Introduction
Financial markets were once again responding to US policy decisions in January, while a number of major US technology stocks announced their results. There remains considerable interest in whether the “AI bubble” really exists, with close scrutiny of financial results as they are published. The attention is not just on the “Magnificent Seven” but a range of technology stocks heavily committed to artificial intelligence.
With this in mind, we will start our round-up with an in-depth focus on the United States.
United States
Despite concerns about a potential recession, the US economy defied downbeat expectations in 2025 and may well do the same in 2026. The main themes appear to be:
- Jobless expansion – The economy is growing but jobs are not keeping pace. While success is typically measured in GDP growth, a slower labour market makes the economy more brittle. This could reflect AI starting to drive efficiencies and earnings in larger businesses, sometimes at the expense of headcount. Amazon inadvertently revealed plans to lay off 16,000 employees in an email in January. The S&P 500 climbed above 7,000 points for the first time on 28 January as equity markets continued to rally. Reduced capital requirements for major banks are also expected to encourage growth. However, the index dipped at month-end as some technology stocks delivered underwhelming results, fuelling concerns about a potential AI bubble. Microsoft was the most notable disappointment, with shares falling 10% on 29 January, while Apple, Meta, and Tesla surpassed expectations. Alphabet and Nvidia are due to report in February.
- The “K-shaped” economy – Wealthier households continue to benefit from equity growth in invested assets, while lower and middle-income families face greater pressure from inflation and a slower labour market. Increasing inequality is affecting general consumer confidence, as reflected in January’s data. Controlling inflation was a key theme in 2025 and will remain so in 2026. While the most pessimistic projections following last year’s tariff announcements have not materialised, affordability of essential goods and services remains a concern.
Tensions over Greenland emerged in early January but were quickly resolved through diplomatic channels. Markets wobbled briefly but remained calmer than might have been expected.
Federal Reserve Chair Jerome Powell made a public statement on 18 January addressing questions about the independence of the central bank. He emphasised the importance of setting interest rates based on evidence and economic conditions rather than political pressure – a position that received support from other major central bankers globally.
Powell’s term as Chair expires in May, with Kevin Warsh nominated as his replacement. Warsh served on the Fed’s board from 2006 to 2011 and his confirmation requires Senate approval. Markets are currently stable, though any perceived compromise to Fed independence could cause longer-term uncertainty.
UK
UK equity markets experienced brief turbulence in response to geopolitical developments but quickly recovered. The FTSE 100 breached 10,000 points for the first time on 2 January, reaching an all-time intraday high of 10,257.75 on 16 January.
UK inflation increased to 3.4% in the 12 months to December 2025, based on the Consumer Prices Index (CPI) measure from the Office for National Statistics. The rise was unexpected, the first in five months, after price increases had slowed in the second half of 2025. Key drivers included alcohol and tobacco duty increases, rising airfares, and food cost increases. While this is expected to be temporary, it has dampened expectations of a February rate cut.
The UK housing market recovered in January after falls in late 2025. The average home price rose by 0.3% in January, and Nationwide expects prices to rise 2–4% over the whole of 2026.
The Prime Minister made an historic trip to Beijing in January – the first by a British PM to China in eight years. While largely symbolic, the visit laid some groundwork for improved political and trading relations.
Europe
The Eurozone economy grew ahead of expectations at 0.3% in the fourth quarter of 2025. Despite tariffs, political challenges, and economic uncertainties, Europe continues to show resilience, growing for nine consecutive quarters.
Germany and France expanded at 0.3% and 0.2% respectively, confounding predictions. Germany has borrowed heavily to invest in defence and infrastructure, with pressure to deliver faster growth going forward. Spain announced growth of 2.8% for 2025 – double the Eurozone average – positioning it as one of the fastest-growing developed economies for a second consecutive year.
While the Eurozone is growing, that growth remains slow. The region has benefited from capital flows diversifying out of the US and seeking perceived safe havens. However, fundamental concerns about traditional industries, such as German car manufacturing, will persist throughout 2026.
With inflation largely under control and close to the 2% target, there is limited expectation of rate cuts from the European Central Bank.
Far East
China’s economy weathered 2025’s challenges better than expected. However, structural issues such as an ageing population and a property market slump made the 5% growth target challenging. With much of China’s household wealth tied to property, falling values are affecting consumer confidence and consumption.
GDP growth was running at around 4.8% towards the end of 2025, with domestic consumption still sluggish and exports continuing to power the economy. While exports to the US were predictably down in the year to November 2025, exports to Africa, ASEAN, Latin America, and the EU rose by 26%, 14%, 7%, and 8% respectively.
China’s fiscal expansion through bond issuance was significant in 2025, running at around 10% of GDP, and is expected to continue in 2026. Rather than investing in traditional infrastructure projects, most funds were used to refinance local government debt, assist troubled property developers, and recapitalise banks. There appears to be a shift towards more targeted support for specific industries such as technology, alongside efforts to boost consumption.
Japan commanded attention with substantial bond issuance in January, followed by a snap election called for 8 February. Prime Minister Sanae Takaichi hopes to improve on her coalition government’s narrow majority. If successful, the result would likely mean greater defence spending and implementation of her promised two-year food tax suspension – potentially pushing debt-to-GDP ratios to pandemic-era levels. Japanese bond and currency markets were predictably volatile in January.
Emerging Markets
US intervention in Venezuela in early January could signal a shift in Latin America’s geo-economic landscape. Central America’s proximity to major shipping routes – the Panama Canal, Caribbean Sea, and Pacific ports – makes the region strategically important for global trade. China has become a significant economic force there, having provided billions of dollars in development loans. Any shift in regional dynamics could affect energy markets, infrastructure investment, and trading relationships across countries including Mexico, Bolivia, Brazil, Argentina, Peru, and Chile.
Investment sentiment in Latin America may be dampened in the near term, with Mexico potentially most affected. South American countries such as Brazil already benefit from close trading relationships with China, and 2026 may see others consider which major trading partners offer the most attractive terms.
Argentina is expected to see economic improvement following last year’s US financial assistance and gains at the mid-term legislative elections for President Javier Milei.
Indonesia’s equity market experienced turmoil after MSCI Inc. warned it could downgrade Indonesia from “emerging” to “frontier” classification, citing concerns over transparency and the limited availability of stock for trading in listed companies.
Summary
We noted in January that investor patience would be tested in 2026. We did not expect quite so much news in what is normally a quiet start to the year.
While geopolitical developments have been turbulent, financial markets have shown surprising resilience. There have been wobbles and dips as US foreign policy became more assertive, but not as dramatic as might have been expected. Markets appear to be taking a measured view of political rhetoric, focusing instead on underlying economic fundamentals.
And finally…
Piggy banks have their origins in clay.
The term comes from “pygg” – an affordable Old English clay used in the 15th century to make household items such as plates and jars. Whenever people had spare coins, they would drop them into their clay jars, which they called “pygg banks.” As the word sounded like the animal, potters eventually shaped them into pigs.
