Market Overview

The closing months of 2025 offered a striking reminder of how financial markets often behave in ways that feel counterintuitive. Political tension, lingering inflation concerns, a prolonged US government shutdown and renewed trade frictions would normally be expected to unsettle investors. Instead, markets finished the year strongly. Global equities rose, credit markets stabilised and bond yields settled into a range.

It was, in many respects, a classic example of markets climbing the proverbial wall of worry.

While the headlines often caused concern, the underlying economic backdrop proved more robust than expected. Growth persisted across major economies, inflation continued to edge lower, and central banks maintained a policy of easing. As the year drew to a close, markets continued to navigate a world that felt simultaneously uncertain and surprisingly resilient.

The year in context: resilience after volatility

The journey through 2025 was far from smooth. Early in the year, markets endured sharp volatility as tariff tensions resurfaced and investors questioned the sustainability of the artificial intelligence (AI) investment boom. Yet by year end, the outcome reinforced a familiar lesson: staying invested through volatility remains one of the most reliable drivers of long term investment success.

Equity markets finished the year strongly. US markets recorded their third consecutive year of healthy returns, while diversified portfolios delivered gains comfortably above long term averages. Balanced investors who maintained discipline through the turbulence were ultimately rewarded.

However, the aggregate numbers conceal a more complex story. Beneath the surface, 2025 was characterised by increasing divergence across regions, sectors and asset classes. This theme of dispersion – the widening gap between winners and losers – may prove to be one of the defining investment narratives of the next few years.

The global economic backdrop

From a macroeconomic perspective, the most notable feature of 2025 was the persistence of economic growth in the face of geopolitical upheaval. The widely anticipated recession did not materialise. Instead, economic activity slowed modestly but remained positive.
The US continued to lead global growth, supported by consumer spending and a relatively resilient labour market.

US employment
(Monthly change in non-farm payrolls (000s))Source: Bureau of Labor Statistics

Europe showed signs of stabilisation after a challenging period, while Asia delivered encouraging momentum, particularly in Japan and parts of emerging markets.

Inflation, although still above central bank targets in many regions, continued its gradual downward trend. This allowed policymakers to begin cautiously lowering interest rates. The US Federal Reserve (the Fed) delivered multiple rate cuts during the year, and the Bank of England followed suit late in the fourth quarter.

UK Interest ratesSource: Bank of England

In financial markets, the general shift in monetary policy from tightening to easing over the last two years marked a significant psychological turning point, and the prospect of a gentler policy environment helped support riskier assets.

Equities: broadening beyond US technology

Equity markets were once again the standout performers of the year. Yet the nature of the rally evolved meaningfully as 2025 progressed.

For much of the previous two years, global equity performance had been heavily concentrated in a small group of US technology companies. The current wave of investment in AI as a technology is unprecedented in history.

Historic Technological Investment Waves
(Capital Expenditure as a % of GDP)Source: ARK Investment Management LLC 

Over the last few years, the transformative potential of artificial intelligence has driven extraordinary enthusiasm, and exceptional returns, for these businesses. Since the launch of ChatGPT in late 2022, AI related stocks have been responsible for the majority of gains in the S&P 500.

However, by the final quarter of 2025, the market began to show signs of broadening. Technology shares continued to dominate indices, but leadership started to rotate toward other sectors and regions. Healthcare, industrials and financials performed strongly, while the importance of the largest technology firms began to moderate. Considering the whole of 2025, out of the ‘Magnificent 7’ only Google and Nvidia outperformed the S&P500.

This shift is both healthy and encouraging. Concentration in one sector and a handful of stocks, can make markets vulnerable to sudden reversals, whereas sustained bull markets typically require participation from a wide range of sectors and regions.

The US: strength with subtle warning signs
The US economy remained remarkably robust during the quarter. Despite the longest government shutdown in history and renewed trade tensions, especially with China, equity markets continued to rise.

Interest rate cuts helped support investor sentiment, and inflation data showed further signs of easing. Yet beneath this strength, investors became increasingly attentive to the costs associated with the AI revolution. Several major technology companies announced plans to issue debt to finance the enormous capital expenditure programmes. Markets reacted negatively to these announcements, highlighting growing sensitivity to valuation and profitability concerns.

Alphabet (Google) plans to increase capital spending in the race for AI dominanceSource: Bloomberg

The US remains the world’s most dynamic and flexible economy, but in 2025 investors became more conscious of the risks associated with high valuations and concentration in technology.

Europe & the UK: quiet outperformance
One of the most notable developments of 2025 was the strong performance of European and UK equities. For the first time in several years, non US markets significantly outperformed the US over the full year.

The prospect of a weaker US dollar and lower market valuations outside the US caused international investors to shift some asset allocation to other markets.

In the UK, there was widespread relief that the Autumn Budget did not contain some anticipated measures, and this stabilised market sentiment. Government fiscal plans created additional headroom, reassuring investors and helping UK assets outperform during the quarter. Large, internationally focused companies, particularly in financials, mining and healthcare, led the advance.

Japan: a structural renaissance continues
Japan delivered one of the strongest performances of the quarter. Equity markets benefited from a combination of corporate governance reforms, improving shareholder returns and supportive government policy.

The Bank of Japan raised interest rates in December, signalling confidence in the domestic economy after decades of ultra low inflation. At the same time, fiscal policy remained supportive, particularly in sectors linked to semiconductors, artificial intelligence and the energy transition.

Japanese equities have now enjoyed a multi year renaissance. Structural reforms, improving profitability and attractive valuations continue to underpin investor interest in the region.

Emerging markets: mixed but encouraging
Emerging markets produced positive returns overall, although performance varied significantly by region.

India and Latin America were among the strongest performers, supported by domestic growth and favourable commodity trends. South Korea also benefited from robust demand for semiconductor technology.

China remained the principal area of weakness. The property sector continued to weigh on economic activity, although there were early signs of stabilisation toward year end. Investors remain cautiously optimistic that policy support could help the Chinese economy regain momentum in 2026.

Bonds: a more familiar landscape returns
Bond markets experienced a quieter but nonetheless important quarter. After several years of disruption, fixed income began to reestablish its traditional role within diversified portfolios.

UK government bonds were among the strongest performers, benefiting from falling inflation and supportive fiscal developments. Corporate bonds delivered modest positive returns, with sterling credit outperforming both US and European counterparts.

Importantly, yields remain significantly higher than the levels seen during the ultra low interest rate era. This means bonds once again offer meaningful income, restoring their value as a diversifier and source of portfolio stability.

The era of over reliance on equities may finally be drawing to a close.

Commodities & alternatives: precious metals shine
Commodities delivered mixed performance during the quarter. Precious metals were the standout winners. Gold reached a new all time high, while silver surged dramatically amid a combination of strong demand and constrained supply.

Gold and Silver price movements (percentage change in 2025)

Source: Econovis, XAU/USD, XAG/USD

These gains reflect persistent investor concerns about geopolitics, inflation and fiscal sustainability. Precious metals continue to play an important role as portfolio diversifiers in uncertain times.

Energy markets, by contrast, experienced a weaker period. Oil prices declined as global supply increased and demand softened.

Credit markets & the return of selectivity
Perhaps the most significant structural development of recent years has been the return of dispersion in credit markets.

During the decade following the global financial crisis, ultra low interest rates compressed yields and reduced differences between borrowers. In today’s higher interest rate environment, those differences are reemerging.

Stronger borrowers continue to access capital at attractive rates, while weaker companies face increasing pressure. Recovery rates in distressed credit have fallen, and investors are becoming more selective in their lending decisions.

This shift marks a return to a more traditional investment environment, one in which careful analysis and disciplined security selection once again matter deeply.

The theme of dispersion: the haves and the have nots
If a single theme encapsulates the investment landscape at the end of 2025, it is dispersion.

The global economy is growing, but not evenly, and pockets of stress are emerging.

In the US, Economists increasingly describe the US as a “K-shaped”, one where different parts of society are moving in sharply different directions.

Wage growth is stubborn at the lower end of the income spectrum, while higher-skilled workers continue to benefit from technology investment and the rapid adoption of artificial intelligence, which is reshaping entry level white collar employment.

Meanwhile, wealth creation has remained firmly tilted toward the top. Equity markets near record highs and rising house prices have boosted the balance sheets of higher-income households, while income from bonds and private credit has surged to levels not seen in decades. This has reinforced a powerful “wealth effect” that is increasingly driving US consumption.

The result is a striking divergence in spending behaviour between higher and lower income households.

Share of US consumer spending by income percentileSource: FT, Moody’s Analytics review of Federal Reserve data, FT graphic: Ray Douglas

Affluent households are still spending freely, particularly on travel, entertainment and premium experiences, and now account for an ever larger share of total consumption. At the other end of the spectrum, lower income consumers are cutting back, trading down and relying more heavily on credit to cope with the rising cost of living. Delinquencies on credit cards, auto loans and student debt have begun to rise, signalling growing financial strain.

The middle of the income distribution appears to be under the greatest pressure. Households earning roughly $50,000-$100,000 are increasingly exhibiting the same confidence levels as lower income consumers, suggesting the traditional US middle class is being squeezed.

For investors, the implication is clear: the US economy remains resilient in aggregate, but that resilience is increasingly dependent on a relatively small cohort of high income consumers. The “top half of the K” continues to power growth, yet the growing imbalance beneath the surface is an important source of stress.

This environment rewards diversification and active decision making. The era of broad, index driven gains may be giving way to a period in which outcomes vary more widely across regions and sectors.

Outlook
The outlook for the year ahead is cautiously constructive. Economic growth remains resilient, central banks have begun easing policy, and corporate earnings continue to expand. These factors provide a supportive backdrop for riskier assets. However, challenges remain. Valuations in parts of the US market appear elevated. Fiscal deficits are large across many developed economies. Geopolitical tensions continue to simmer.

The experience of 2025 reinforced several enduring investment principles. Markets are forward looking and often rise in the face of uncertainty. Diversification remains essential. Perhaps most importantly, patience continues to be rewarded.

As we move into 2026, we remain mindful of both opportunities and risks. The environment is evolving, but the foundations of successful investing remain unchanged: discipline, diversification and a long term perspective.

The wall of worry may yet grow taller. History suggests that markets will continue to climb it.