Q4 2025 Market Commentary

Markets ended the year in a buoyant mood, with further gains in the fourth quarter meaning that most equity markets finished 2025 at or near all-time highs having made double digit returns. Bond markets also made modest gains, and the standout performer was precious metals, led by silver. One of the surprises was that the US equity market was among the year’s laggards, with returns for UK investors further reduced by US dollar weakness.

This outcome is a far cry from the consensus outlook and sentiment prevailing on “Liberation Day” when tariffs were unveiled. The relative outperformance of non-US markets makes sense to us in terms of valuations and growth prospects. These markets had better valuations, and many countries were galvanised into fiscal stimulus by the actions of the US, leading to improvements in both growth and profits. What has surprised us is the strength of absolute returns, which we believe has been underpinned by persistent and strong inflows into US equities from retail investors.

At the start of each calendar year, we dust off our forecasts, and the outlook for growth and profits seems rather benign. Even inflation, which remains persistently above central bank targets, is expected to be well behaved. The fiscal outlook also remains particularly positive, with government-led stimulus in China, Japan, Germany, and, of course, the US, where Trump’s tax cuts will come into force.

However, not everything is rosy. Valuations in many markets are demanding, and we have yet to determine whether the AI-driven capex boom will prove to be money well invested or not. There are signs of speculative behaviour in some areas, such as unprofitable tech. But this is no longer an indiscriminate bull market, we are seeing signs of increasing dispersion between stock returns which gives more opportunity for active managers to outperform.

Despite our earlier comments on inflation, this presents the greatest potential for a negative (i.e. too hot) surprise. Labour markets are showing clearer signs of cooling, which is a double-edged sword: less inflationary pressure through reduced wage growth, but also the possibility of slower economic activity.

Markets are increasingly inured to the geopolitical and policy volatility emanating from the US, even seemingly momentous actions such as subpoenaing the Chair of the US central bank or threatening to invade an ally. Frankly, it is impossible to determine whether this response is appropriate or simply complacent.

Against this backdrop, our portfolios remain cautiously positioned. We continue to favour diversification and a focus on quality and valuation whilst maintaining an underweight to equities. Our regional preferences remain tilted away from the US towards the UK, Asia, and emerging markets. However, it is fair to say that valuations in these markets are no longer attractive—just less demanding. Within bonds, we remain invested in investment-grade companies, and the portfolio has a shorter maturity profile than the broader market. With uncertainty likely to persist into 2026, we believe discipline and diversification remain essential.

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