Market headlines
Global equities end the year on a strong note
Despite some late-December volatility, global equities posted nearly +20%
for the third consecutive year. Returns broadened across regions and sectors. European markets gained over 20%, UK large-caps and Japan advanced more than 25% in 2025.
US Federal Reserve (Fed) cuts rates but signals caution ahead
The Fed lowered rates by 25 basis points (bps) to 3.50-3.75% in December, but the split vote and projections for only one more cut in 2026 underscored a hawkish tone.
Inflation cooled across major economies
US inflation for November eased to 2.7% year-on-year. In the UK, inflation slowed to 3.5%, its lowest level since March, driven by softer food, transport and housing costs.
Gold shines as safe-haven demand builds
Macro uncertainty drove gold prices up 65% in 2025, marking one of its strongest annual performances and reinforcing its role as a hedge in a shifting rate environment.
The big topics
Broadening market leadership amid year-end rally
Global equities ended December on a positive note, with gains extending beyond the artificial intelligence (Al)-driven mega-cap companies that dominated much of 2025. MSCI All Country World rose +0.8%, while MSCI All Country World ex-US gained +2.2%, supported by strength in both Europe and Asia. In the US, the technology-heavy Nasdaq Index underperformed the broader market, signalling a rotation away from mega-cap companies as investors took profits.
This broadening of leadership slightly eased concerns over market concentration, which had been a recurring theme throughout the year. However, valuations in certain areas remain elevated, suggesting that while breadth improved, selectivity will remain critical heading into 2026.
Al momentum meets valuation scepticism
Al-related themes continued to dominate market headlines in December, but signs of fatigue have emerged. While enthusiasm for generative Al remained strong, profit-taking in mega-cap tech and commentary from prominent investors highlighted concerns over ambitious profitability assumptions. This dynamic fuelled a modest rotation into undervalued sectors, as investors sought balance between growth potential and valuation discipline.
The debate over whether Al-driven productivity gains can justify current valuation multiples is likely to persist into 2026, making sector allocation decisions increasingly nuanced amid shifting sentiment and evolving fundamentals.
Central bank policy divergence shapes outlook
The Fed delivered a third consecutive 25 bps cut, bringing rates to the range of 3.50-3.75%, but its relatively ‘hawkish’ tone and divided vote with three dissenters tempered expectations for aggressive easing in 2026. In contrast, the Bank of England followed with a modest cut, while the European Central Bank opted to hold rates steady. The Bank of Japan surprised markets with a hike, citing inflation persistence.
These contrasting actions underscore the uneven progress on inflation globally and suggest that policy paths will remain asynchronous, creating opportunities and risks across currencies and fixed income markets.
Mixed macro signals and geopolitical undercurrents
Economic data painted a complex backdrop for markets. US Q3 Gross Domestic Product (GDP) surprised to the upside at +4.3% annualised (versus 3.3% expected), yet softer labour market prints and cooling inflation suggested a gradual slowdown. European Purchasing Managers’ Indexes (PMls) hinted at stabilisation, while Japan’s inflation uptick supported its policy shift.
Geopolitical risks lingered as trade tensions and tariff threats persisted. Gold extended its rally, up nearly 65% in 2025, as investors hedged against uncertainty, while oil prices drifted lower on demand concerns. These crosscurrents reinforced the need for diversified positioning as markets navigate latecycle dynamics and geopolitical complexity.
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