Introduction
As 2025 draws to a close, it’s a good moment to pause and reflect. Market turbulence, often described as volatility, does not automatically translate into losses. Despite frequent headlines and periods of uncertainty, markets have continued to deliver positive results.
In 2024, much of the focus was on monetary policy normalisation as central banks worked to bring inflation under control. In 2025, attention shifted frequently to global trade developments, and more recently to discussions around artificial intelligence and the strength of major technology companies. With stock markets in both the US and UK reaching record highs, it is natural that speculation arises about what could go wrong, even when much has gone right.
Below, we review December’s key market developments and look ahead to 2026.
United Kingdom
At its 17 December meeting, the Bank of England’s Monetary Policy Committee reduced the Bank Rate by 0.25 percentage points to 3.75% – the fourth cut of 2025. The narrow 5–4 vote highlighted differing views on the economic outlook.
Cooling inflation supported the decision. Consumer Price Inflation fell to 3.2%. Although still above the 2% target, the downward trend has raised expectations of further gradual rate cuts if progress continues. Since August 2024, the Bank Rate has fallen by 1.5%.
UK equities responded positively to the inflation data and the anticipated rate cut, with investors encouraged by signs of easing price pressures.
Economic growth, however, remains modest. The Office for Budget Responsibility’s projections and recent Office for National Statistics data show the economy expanding slowly, with GDP rising just 0.1% between July and September.
Labour market data also pointed to some softening. Unemployment reached an estimated 5.1% between August and October 2025, higher than a year earlier. Payrolled employees fell by 171,000 year‑on‑year in November.
Average regular earnings grew 4.6% over the same period, with stronger wage growth in the public sector than in the private sector.
In retail, Black Friday continues to influence seasonal spending patterns. While November figures benefit, December’s traditional surge has been more muted in recent years. This year, however, Boxing Day sales were expected to reach £3.8bn – 2% higher than last year – despite Black Friday results falling short of expectations as consumers held out for better deals.
A KPMG survey found that many households were cautious heading into 2026 due to concerns about the broader economy and ongoing cost pressures.
One area showing resilience is the DIY sector. With a slower property market and more people choosing to improve rather than move, retailers have seen increased demand for home‑improvement products.
Despite broader economic challenges, the FTSE 100 reached record levels in December, ending the year at 9,923.06 – up 22% for 2025. The index crossed the 10,000 mark for the first time on 2 January 2026, just 171 days after reaching 9,000, the fastest such rise in its history.
United States
The Federal Reserve cut interest rates by 0.25% in early December, lowering the federal funds target range to 3.5% – 3.75%. Despite limited data availability following a government shutdown, the committee proceeded with its decision.
Committee members expressed differing views on the appropriate pace of easing, reflecting a wide range of perspectives on the economic outlook.
Future policy decisions are expected to be guided by incoming economic data, particularly labour market trends, rather than inflation alone.
The US dollar experienced one of its sharpest annual declines in years, influenced by interest‑rate cuts and changes in trade policy. While a weaker currency can support export competitiveness, it can also reduce consumers’ purchasing power for imported goods.
A key question for global markets is whether technology valuations will undergo a correction in 2026. Concerns about an “AI bubble” have been widely discussed, and the concentration of market gains in a small number of large technology companies has heightened sensitivity to potential revaluations.
The S&P 500 delivered a further 16.4% gain in 2025 – its third consecutive year of double‑digit growth.
Europe
European equities ended the year strongly, with gains across banking, commodities and defence sectors. Fiscal stimulus in several countries, including increased investment in infrastructure, contributed to improved sentiment heading into 2026.
Inflation and interest rates have remained stable in the Eurozone, allowing policymakers to focus on supporting economic growth. Political uncertainty persists in some regions, but overall resilience has been notable.
The European Central Bank held interest rates at 2% in December, with inflation close to target. Growth forecasts for 2025 were revised upward to 1.4%, supported by stronger‑than‑expected performance and less disruption from global tariffs than initially feared.
The labour market also remains robust. Some analysts have suggested the ECB may consider rate increases in 2026 if inflation remains on track, though this will depend on early‑year data.
Equity markets performed well: France’s CAC 40 rose 10% in 2025, while Germany’s DAX 40 gained 22%.
Far East
China’s real GDP grew in line with its 5% target for the first three quarters of 2025, though growth slowed to 4.8% in Q3. A downturn in the property market has weighed on sentiment, despite strong performance in technology‑focused industries such as AI and electric vehicles.
With a significant proportion of household wealth tied to property, falling home prices have affected consumer confidence. New home sales fell 11.2% by value in the first 11 months of the year.
China’s longer‑term outlook will depend on progress in trade relations, the effectiveness of fiscal measures announced in 2025, and efforts to strengthen domestic demand. The gradual appreciation of the renminbi against the US dollar has also helped ease trade tensions.
Hong Kong was the world’s leading exchange for IPO fundraising in 2025, with Shanghai and Shenzhen also ranking among the top global exchanges.
Japan will be closely watched in 2026 as new economic stimulus and defence spending plans take shape. The country continues to navigate the transition away from years of deflation, while managing demographic and debt‑related challenges.
Emerging Markets
India overtook Japan to become the world’s fourth‑largest economy in December, with government figures indicating strong momentum heading into 2026. Real GDP grew 8.2% in Q2 2025–26, supported by a high‑growth, low‑inflation environment.
Emerging market equities broadly finished 2025 on a strong note, benefiting from a weaker US dollar and expectations of further US rate cuts. Technology‑heavy markets such as Taiwan and South Korea experienced volatility similar to that seen in US tech stocks.
Summary
Although 2025 often felt dominated by negative headlines, global equity markets delivered strong results – particularly from April onwards. Concerns about what might happen in 2026 largely stem from the strength of the past year.
While the future cannot be predicted with precision, there are important factors we can control: maintaining a well‑diversified portfolio, making full use of tax allowances, and adjusting financial plans thoughtfully rather than reactively.
The market volatility seen in early April demonstrated once again that patience is often rewarded, while impulsive decisions can be costly.
As we enter 2026, periods of uncertainty are inevitable, but we remain committed to supporting you and helping you make informed, confident decisions.
And finally…
Square watermelons are available in Japan. They are grown in moulds and harvested before ripening to maintain their shape, making them decorative rather than edible – and a popular novelty item in high‑end department stores.
