Q4 2025: resilience and breadth define the year-end

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• Equities left their comfort zone – gains broadened out from US tech giants as Europe, Asia and emerging markets joined the rally.
• Bonds found their footing – gilts outperformed as inflation cooled and rate‑cut bets increased.
• Dollar slipped, gold glittered – a weaker greenback lifted non-US assets, while precious metals outshone oil.

Wall Street holds firm, but leaders shift

US stocks posted another positive quarter, with the S&P 500 Index up 2.8% and the NASDAQ gaining 2.5%, both in US dollar, total return terms. This resilience came despite the longest US federal government shutdown on record, which disrupted official data releases through the quarter. Well-received corporate earnings reports underpinned performance, as did cooling inflation. The one corner of the global equity market where leadership narrowed rather than broadened was the US, as investors homed in on select sectors and mid-cap names instead of the earlier mega-cap dominance. Technology remained influential, yet financials and industrials also contributed as recession fears faded.

Europe finds its stride

European equities advanced strongly, supported by fiscal measures that boosted confidence. Exporters in the region became more competitive on euro weakness, while luxury goods and industrials led gains. Defensive sectors also played their part, cushioning lingering geopolitical risks. The FTSE Europe ex UK Index rose 6.4% in euro, total return terms, marking a solid finish to the year.

Easing hopes help UK power ahead

UK equities ranked among the best-performing developed markets in the final three months of 2025, with the FTSE All-Share returning 6.4% in sterling, total return terms. Falling inflation and rising hopes of Bank Rate cuts boosted investor conviction, driving gains in rate-sensitive sectors like real estate and utilities. Consumer discretionary stocks also benefited from improving confidence, while energy names lagged as oil prices softened into year-end.

Asia and EM also advance

Emerging markets and Asia ex‑Japan also produced strong gains, helped by a softer dollar and signs of stabilising global trade. The MSCI EM Index was up 4.7% in US dollar, total return terms. Meanwhile, the MSCI AC Asia ex‑Japan added 4.3% on the same basis. Asia’s share price gains were led by technology and consumer sectors. Japanese equities also performed strongly, with the TOPIX delivering a total return of 8.8% in yen terms, though China remained a drag as property‑market strains persisted.

Bonds regain composure as easing comes into view

Government bonds rallied into year‑end as inflation cooled, and central banks signalled a shift towards rate cuts. Gilts led the way, supported by softer UK price data and growing expectations of Bank Rate cuts, while US Treasuries and euro‑area sovereigns also advanced.

Across credit markets, investment‑grade spreads stayed tight and high yield remained resilient as default fears receded alongside improving growth visibility. The decline in developed‑market yields helped total returns, even where spread compression was limited, and duration exposure proved beneficial as policy expectations softened.

Commodities: gold shines as oil eases

Gold extended its strong run on dollar weakness and prospects of easier policy, while oil prices softened as supply concerns faded and demand expectations normalised. These contrasting moves left precious metals in favour and energy under pressure at year‑end.

Outlook: steady disinflation, selective easing and broader leadership

Global growth is expected to remain close to trend in 2026, while inflation continues to ease. This gives central banks scope for selective rate cuts, although decisions will stay data dependent. The UK has already started to ease, and the US Federal Reserve (the Fed) is expected to follow cautiously. These conditions support a constructive view on risk assets, but leadership is likely to rotate more frequently as valuations and earnings come under scrutiny.

The tech sector, and AI in particular, is likely to be the most important macro factor in 2026. AI remains a key macro driver in 2026. A sharp correction in tech valuations could ripple across global markets, dampening investment and consumption, and raising recession risks.

US: modest growth, with late-cycle caution

Growth is expected to remain modest as inflation cools and the Federal Reserve keeps easing on the table, with the pace of any cuts likely gradual and data dependent. Support could come from productivity‑linked investment and still‑solid household balance sheets if earnings momentum holds and labour‑market softening remains orderly. These themes mattered in 2025, when AI investment and wealth effects helped resilience, but they are potential rather than assumed tailwinds for 2026.

Europe (ex UK): disinflation buys time

Expectations of a meaningful economic acceleration in Germany on the back of large fiscal easing should provide a steady backdrop for European assets. A continued recovery is likely with moderating price pressures and margins holding up, while geopolitics and weak trend growth remain constraints. The currency backdrop is likely to shape competitiveness, with any euro softness supporting exporters.

United Kingdom: easing bias underpins a constructive tone

The Bank of England’s December Bank Rate cut to 3.75% signals a careful easing path as inflation trends lower and the labour market softens. Gilts and other high‑quality UK fixed‑income assets should remain supported if disinflation continues and growth stabilises. UK equities have valuation support, with domestic conditions improving, although global commodity dynamics will continue to influence energy exposure.

Asia and emerging markets: softer dollar and trade stabilisation as possible tailwinds

Asian and emerging markets could benefit from a softer US dollar and signs of stabilising global trade, provided local policy remains supportive and earnings visibility improves. Technology and consumer‑related areas that gained traction in late 2025 could continue to participate, while China requires selectivity given ongoing property‑market strains.

Meanwhile, Japan enters 2026 with improving domestic demand and continued corporate‑governance progress. A careful Bank of Japan normalisation process should be manageable if wage growth remains firm and inflation expectations stay anchored. Currency moves will remain an important swing factor for international investors translating returns to sterling or dollars.

The information in this article should not be regarded as financial advice and is based on our understanding in January 2026.

Money invested is at risk.