited tech exposure and policy uncertainty. Equity hedge funds returned 7.2%, with healthcare and growth strategies benefiting from the rally, though quantitative managers trailed as economic and geopolitical volatility disrupted models.

The S&P 500's momentum was underpinned by a robust 8.4% blended revenue growth rate in Q3 2025-the highest since the same period in 2022-driven squarely by Health Care, Financials, and Consumer Discretionary sectors according to FactSet analysis. Health Care alone contributed 20% of the growth surge, fueled by companies like Cardinal Health and Amazon, while JPMorgan Chase amplified Financials strength. Despite this near-term strength, analysts caution that revenue growth is projected to decelerate over the next five quarters, averaging 7.0% annually. The divergence between current momentum and near-term expectations underscores the need for investors to distinguish cyclical rallies from sustainable trends.

Caveats remain significant: non-U.S. developed markets' underperformance highlights structural weaknesses outside AI-intensive regions, and quantitative strategy struggles reveal fragility in volatile environments. While the S&P's revenue expansion is impressive, the forward-looking deceleration signal tempers enthusiasm, reminding investors that today's surge may not persist without evolving catalysts.

Growth Engines: AI Monetization and Penetration Metrics

The tech sector continues to power market gains, with the top five U.S. firms delivering a collective 11.2% earnings beat and pushing revenue far above expectations at $178.4 billion in Q3 2025, an 18.6% surge from last year according to YCharts analysis. This momentum is heavily anchored in artificial intelligence commercialization, particularly within enterprise infrastructure and cloud services. NVIDIA exemplified this tailwind, reporting astronomical 93.6% revenue growth. Microsoft's Azure AI services and Alphabet's Google Cloud both contributed significantly, rising 30% and 28.4% respectively. Consequently, technology now represents a record 29.4% of the S&P 500 index, underscoring its dominant role in the market landscape.

Cloud infrastructure, particularly AI-driven offerings, is demonstrating rapidly increasing adoption rates across major platforms. The substantial YoY growth figures for Azure AI and Google Cloud directly reflect this rising penetration as enterprises accelerate AI deployments. The sector's structural shift towards AI-heavy investments is clearly visible in the S&P 500's composition. However, this aggressive expansion comes with tangible near-term friction. Elevated capital expenditures remain a significant concern, potentially delaying the realization of projected returns as companies scale their AI infrastructure. While the AI monetization pipeline shows strong penetration and revenue velocity, investors should monitor how swiftly these substantial capex outlays translate into sustainable profit growth.

Growth Slowdown and Defensive Shift

The market's blistering Q3 growth phase may be cooling rapidly. S&P 500 companies posted an 8.4% blended revenue surge in Q3 2025-the strongest since early 2022-fueled by health care, financials, and discretionary spending according to FactSet analysis. But analysts already see the brakes: they forecast annual revenue growth decelerating to just 7.0% over the next five quarters. This anticipated slowdown reflects growing fragility in cyclical sectors, as stretched valuations meet stubborn inflation and policy uncertainty.

Amid this transition, investors are shifting toward safer ground. Asset managers like Mondrian are overweighting utilities and consumer staples-companies with predictable earnings from electrification demand and stable household spending. Though cyclical rotation helped drive a broader equity rally, including an 8.1% surge in the S&P 500 during Q3 according to the quarterly review, the move to defensive assets reflects recognition that growth drivers may weaken. Even with regulatory tailwinds in utilities and durable cash flows in staples, geopolitical tensions and mounting debt pose headwinds.

Emerging markets, meanwhile, show both promise and peril. Their 10.6% outperformance in Q3 rode waves from China's AI investments and Taiwan's chip boom-yet analysts warn of abrupt policy shifts and capital flight risks. Unlike small-cap stocks that surged ~12%, emerging markets remain vulnerable to global interest rate moves and domestic instability. While their AI-driven gains could persist, investors must watch for sudden reversals as monetary policy tightens globally.

The dual narrative is clear: cyclical strength is fading, and defensive positions are gaining favor. But the transition isn't risk-free-whether from policy volatility or growth sputtering-demands sharper stock selection than broad sector bets.

Catalysts and Cost Efficiency Implications

Private equity activity is surging, with global investments hitting $1.5 trillion year-to-date and $537.1 billion in just the third quarter of 2025. Large U.S. public-to-private deals fueled this, including Electronic Arts at $54.6 billion and Air Lease at $28.2 billion. Infrastructure investment reached a three-year high of $126.3 billion globally, underscoring strong capital flow into physical assets. This momentum contrasts with the digital advertising sector's post-QE normalization, where growth has stabilized but lacks explosive new catalysts.

The Americas dominated Q3 PE activity, accounting for 60% of the value at $322.9 billion, led by the U.S. alone contributing $300.2 billion. However, rising funding costs now threaten to erode profit margins for companies benefiting from this investment boom. While Q3 saw the strongest blended revenue growth for the S&P 500 since mid-2022-driven by health care, financials, and consumer discretionary sectors-analysts expect this momentum to fade. They project revenue growth will slip to an average of 7.0% annually over the next five quarters, signaling potential pressure on corporate profitability.

This disconnect between current strength and near-term expectations highlights a critical risk: companies scaling up aggressively based on today's PE influx may struggle if financing costs stay elevated. The AI infrastructure demand powering much of the current investment surge could face margin compression if interest rates remain high, forcing a recalibration of growth expectations.