Global markets rounded off a good year with gains in the final quarter as investors cheered interest rate cuts, despite inflation being above target, economic activity remaining robust and corporate earnings growth continuing to beat expectations. Although the appetite for artificial intelligence, cloud services and digital offerings is driving multi-trillion Dollar investment spending by US companies, investors have benefited from diversifying as other developed equity markets generally outperformed. UK equities were driven by rising commodity companies, the international earnings of FTSE100 companies and banks. In contrast mid-sized UK companies lagged the rise due to UK budget disappointment as they are more exposed to the fortunes of UK economic growth.
In the US, investors shrugged off the lack of economic data, due to a prolonged Government shutdown, as over three-quarters of large companies beat forecasts when reporting in the final quarter. High valuations in the US and a market concentrated in a few names tempers optimism. So, it is not surprising that investors found value in Europe, Asia and parts of Emerging Markets where valuations are more modest.
It was a more subdued quarter for Fixed income markets, although they enjoyed a late lift as inflation signs eased and central banks shifted tone. Short-term yields fell (and prices rose) on expectations of modest interest rate cuts from Central Banks, while longer term yields drifted lower amid mixed economic growth signals. Corporate bonds remain supported by strong company fundamentals and activity, so the extra yield over government debt remains narrow. Heavy bond issuance to finance AI capex and mergers also kept a lid on corporate credit price appreciation.
Inflation remains stubborn, though wider measures eased late in the year, core measures still run above target. Central banks face a fine line: cut too much and risk reigniting cost pressures; cut too little and risk growth weakening. In the face of this, policymakers trimmed rates in small steps: the Fed cut for the first time since 2024; Europe held off after prior moves to lower rates; the Bank of England nudged rates lower. Guidance leaves room for further easing if labour markets weaken. In contrast, Japan raised its policy interest rate to its highest level in 30 years as part of a gradual exit from decades of ultra-loose monetary policy. The decision was driven by persistent inflation above the 2% target and expectations of sustained wage growth.
Economic Growth and labour data tell an uneven story. Unemployment in the US and UK is creeping higher from multi-decade lows as hiring cools and wage growth decelerates, giving central bankers room to ease policy. Global economic growth is sufficient but activity in the US is boosted by fiscal stimulus from the Big Beautiful Bill and vast investment spending on AI infrastructure, this might limit the extent of interest rate cuts available versus other regions. In the final quarter of the year this helped to stabilise the US Dollar. Although tariffs have not had the negative effect that some had feared, they do act as a brake on economic activity, and their impact is felt more by some sectors that are struggling to adjust to the change in trade landscape.
As we enter 2026, analysts forecast much of the same, expecting solid returns but at a more modest rate compared to previous years. Anticipated cuts in interest rates by the Federal Reserve are expected to support risk assets, although macroeconomic headwinds such as slowing consumption growth and inflationary pressures could impact investor sentiment. The outlook for 2026 argues for a diversified approach to spread risks, whilst exploiting potential opportunities that arise.
Market Commentary January 2026
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Global markets rounded off a good year with gains in the final quarter as investors cheered interest rate cuts, despite inflation being above target, economic activity remaining robust and corporate earnings growth continuing to beat expectations. Although the appetite for artificial intelligence, cloud services and digital offerings is driving multi-trillion Dollar investment spending by US companies, investors have benefited from diversifying as other developed equity markets generally outperformed. UK equities were driven by rising commodity companies, the international earnings of FTSE100 companies and banks. In contrast mid-sized UK companies lagged the rise due to UK budget disappointment as they are more exposed to the fortunes of UK economic growth.
In the US, investors shrugged off the lack of economic data, due to a prolonged Government shutdown, as over three-quarters of large companies beat forecasts when reporting in the final quarter. High valuations in the US and a market concentrated in a few names tempers optimism. So, it is not surprising that investors found value in Europe, Asia and parts of Emerging Markets where valuations are more modest.
It was a more subdued quarter for Fixed income markets, although they enjoyed a late lift as inflation signs eased and central banks shifted tone. Short-term yields fell (and prices rose) on expectations of modest interest rate cuts from Central Banks, while longer term yields drifted lower amid mixed economic growth signals. Corporate bonds remain supported by strong company fundamentals and activity, so the extra yield over government debt remains narrow. Heavy bond issuance to finance AI capex and mergers also kept a lid on corporate credit price appreciation.
Inflation remains stubborn, though wider measures eased late in the year, core measures still run above target. Central banks face a fine line: cut too much and risk reigniting cost pressures; cut too little and risk growth weakening. In the face of this, policymakers trimmed rates in small steps: the Fed cut for the first time since 2024; Europe held off after prior moves to lower rates; the Bank of England nudged rates lower. Guidance leaves room for further easing if labour markets weaken. In contrast, Japan raised its policy interest rate to its highest level in 30 years as part of a gradual exit from decades of ultra-loose monetary policy. The decision was driven by persistent inflation above the 2% target and expectations of sustained wage growth.
Economic Growth and labour data tell an uneven story. Unemployment in the US and UK is creeping higher from multi-decade lows as hiring cools and wage growth decelerates, giving central bankers room to ease policy. Global economic growth is sufficient but activity in the US is boosted by fiscal stimulus from the Big Beautiful Bill and vast investment spending on AI infrastructure, this might limit the extent of interest rate cuts available versus other regions. In the final quarter of the year this helped to stabilise the US Dollar. Although tariffs have not had the negative effect that some had feared, they do act as a brake on economic activity, and their impact is felt more by some sectors that are struggling to adjust to the change in trade landscape.
As we enter 2026, analysts forecast much of the same, expecting solid returns but at a more modest rate compared to previous years. Anticipated cuts in interest rates by the Federal Reserve are expected to support risk assets, although macroeconomic headwinds such as slowing consumption growth and inflationary pressures could impact investor sentiment. The outlook for 2026 argues for a diversified approach to spread risks, whilst exploiting potential opportunities that arise.
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