Q4 2025

Onward, Upward and Outward 

Investors were caught between risk and opportunity in 2025, but their worst fears proved premature: the global economy showed resilience and global markets continued to advance. 

Stocks hit occasional speedbumps and political shocks caused volatility, but a potent mix of resilient global growth, strong corporate profits (led by AI), interest rate cuts and the prospect of fiscal expansion in 2026 lifted global equities a further 3% in Q4, closing out a gain of over 20% for 2025. 

A surprising number of market shocks arose in Washington: trade tensions and Independence Day tariffs that threatened growth and risked inflation; challenges to the Fed’s independence; hardline immigration policies with implications for labour costs and long-term growth; a sustained government shutdown that disrupted federal payrolls and data publication; and, as the year turned, a demonstration of US military force and willingness to intervene in Nigeria, Venezuela and, one must fear, beyond. 

So far, each shadow has passed. Markets experienced bouts of volatility, including a shocking pullback on tariff fears in the spring, but stabilised and moved ahead. This marked the first year since the pandemic when all major asset classes delivered positive returns: equities, global bonds (+5% in USD terms) and commodities (+15%, led by gold, up over 60%). 

The response to Trump’s tariffs, first announced in Q1, was swift and universal; among forecasters and financial markets, that is. Economists revised growth expectations sharply lower and inflation higher, as tariffs were expected to raise import costs and disrupt global supply chains. Stocks sold off and bond yields rose on inflation fears, while firms were expected to delay investment decisions amid uncertainty over future trade barriers. 

Things haven’t played out as badly as feared; growth proved resilient and inflation did not spiral, prompting economists to nudge 2025 growth forecasts back up since Q1, with consensus pointing to moderate growth in 2026. There’s little doubt that tariffs have pushed US inflation above ideal levels, but November’s data showed some moderation, helped by falling oil prices (from around $75 to $60 a barrel). In the UK, higher minimum wages and National Insurance lifted services inflation, but with little sign of excess demand, this has been less concerning for policymakers. 

Inflation’s impact on consumers has been cushioned by real wage growth, although perceptions of high living costs continue to weigh on confidence, alongside rising unemployment in both the US and UK. But growth has been more resilient than expected, driven by capital investment — notably defence and infrastructure spending in Europe, and AI-related investment and consumer spending in the US, with optimism building over fiscal stimulus in 2026. UK growth has lagged, but falling inflation and a less onerous November Budget, with some tax rises delayed until 2028, have eased concerns. 

With inflation less rampant than feared, central banks have had some flexibility. The ECB cut rates through the first half of the year before pausing; the Bank of England cut consistently to 3.75% in December, a 3-year low; and after a wary first half of the year, the Federal Reserve resumed cuts in September, cutting twice in Q4.

The global equity bull market entered its fourth year during the quarter - with US equities now having doubled since their low in October 2022. There have been pauses and corrections along the way - notably in the tariff scares in Spring, and a small pullback in November - but stocks rallied into the holiday period, taking heart from strong earnings, an economy in growth mode and resumed easing from the Federal Reserve. Optimism in equities was widespread: all-time highs were achieved in December not only in US equities but also British, Spanish, Italian, German, Swiss, Swedish and Canadian stocks, not to mention in a series of Emerging Markets, notably Brazil and India. 

While AI dominated the headlines, the equity story of 2025 was the broadening of performance beyond the US and beyond the technology superstars. Policy uncertainty weighed on US assets and the Dollar in the first half, and although that trend paused in Q3, it reasserted itself strongly in Q4. US equities performed well, up 18% for the year, but lagged the global index (+21.6%) with other mature markets (Japan +25%, UK +23% and Europe +20%) and emerging markets leading the way, notably Korea (almost doubling), Latin America (up over 50%) and China (over 30%). This was the first time in two decades that US equities were the weakest of the major markets. 

We see some broadening and divergence of performance at a global sector level too: Communications Services stocks (a sector dominated by Google and Meta) were the best global performers (+32% in 2025), but “Old Economy” sectors like Financials, Materials, Utilities and Industrials (25-30% in 2025) all delivered stronger returns than Information Technology stocks (+24%), boosted by decent earnings and much cheaper valuations. The Consumer Discretionary sector (+9%), dominated by Amazon and Tesla, was the second-worst performing of the global sectors, beating only staid Real Estate. 

The outperformance of non-US assets was even more extreme once currency is factored in. The US Dollar weakened broadly in 2025, in some cases significantly: 13% against the Euro, over 7% against the Pound. For a UK-based investor, this reduced returns from US equities to around 10%, less than half the gains achieved by UK and European stocks. 

There are many drivers of Dollar weakness at play; it’s hard to argue that investors have found new enthusiasm for the Pound or the Euro - economies facing their own issues after all. But unpredictable policy steps from the White House may have tarnished the “safe haven” appeal of the Dollar, and raised questions over fiscal sustainability; and renewed easing by the Fed (while the ECB goes on hold and the Bank of Japan embarks on rate hikes) reduced the relative attraction of US interest rates.  

While equity investors typically leave currency exposure unhedged, that tends not to be the case for global bonds, where currency moves could easily outweigh underlying returns. Investors look to bonds for stability, income and diversification. Up to a point, bonds served their purpose in 2025: global bonds returned 5%, a healthy contribution to a balanced portfolio from an asset held to reduce risk. Gilts returned 5%, and US Treasuries over 7% as 10-year yields fell, despite concerns over tariffs, inflation and fiscal sustainability. There’s a wafer-thin premium on offer for lending to riskier companies at the moment, but in a benign environment with low levels of default and downgrade, corporate bonds have performed well, with high quality investment grade credit delivering 7-8%. Emerging market bonds were stand-out performers, delivering well into double digit returns (in USD terms), thanks to widespread strength of emerging market currencies against the Dollar. 

Despite solid returns from bonds last year, investors are questioning bonds’ diversification benefits. During the shock tariff-related equity sell-off, bonds sold off too: high correlations meant little in the way of portfolio protection. Investors are left considering portfolio resilience in a wide range of risk scenarios, and considering other diversifiers: bonds might protect against recession, but are unsurprisingly less effective in an inflation shock, or periods of fiscal uncertainty. 

These concerns help explain investor interest in alternatives, but investors need to be discerning. Hedge funds and private markets may play a role, but liquidity, costs and access to quality managers all present obstacles. Cryptocurrencies are favoured by some, but ultimately disappointed in 2025, with Bitcoin losing 8% in a year when most assets rose. But precious metals shone brightly, with gold, gold miners and silver all generating substantial returns, benefiting from political uncertainty and shaky confidence in government finances. 

Some commentators warn of a K-shaped economy: a rising trend for wealthier groups and sectors exposed to technology and AI-related spending, versus a falling trend for lower income groups, struggling with inflation and slower wage growth, and missing out on rising asset prices and the benefits of new technology. This is nothing new: economists have warned about rising inequality and differing outcomes for different groups since at least the Global Financial Crisis in 2008, but this dynamic helps explain persistent political volatility and electorates’ growing appetite for change. 

It is beyond doubt that investment in artificial intelligence and related infrastructure has been a significant driver of economic growth, corporate profits and market behaviour. Economists expect spending on AI in the US to reach $450bn in 2026, more than 1.5% of US GDP, a huge impulse in a mature economy growing at around 2% a year. One of the stories of 2025 has been significant profit growth for listed companies, but this is heavily influenced by AI: profit margins expanded for AI beneficiaries, while stagnating for the vast majority. And this has led to a concerning concentration at the top of the US equity market: the largest 7 tech companies now account for over 40% of the stock market by value. This concentration means that passive, “index-tracking” investments have performed well, but are not nearly as diversified as they seem. 

Investors are questioning whether an AI bubble is developing. Should we be concerned by rich valuations, by the concentration of the index and the reliance of the economy on this theme? Are financing relationships between tech giants and AI innovators becoming circular? It’s clear that high valuations don’t leave much room for disappointment; it’s likely - as in every innovation wave - that some investments will prove misguided; but it’s also apparent that there are major differences to prior bubbles. Any comparison to the Dotcom bubble falls apart: valuations today are high, but well below 1999 extremes, and today’s leading AI companies generate not only revenue but often huge profits. Still, a prudent investor would be watchful, avoiding excessive reliance on the theme and mindful that if there is a reappraisal of market faith in AI, high valuations leave markets vulnerable. With just a handful of gigantic, expensive tech stocks dominating the US equity index, prudence means diversifying beyond growth, beyond the US and beyond equities. 

What lessons can investors draw on from 2025? Media narratives and market outcomes can diverge: stocks and bonds performed well, despite the tariff panic, while many tech-related themes lagged, despite the intense focus on AI. The underperformance of the US and the Dollar reminds us that long-standing performance trends can change unexpectedly and that diversification remains vital; perhaps now more than usual, with a global market index concentrated in US assets and US growth stocks, and a White House embarking on unprecedented and unpredictable policy steps. Periods of market volatility remind us that it will not always be plain sailing - the wind can change suddenly and unpredictably, but those turbulent moments can provide opportunity: markets recover from drawdowns, sometimes (as this year) very quickly, and waiting for calm can mean missing out. A resilient portfolio will be truly diversified, across asset classes, styles, geographies and sectors; that will mean holding assets that are cheaper, out-of-favour and underperforming at any given moment - but precisely those assets with scope to offer real protection when it is most needed. 

N.b. All content is based on data at the time of writing on 02/01/26.