The route through 2025 was not smooth, but the end result has been more resilient than many would have predicted in January.
Coming into 2025, both economists and investors gave muted forecasts for the year ahead, and for good reason. The return of President Trump to the White House, renewed trade tensions and a more fractious geopolitical backdrop all pointed towards a challenging environment for investors. The one certainty was that US exceptionalism would continue, backed by deregulation, easing monetary policy and potential tax cuts. Instead, global equity markets are on track to deliver another year of double-digit returns and the most notable and welcome feature this year is the performance of non-US equities.
While political events did create periods of volatility, they did not define the year. The more powerful force was a steady flow of monetary and fiscal support that continued to underpin economic activity. Despite the disruption around “Liberation Day” and persistent uncertainty in several regions, diversified investors experienced a positive year. The route through 2025 was not smooth, but the end result has been more resilient than many would have predicted in January.
Inflation, interest rates and the path for policy
Inflation has eased gradually, but progress was slower than most forecasters anticipated. The combination of tariff-driven supply pressures and tighter US immigration rules meant price pressures remained stubborn in many advanced economies, and this kept central banks cautious. The Federal Reserve did not begin cutting rates until late in the year, maintaining a restrictive stance for longer than markets had once expected.
The persistence of inflation also influenced market behaviour. At times, equities and bonds rose and fell together, a pattern that complicates portfolio construction. Bonds did not always offset weakness in equities, limiting the diversification investors normally rely upon.
For investors, the message remains straightforward. Inflation continues to erode the real value of cash. While cash rates are higher than they were two years ago, holding excess balances carries an opportunity cost. A diversified investment approach remains the most effective way of preserving purchasing power over time.
Fiscal support and global growth dynamics
Government spending played an important role in shaping economic conditions this year. Germany’s sizeable stimulus programme, which spans defence, infrastructure and industrial investment, began to filter into economic data. Across Europe more broadly, commitments to increase defence expenditure over the coming decade have laid the groundwork for a sustained period of public investment.
In the United States, tariffs weighed on parts of the economy early in the year, and hiring softened. Uncertainty around trade policy led to a temporary loss of momentum. However, markets shifted their focus in the summer as attention turned to the ongoing investment in artificial intelligence (AI) and the potential for easier monetary policy ahead. The “One Big Beautiful Bill Act”, offering tax rebates from early 2026, further reinforced expectations of continued consumer and business support.
Capital expenditure was a major contributor to US growth in 2025, driven heavily by AI-related investment among large technology companies. While questions remain about the long-term return on this investment, it was a central feature of this year’s economic landscape.
The questions remain:
– Will the AI boom turn into a circular bubble, taking concentration risk from a tailwind to a headwind?
– Is the revival in international equities a brief blip or the start of a structural wave?
– Will the Fed be “flipped” into a Treasury tool to support US fiscal dominance, and if so, what will that do to the long end, the dollar, and inflation expectations?
Currency markets and the US dollar
The dollar came under pressure following the sell-off in April and has declined roughly 8% against a basket of global currencies. Softer expectations for US growth, narrowing interest-rate differentials and stronger economic performance elsewhere all contributed to the move.
Most of the outflows from US dollar assets now appear to have run their course. Looking ahead, interest-rate decisions are likely to be a more significant driver of currency behaviour than politics or sentiment alone.
Equity markets: A strong year with notable differences
Global equity markets delivered solid returns, though with considerable variation beneath the surface.
A good year for the FTSE
The UK market delivered a stronger year than many anticipated, with the FTSE 100 rising close to 18% and outperforming the S&P 500’s 8.5% return in sterling terms. After a prolonged period of subdued sentiment, this marked a welcome shift. London’s recent performance also looks less bad when you factor in the UK’s more generous dividend yields. Over the past 5 years, the FTSE 100 Index has delivered a total return of 80%, worse than the 97% of the S&P 500, but not catastrophically behind.
Currency was a tailwind but sector composition played the key role. The UK’s tilt towards established industries often labelled “old economy” proved beneficial in a year when enthusiasm for AI-driven growth stocks created concentration risks elsewhere. Companies in areas such as precious metals, defence and energy performed well, helped respectively by stronger gold prices and rising global defence spending.
The Autumn Budget, widely trailed as an opportunity to revitalise UK capital markets, delivered only limited change. Measures such as a temporary stamp duty holiday for new listings were helpful at the margin but fell short of the deeper reforms many had hoped for, particularly around pensions and regulation.
Emerging markets and smaller companies
Emerging markets and global small caps performed particularly well, achieving returns above 20%. Emerging markets, especially China, saw impressive performance given the backdrop of fear over global trade uncertainty. Stronger growth in several regions, an improvement in sentiment, as well as more attractive valuations, all played a part. Not forgetting the ‘TACO’ trade (Trump Always Chickens Out), we saw the US effective tax rate on China peak at 149%, slashed to 23%. This represented a meaningful shift after several years in which US large caps dominated global performance.
Artificial Intelligence (AI) in the United States
AI remained a major source of earnings support. Investment in infrastructure, chips and data centres continued at an exceptional pace. This buoyed parts of the US market despite the mixed economic environment. Dealmaking also began to recover, especially in technology and healthcare.
Leadership in the US has narrowed sharply: by mid-2025, the top five to seven US stocks accounted for 25% to 35% of the S&P 500, surpassing the 2000 peak. Similarly, the top five constituents of the MSCI World Index today account for c.20% of its value, almost twice the c.11% level reached at the heights of the dot.com bubble in early 2000. Speculative behaviour resembles 1999, yet today’s environment features higher rates, greater capital intensity and passive-flow amplification.
Europe’s mixed performance
European equities made a strong start to the year. Low valuations and investor under-exposure provided a supportive backdrop, and Germany’s fiscal shift helped sentiment. Mid-year, however, earnings disappointed in several sectors, and a stronger euro created a headwind for companies with significant overseas revenues. Recent currency stabilisation is a welcome development.
China: gradual recovery and shifts in sentiment
China offered signs of stabilisation as the year progressed. The rapid development of DeepSeek, a domestic AI company, highlighted the country’s ability to innovate and helped lift sentiment in the technology sector. Policymakers have shown increased support for these areas, which could prove important over the medium term.
In addition, the stabilisation of the housing market has been a key priority for authorities. Improvements in home prices helped support consumer confidence, suggesting that earlier stimulus measures are starting to gain traction.
Gold and other defensive assets
Gold experienced another strong year, supported by a weaker US dollar, geopolitical uncertainty and ongoing central-bank demand. Prices remained volatile at times but did provide diversification benefits during periods when both equities and bonds came under pressure.
Gold’s performance also reflected a wider divergence across commodity markets, with energy prices subdued and some industrial metals supported by supply constraints.
Key lessons from 2025 and the outlook for 2026
The global economy has shown resilience in the face of numerous challenges. Inflation proved more persistent than expected, but the broader economic picture remained constructive. Growth was supported by investment, especially in the US, and by substantial fiscal spending across multiple regions. Tariffs affected prices more than output, and despite a volatile year, the dollar’s weakness now appears to be settling.
For investors, the guidance is consistent with previous years. Remaining invested and maintaining diversification continues to be the most effective approach. Periods of volatility, though uncomfortable, can create opportunities to improve long-term positioning rather than reasons to step aside.
As we move into 2026, the major spending programmes in areas such as AI infrastructure, defence and public investment are likely to continue influencing markets. While risks remain, these structural trends also provide a foundation for future growth.
[i] Would you like a second opinion on your investment performance? Get in touch by calling 03300 564 446, or use our contact form.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
