MARKET COMMENTARY – JANUARY 2026

Global markets navigated conflicting forces in 2025, ultimately closing the year positively as increased risk appetite drove positive returns across all major asset classes for the first time since the pandemic. While the first half of the year was dominated by trade concerns and tariff fears, the second half saw investors focus on the positive implications of fiscal and monetary stimuli.

The divergence in regional performance was marked, with emerging markets, large cap UK and European equities outshining the US in a reversal of recent trends. Growth stocks outperformed in the US, but value stocks outperformed in most other developed markets. As a result, growth and value styles delivered similar returns at a global level.

Developed market central banks continued to normalise policy in 2025, supported by easing inflation concerns. The US Federal Reserve cut interest rates by 0.75% in the second half of the year as labour market nervousness grew and tariff-driven inflation fears failed to materialise. The Bank of England moved more aggressively, cutting rates by 1% amid a cooling jobs market. Conversely, the Bank of Japan continued its policy normalisation, pushing 10-year government bond yields up by 0.99%.

US equities delivered a solid year but lagged global peers, returning 17.9%. Artificial Intelligence (AI) remained a dominant theme, driving the communication services and information technology sectors to returns of 33.0% and 23.6% respectively, performance among the “Magnificent Seven” was varied. Consumer-facing sectors struggled as confidence waned, marking the first time in 20 years that the S&P 500 was the worst-performing major equity market.

European equities proved resilient, particularly for sterling-based investors. While local currency performance was mixed, a 7.0% decline in the trade-weighted US dollar provided a significant tailwind. Markets rebounded strongly from April’s tariff concerns as fiscal stimulus and improving growth data took hold, rate cuts from the European Central Bank provided further support. European equities returned 27.2% in sterling terms, significantly outperforming US markets on a currency-adjusted basis.

UK equities delivered positive but uneven returns in 2025, supported by attractive valuations, high dividend yields and the market’s strong exposure to internationally focused companies, the FTSE 100 returning 25.82%. Energy and financial stocks were among the stronger performers, benefiting from resilient earnings and higher interest rates earlier in the year, while overseas revenues helped offset weaker domestic conditions. More UK-focused sectors lagged as consumer confidence remained subdued and fiscal policy uncertainty weighed on sentiment and although easing inflation and lower interest rates provided some support later in the year, the market’s progress remained closely tied to improvements in the domestic economic outlook.

Emerging markets were the top-performing equity region. Chinese equities rallied 31.4%, after years of subdued performance, boosted by homegrown AI advances and trade diversification. South Korea was a standout performer, elevated by a combination of AI optimism and corporate governance reforms.

Japan also saw strong momentum, with the TOPIX rising 25.5% in local currency terms. Hopes for continued reflation were boosted by the election of Prime Minister Takaichi, with markets factoring in the likelihood of greater government spending.

Fixed-income markets participated in the broad rally, with global bonds returning 8.2% in US dollar terms. US Treasuries returned 6.3% in local currency terms, while UK Gilts returned 5.0%, supported by the Bank of England’s rate cuts and a budget that avoided major mishaps. However, fiscal concerns lingered; German government bonds delivered negative returns as the country eased fiscal consolidation and French bonds struggled amid domestic political instability.

Commodities saw divergent performance, with the asset class returning 15.8% overall. Precious metals were the clear standout. This strength offset falling oil prices, as central bank diversification and investment fund inflows provided support.

Looking ahead to 2026, markets are expected to face a more moderate growth environment. Central banks are likely to continue easing cautiously, while artificial intelligence and productivity-related investment remain key long-term themes. Political developments and valuation levels will be important sources of risk, reinforcing the need for diversified portfolios. With US dollar weakness expected to continue and activity in Europe and emerging markets forecast to accelerate, identifying opportunities for diversification outside the US may prove important.

Total returns in GBP to 31/12/2025

*November 2025

Source of data: FE Analytics, www.bankofengland.co.uk, www.ons.gov.uk

This commentary in no way constitutes a solicitation of investment advice and should not be relied upon in making investment decisions. Past performance is not a reliable indicator of future results. The value of your investments can fall as well as rise and are not guaranteed.