Markets, Politics and the Shape of What Comes Next
A Political Backdrop That Refused to Stay Quiet
2025 unfolded against a backdrop of persistent political noise, even as markets themselves delivered relatively calm outcomes. Elections, fiscal pressures and geopolitical tensions continued to shape investor sentiment — sometimes more than the economic data itself.
In the UK, a new government took office promising stability and credibility after several turbulent years. The tone shifted away from grand policy experiments toward fiscal realism, though this realism came with uncomfortable consequences for households and investors alike. In the US, politics remained polarised, but the economic machine kept running, supported by consumer spending, corporate investment and a still-resilient labour market. Elsewhere, tensions between major powers — particularly around trade, technology and energy security — reinforced a world that feels more fragmented and less predictable than it once did.
Against this backdrop, many expected markets to struggle. Instead, 2025 became a reminder that markets do not require political harmony to function — but they do demand credible policy, adaptive businesses and disciplined investors.
Economic and Market Review of 2025: Resilience Over Drama
The dominant economic story of 2025 was resilience. Growth slowed, but recession fears proved overstated. The US economy continued to expand at around 2%, Europe avoided a hard landing, and the UK muddled through with low but positive growth.
Crucially, inflation moved decisively lower across developed markets. Central banks stopped raising interest rates and shifted toward a more neutral stance. In the US, this culminated in the first tentative rate cut late in the year, with markets increasingly confident that further — gradual — easing lies ahead in 2026.
This progress on inflation mattered enormously. It reduced pressure on households, stabilised bond markets and removed one of the biggest threats hanging over risk assets. However, the world did not revert to the pre-pandemic norm. Government debt levels are far higher than they were a decade ago, and this means interest rates are likely to settle at structurally higher levels than investors became used to during the 2010s.
Strong Returns, Uneven Participation
Equity markets delivered strong returns in 2025, but the character of those returns deserves close attention.
Performance was heavily concentrated in a small number of large US technology companies, many closely associated with artificial intelligence. These firms drove a substantial proportion of global equity gains, pushing major indices to new highs. At times, enthusiasm around AI blurred into outright optimism, with valuations expanding rapidly.
Yet this was not a story of technology alone. Beneath the surface, other parts of the market also performed well. Companies involved in AI infrastructure — such as semiconductors, data centres, cloud services and energy — benefited from rising capital investment. More traditional businesses that stand to gain from productivity improvements, including industrials, healthcare and financial services, also saw renewed interest.
Outside the US, equity performance became more encouraging as the year progressed. Emerging markets, which had lagged for several years, delivered improved returns, helped by easing inflation, stabilising currencies and renewed investor appetite for growth at more reasonable valuations. Markets such as India and parts of Southeast Asia continued to benefit from favourable demographics and supply-chain diversification, while selective opportunities re-emerged in Latin America and Eastern Europe.
Japan also stood out, supported by corporate governance reforms and a greater focus on shareholder returns. The broader message from 2025 was that equity returns were available beyond the most obvious names — but they required a wider lens.
Quiet Progress and Restored Purpose
While equities attracted most headlines, bonds quietly repaired their reputation.
With interest rates no longer rising, fixed income delivered positive returns and meaningful income. High-quality bonds once again offered yields that compensated investors for inflation, restoring their role as a stabilising force in portfolios. This shift was particularly valuable given the concentration risks evident in equity markets.
Fiscal Discipline and Long-Term Pressure
In the UK, easing inflation was offset by tighter fiscal policy. Extended freezes to tax thresholds, alongside changes to investment and property taxation, pointed toward a higher effective tax burden over time. Growth remains constrained, and the room for policy manoeuvre is limited.
For investors, the UK context reinforced the importance of structuring, tax awareness and realistic assumptions — particularly for those building wealth alongside demanding family and career commitments.
Looking Ahead to 2026: A More Balanced Opportunity Set
The outlook for 2026 is broadly constructive, though not without risk. Inflation is expected to continue easing, allowing central banks to lower interest rates gradually. This supports both economic activity and asset prices, but markets are unlikely to tolerate policy missteps easily.
Equities - From Concentration to Breadth?
Equities remain the most important engine of long-term returns, and the opportunity set appears broader heading into 2026.
While US technology remains influential, returns are likely to be more selective. Stocks that benefit from AI adoption — rather than simply AI narrative — may take centre stage. This includes companies improving efficiency through automation, data analysis and advanced software, as well as those supplying the infrastructure that makes AI possible.
Emerging markets could also play a larger role. If global growth holds up and the US dollar weakens modestly as rates fall, emerging market equities historically benefit. Combined with lower starting valuations and structural growth drivers, this creates a more balanced global equity picture than investors have seen in recent years.
Income with Optionality
Bonds continue to offer income, diversification and flexibility. Shorter-dated bonds provide stability, while longer-dated bonds offer upside if rates fall more sharply. Importantly, bonds no longer rely on pessimism to justify their place in portfolios — they stand on their own again.
A Defining Force, Not a One-Trade Market
Artificial intelligence will remain one of the defining forces shaping markets over the coming decade. The long-term productivity potential is genuine, and capital investment reflects this belief.
However, technological revolutions rarely reward a narrow group indefinitely. Leadership evolves, competition intensifies, and value often migrates from innovators to adopters. For investors, this argues for participation without over-reliance, and for recognising that AI’s benefits may be more widely distributed than markets initially assume.
A Final Thought
If 2025 taught us anything, it is that markets are remarkably adaptive. They can absorb political uncertainty, higher interest rates and structural change — provided expectations remain realistic and capital is allocated thoughtfully.
2026 is unlikely to be a year of straight lines or easy wins. But it offers something arguably more valuable: a wider range of credible opportunities across regions, sectors and asset classes. In such an environment, patience, diversification and clarity of purpose matter more than bold forecasts.
The challenge — and the opportunity — lies not in predicting the next headline, but in remaining well-positioned for the years that follow.
Disclaimer: This content is for your general information purposes only and does not constitute investment advice. The commentary is intended to provide you with a general overview of the economic and investment landscape. It is not an offer to purchase or sell any particular asset and it does not contain all of the information which an investor may require in order to make an investment decision. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.
Past performance is not a reliable indicator of future results. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances. Your capital is at risk and the value of investments, as well as the income from them, can go down as well as up and you may not recover the amount of your original investment.