September 23, 2025
In 2025, financial markets have exhibited a striking divergence. Commodity-linked equities, particularly in the Energy and Materials sectors (chart below, top panel), have underperformed the S&P 500 and other major benchmarks despite inflation running above central bank targets. At the same time, global equity markets have rallied, even in the face of weakening economic data. Understanding this apparent contradiction requires examining the composition of inflation, the demand dynamics for commodities, and the forward-looking nature of equity investors.
The weakness in commodity-linked equities is best explained by the drivers of current inflation. While headline U.S. CPI in August 2025 registered a 2.9 percent year-over-year increase and core inflation stood at 3.1 percent, the strength came primarily from sticky categories such as shelter and services. Energy prices, by contrast, were nearly flat at just 0.2 percent higher year-over-year, with the sub-category of energy commodities actually falling by 6.2 percent over the same period, according to Bureau of Labor Statistics. This reveals that inflationary pressures are not being driven by commodities but by domestic service costs, housing, and wages. As a result, Energy and Materials equities have failed to benefit from the inflation narrative. This is a sharp contrast to 2022 when commodities prices were rising with inflation as supply chain bottlenecks from COVID pressured input costs (chart below).
Global commodity markets have also been weighed down by weak demand. World Bank data show broad softness in metals and energy prices, reflecting sluggish economic activity in key demand centers such as China and Europe. For the Materials sector, which includes metals, steel, and chemicals, declining construction and manufacturing output has eroded margins and earnings expectations. For the Energy sector, volatility in oil and natural gas prices, combined with high production costs, has undermined profitability even when demand has been moderately resilient. Additional headwinds have come from regulatory and ESG requirements, such as decarbonization mandates and emissions compliance, which raise structural costs, as well as from tariff and trade frictions that reduce cross-border commodity flows. Together, these dynamics explain why commodity-linked equities are lagging even as overall inflation appears elevated.
In contrast, global equity markets are showing strength, largely because of policy expectations, valuations, and sectoral narratives. In China, weak activity data in areas like property investment, retail sales, and industrial output have paradoxically fueled equity gains. Investors interpret poor data as increasing the likelihood of stronger monetary easing and fiscal support. Reports from the South China Morning Post in September 2025 highlighted how “bad news” has been received as “good news,” since it strengthens the case for policy stimulus. This dynamic mirrors broader global trends, where investors expect the Federal Reserve and other central banks to continue shifting toward an easing bias. Markets are forward-looking, and equities are rallying on the belief that easier policy will eventually support growth.
Valuation and yield dynamics are also contributing. Chinese equities (chart below) remain relatively cheap after years of underperformance, and Reuters reported in August 2025 that the Shanghai Composite reached decade highs as investors were drawn to attractive forward multiples. Globally, low real yields are providing a supportive backdrop, as inflation has moderated but nominal interest rates remain high enough to suggest further rate cuts are ahead. This makes equities comparatively more attractive than bonds or deposits.
Structural sectoral themes are amplifying the rally. In China, technology, semiconductors, renewable energy, and export-oriented sectors are benefiting from both government support and resilient global demand. In the United States and other developed markets, artificial intelligence and semiconductor leaders have powered gains, helping to offset cyclical weakness elsewhere. Retail investor flows are also playing a major role. In China, savers have been shifting capital into equities as property markets remain weak and deposit yields unattractive, while in the United States, strong household balance sheets and enthusiasm for the AI “super-cycle” are fueling broad participation in equity markets.
Conclusion
In summary, the divergence between commodity-linked equities and global stock markets underscores the importance of both inflation composition and investor psychology. Inflation in 2025 is being driven primarily by sticky services and housing costs, not by commodities, leaving Energy and Materials equities without the tailwind they typically enjoy in an inflationary environment. Global equities, meanwhile, are rallying on expectations of policy support, attractive valuations, structural growth themes in technology and AI, and strong retail and institutional inflows. This combination allows equity markets to look past weakening economic data, while commodity-linked equities remain tethered to near-term demand realities
Data sourced from Factset Research Systems Inc.
