Equity markets
- Major US stock indices had a solid 2025 — the S&P 500 up ≈16% and Nasdaq up >20%, driven by strong tech and AI-linked gains.
Market drivers in the US:
- AI and Big Tech: These sectors remain a central driver of sentiment and valuations, though concerns about sustainability of lofty multiples have emerged.
- Monetary policy: Markets expect the Federal Reserve to hold interest rates in the near term, with some speculation about eventual cuts later in the year depending on inflation and labour market data.
- Bonds and yields: US Treasuries performed well in 2025 amid rate cuts and safe haven demand.
Risks & catalysts:
- Fears of an AI Bubble.
- Consumer and manufacturing data remains on weak side. Inflation still stubborn around 3% annually. Geopolitical events could well add volatility potential with Trump in charge.
United Kingdom – Stocks, Rates
Equities and indices:
- The FTSE 100 crossed the 10,000 mark, a milestone reflecting strong 2025 performance and continued investor appetite with UL on much lower valuations compared to US.
Interest rates and credit:
- Bank of England (BoE) has eased policy over recent months cutting to base rate to 4%
- Economic backdrop:
- UK manufacturing has shown resilience and modest expansion but much weaker than US.
Europe – Stocks
Equity performance:
- European equity markets are performing well, with several benchmarks — including the STOXX 600 — near or at record levels as 2026 and outperforming the US in 2025 as investors diversify exposure away from US.
Broad Themes Across Markets
1. Central Bank Policy & Rates
- The Fed and BoE are in pause mode, with markets pricing potential future cuts if inflation continues moderating.
- Diverging policy expectations between the US, UK, and ECB (where the next interest rate move could be UP) could drive currency and rate differentials. The US Dollar weakened by 10% in 2025 on a soft interest rate outlook and a general Trump inspired flight from US safe haven status
Summary Outlook
- US markets: fundamentally supported by tech and AI, but near-term trading looks mixed with cautious optimism.
- UK markets: strong equity performance with easing interest rates and cooling real estate dynamics.
- European markets: solid equity momentum coupled with regulatory shifts influencing global sector plays.
Overall, financial markets are entering 2026 at elevated valuations yet underpinned by economic resilience and policy support, while structural risks and geopolitical developments will continue to shape investor decisions.
