• Gold hit a record high this week, surpassing $3,540 an ounce on Tuesday¹
• US small cap stocks outperformed large caps by 1.7% annually from 1926 to 2022²
• This week the 10-year UK Gilt yield rose to 4.85%³

Public spending affordability, accelerated news cycles, and unpredictable policy shifts are disrupting signals that investors have long relied on. This week, we will examine several current market contradictions that defy conventional investment patterns and seek to unpack why these traditional market indicators may no longer tell the whole story.

Gold and Equities

Gold has established itself as the hedge of choice against economic uncertainty, inflation, and currency devaluation. The price usually strengthens when at least one of these factors is high, reflecting a risk off environment. At the same time, equity markets often move in the opposite direction as corporate earnings become less predictable and economic growth projections lower – however the gold price and US equity valuations are currently both towards record highs. This double rainbow is due to a unique mix of optimism and risk, with positive contributors like innovations in AI and falling interest rates battling with persistent inflation and geopolitical uncertainty at play.

Gold and US large cap index % return over 5 years

Source: Refinitiv, 2025

Relative valuations between small and large market cap

Small caps have historically outperformed large caps by 1.7% annually (data from 1926 to 2022)², as demonstrated on the graph below with the historical average forward price to earnings ratios being higher for smaller companies. This outperformance is fundamentally due to the potential for future share price growth.  Apple for example would need to attract c.$353bn in flows for the share price to move just 10%, whereas smaller companies share prices are more sensitive to flows, with the opportunity to exponentially increase revenue and earnings over time.

This premium is currently challenged though, with small cap valuations trading below large caps in developed markets. Reasons for this can include their higher sensitivity to interest rates as they are typically more highly leveraged, a general increase in profitless stocks and the effect of passive investing popularity making markets more concentrated around larger stocks. Also, the recent bullish narrative around AI seems concentrated in the large cap US tech stocks which has resulted in further flows into a small number of already very large companies.

Regional large and small cap forward price to earnings ratios

Source: JP Morgan, 2025

Gilt yields and interest rates

Government debt yields typically have an inverse relationship with interest rates and their expectations. In the UK, when markets anticipate that the Bank of England will lower the interest rate, often in response to slowing economic growth or easing inflation, demand for existing Gilts increases as they become more attractive relative to new issues. This pushes Gilt prices higher and, by extension, causes yields to fall.

However, this week the 10-year Gilt yield surged to 4.85%, its highest level since January when interest rates were 0.75% lower, and notably even higher than the infamous Liz Trus budget reaction. While interest rates have been, and in our opinion, are still likely on a downwards trajectory, this decoupling of interest rate expectations and Gilt yields may be driven by growing concern around the UK’s fiscal discipline and subsequent repositioning ahead of the UK budget, announced this week to be held on 26^th November. This pressure was compounded by global bond market turmoil, as yields rallied across major economies in response to high U.S. Treasury rates and inflation fears.

UK interest rates and ten-year Gilt yield

Source: Refinitiv, 2025

Bowmore portfolios

Markets are conflicted because multiple forces are pulling in different directions: rate-cut hopes, inflation pressures, government spending, geopolitical risks, and shifts in market structure to name a few. It’s a landscape where playbooks need to be adapted, and while markets struggle to find clarity, we advocate for the importance of a diversified portfolio. This approach ensures portfolios can remain strongly positioned to capture opportunities and withstand setbacks, as the landscape shifts.

As we have mentioned in previous notes, we have implemented a series of strategic adjustments across our portfolios this year to enhance diversification across geographies, investment themes, and styles, thereby strengthening overall market resilience. In May, we introduced a global income theme by incorporating the Artemis Global Income Fund into our core portfolios. This fund targets companies characterised by strong cash flows, sustainable earnings, and potential for dividend growth. Since its inclusion less than four months ago, the fund has delivered a return of 16.5%.

 

Source: LSEG DataStream, data as at 04/09/2025

The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a guide to future performance.

Sources:

¹ Alpha Terminal, 2025

² Morningstar, 2025

³ Trading Economics, 2025