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2025 – a year of news

Trump’s second term has eclipsed the news cycle even more than I thought it would. However, political events don’t always influence asset prices as much as you might think, particularly once the dust settles.

2025 saw a sequence of dramatic events, notably Liberation Day on 2nd April, when Trump announced a series of searing tariffs for almost all countries in the world. Markets reacted with horror, and even one of the ‘safe haven’ trades, the US treasury market, started to slump. And then the phrase TACO was born – Trump Always Chickens Out – coined by FT journalist Robert Armstrong. We learnt that Trump likes drama more than consequences. His administration reversed many of the most punitive tariffs and markets staged a rapid recovery, particularly in companies related to the all-important semiconductor sector, and ended the year in good fettle.

In this chart, you can see that most of the semi-conductor tariffs were reversed. Energy, where low cost power is the lifeblood of the US economy, including the important buildout and powering of data centres, was also not tariffed, and neither (yet) is pharma.

Source: USITC, White House, JPMAM, 2025

Can the stock markets continue their ascent in 2026?

Two thirds of the global equity market is made up of the US market, so thinking about the US is vital. Across the S&P500, earnings growth of 18% was delivered in 2025. That’s a strong outcome. Heavy investment in Artificial Intelligence models and hardware is slated to continue into 2026 and beyond. By some estimates, AI investment has contributed around half of the US’s current GDP growth rate of near 4%.

And what is the story outside US equities? Europe and the UK indices had a good 2025 – both rising around 20%. Germany announced that it would spend EUR1trillion on infrastructure and defence, which will add about 0.5% to GDP growth in 2026. The UK’s weighting to mining and defence companies served the FTSE well, as did a strong recovery in banking shares. As inflation began to steady, interest rate cuts should boost domestically oriented companies.

Emerging markets are something of a misnomer as they include so many sophisticated and developed economies such as South Korea and Taiwan. A broad mix of regimes, industries and demographics are represented. We see opportunity in investing in the Indian and Brazilian consumer, and continue to see significant strength in China, Taiwanese and South Korean tech.

Global economic growth of over 3% in 2025 was positive and certainly a better outcome than many predicted, particularly in the depths of the tariff shock in April.

Bond markets

Government bond markets were mixed in 2025. While yields were attractive and most central banks moved toward rate cuts, the outlook for 2026 remains uncertain. Inflation risks persist, proving stickier than expected, while elevated government spending and sizeable fiscal deficits continue across many regions. Markets are pricing in further rate cuts in the United States and there may be disappointment if these don’t happen.

The UK faces a particularly challenging political backdrop, with Labour MPs pushing back against proposed welfare spending cuts, which could lead investors to demand higher yields. Corporate bond markets remain relatively well supported, although success in this area requires an active and agile approach, particularly within higher-yielding segments. Overall, bonds continue to offer an attractive source of diversification and, crucially, income, as the “higher for longer” rate environment keeps yields near multi-decade highs across many developed markets.

The outlook for 2026

‘… as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tends to be the difficult ones’ Donald Rumsfeld

I think Rumsfeld’s quote is a good way to think about 2026 and whilst there are many issues to consider – the UK political landscape for one, tensions between China and Japan, fiscal deficits – these are the four I’ll watch most closely:

The known knowns – the Midterms
2026 has started with a political bang, as the US captured Maduro and Trump says his sights are set well beyond Venezuela. His popularity is dipping at home, and he and his team may feel ahead of the mid-term elections in November, that pushing the ‘Donroe Doctrine’ – ‘securing’ the Western hemisphere for the US’s national interest – will shore up support. It’s not surprising that defence stocks have been the big gainers of the new year so far, and that gold, the most traditional of safe havens, is trading near all-time highs.

The known known – a new chair of the Federal Reserve
A new head of the Fed will be appointed by Trump in the summer of 2026, no doubt one that will push for rate cuts. If a lack of independence is perceived, investors may worry. It should be remembered that the Fed committee is composed of 12 voters. One more ‘dovish’ vote – a dove is enthusiastic about rate cuts, a hawk isn’t – isn’t everything, but some recent votes have been close.

The known unknown – AI
Given the tailwind from AI investment in the tech-heavy US index and in Asia, how AI develops this year will influence asset prices. The biggest tech stocks are index heavyweights, and so what they say about costs, adoption and model progress, will have a considerable effect on indices. Our active approach to fund management aims to pick the winners but we know that poorly received data will likely tarnish most names in the shorter term.

Another known unknown – inflation
Inflation has been declining but remains above target in most economies. The average global tariff rate has risen from low single digit to mid-teens. Whilst companies have absorbed much of this, at some stage they may raise prices to protect margins. ‘Affordability’ is a big worry for politicians in many developed economies, and sticky inflation could stymie Central Bank rate cuts.

Unknown unknowns by their very nature are unavoidable and unpredictable. However, our job as your portfolio manager is to mitigate any adverse effects. This is by ensuring a diversified portfolio of assets, paying close attention to valuation and looking for under-appreciated areas of the market.