2025 - Q4 market commentary

Global markets remain high despite economic uncertainty

Markets performed strongly despite concerns over elevated technology valuations and China’s economic slowdown. The FTSE 100 reached record levels, while European and US equities were supported by robust corporate earnings. While the US economy continues to show resilience and corporate profits are growing at their fastest pace in four years, the labour market is softening and consumer sentiment has weakened.

In this update, we reflect on these developments and take a look at some of the highlights and lowlights of the quarter, alongside our usual fund views and outlook from the Investments team.

Global market overview

Global markets performed strongly over the period, supported by robust company earnings, easing trade tensions and growing expectations of interest rate cuts. Although there was some volatility in November amid concerns over elevated technology valuations and China’s economic slowdown, markets recovered quickly.

Earnings have been robust during the quarter and the outlook for the US economy remains broadly positive. Company profits are rising at their fastest pace in four years, despite concerns that US President Trump’s wide-ranging tariffs could raise costs and weigh on growth. Continued enthusiasm for artificial intelligence (AI) helped support US equities, while earnings outside the Magnificent Seven (Alphabet, Amazon, Apple, Tesla, Meta Platforms, Microsoft and Nvidia) also came in ahead of expectations.

Markets were given a further boost when the likelihood of a December rate cut from the Federal Reserve increased after New York Fed President John Williams said interest rates could start to fall in the near term.

The FTSE 100 climbed to a record high, bolstered by strong company results and hopes of further interest rate cuts. London’s benchmark index has had its best year in over a decade, delivering returns roughly twice those seen in 2024.

European stocks got off to a strong start in October with a record-breaking rally as investors bet on the Fed cutting interest rates. European equities have performed well throughout the year amid improving economic growth, increased fiscal spending and a stronger euro.

Asian stocks came under pressure after China’s slowdown worsened in October, weighed down by weak consumer demand and an intensifying property slump. Japanese stocks surged to a record high in October, supported by the global tech rally and hopes of aggressive fiscal stimulus under new Prime Minister Sanae Takaichi.

Bond markets

US government bond yields fell in November (meaning prices rose), driven by weaker-than-expected economic data and expectations of easier monetary policy from the Fed. Yields picked up again in December as investors reassessed the outlook for interest rate cuts and pulled back from bonds.

Japanese government bond yields rose after a ¥21.3 trillion ($135.4bn) economic stimulus package was approved, marking the first major policy initiative under Prime Minister Sanae Takaichi. Yields on 10-year bonds then climbed to their highest level since the 1990s after the Bank of Japan raised interest rates in December.

UK 10-year gilt yields rose in November on fiscal and rate expectations but eased through December as markets priced in prospective Bank of England rate cuts.

Inflation and interest rates

The US Federal Reserve (Fed) cut interest rates by a quarter point for the third consecutive time this year, taking the target range to 3.5% to 3.75%. However, a split vote among committee members highlighted the challenge of tackling a weakening labour market alongside elevated inflation.

The Fed’s decision making was hampered during the period by a lack of available data caused by the government shutdown. US inflation unexpectedly fell to 2.7% in November, although data were only collected for the second half of the month.

UK inflation now appears to be past its peak after reaching 3.8% in September. Inflation fell more than expected to 3.2% in November, its lowest level in eight months. The Bank of England left interest rates unchanged at 4% in November, before cutting rates by a further quarter point to 3.75% in December to support the economy. The Bank also said November’s Budget should help push energy bills lower in 2026.

The European Central Bank (ECB) kept rates on hold at 2% for a fourth consecutive meeting in December. The ECB has cut rates eight times since June 2024, bringing them down from a peak of 4%. Eurozone inflation remained unchanged at 2.1% in November.

US shutdown ends

The longest shutdown in US history came to an end on 12 November after 43 days, when President Donald Trump signed a funding bill to reopen the government. The disruption delayed key employment and inflation data, leaving the Federal Reserve with less information to inform policy decisions.

Once the shutdown ended, labour market data showed an unexpected rise in US jobs in September, even as unemployment climbed to a four-year high. Employers added 119,000 jobs, exceeding forecasts, while the unemployment rate edged up from 4.3% to 4.4%. At the same time, US consumer sentiment fell sharply in November to one of its lowest levels on record as concerns about personal finances intensified.

UK Chancellor Rachel Reeves announced £26bn of tax cuts in her second Budget, including a three-year extension of the freeze on income tax thresholds and the removal of the two-child benefit cap. The UK economy is losing momentum, with growth falling by 0.1% in the three months to October. This reflected uncertainty surrounding the Budget and a major cyber-attack on Jaguar Land Rover that disrupted car production.

The labour market has also begun to soften following April’s increase in employer National Insurance contributions. Unemployment rose to 5.1% in the three months to October, its highest level in four years, while wage growth eased to 4.6%.

Despite ongoing headwinds, the eurozone economy has shown resilience, confounding expectations of a slowdown. Output rose by 0.3% in the third quarter of 2025 compared with the previous three months, even as growth was flat in Germany and Italy. A new trade deal with the US lifted exports, pushing the trade surplus sharply higher.

Business activity continued to expand at a solid pace, underpinned by the services sector. However, input costs rose sharply, potentially reflecting higher tariffs and energy prices. Retail sales were little changed, suggesting households remain cautious about spending.

Tensions between the US and China eased after a temporary trade truce in October following a meeting between Presidents Donald Trump and Xi Jinping. China’s trade surplus rose above $1 trillion for the first time, with falling exports to the US offset by increased shipments to other markets. However, persistently weak demand continues to weigh on China’s economic outlook.

China’s factory activity fell for an eighth consecutive month in November, while services activity dropped to its lowest level since December 2023. Retail sales growth also slowed for the sixth straight month. Despite a late-period pickup in consumer prices, deflationary pressures remain a challenge. Fixed-asset investment fell 2.6% in the year to November, the weakest reading since the pandemic, while property investment dropped 15.9% over the first 11 months of the year.