Market Commentary: January 2026
Looking back at 2025 and ahead to 2026
In 2024, the big topic was monetary normalisation. Central banks were focused on taming inflation and lowering interest rates. Then, in 2025, conversations were dominated by President Trump and his trade tariffs.
Now, the buzz is all about the AI bubble and how US tech stocks are leading the charge. With stock markets hitting record highs in both the US and UK, there’s plenty of optimism—but also plenty of speculation about what might go wrong.
Let’s break down December’s market news and look at what 2026 might bring.
United Kingdom
On 17 December, the Bank of England’s Monetary Policy Committee cut the Bank Rate by 0.25% to 3.75%. This was the fourth rate cut in 2025, and it passed by a close vote of 5-4, showing some uncertainty about the future.
This decision came as inflation cooled. Consumer Price Inflation (CPI) fell to 3.2%. While still above the 2% target, the downward trend gives hope for more cuts if inflation keeps easing. The Committee said rates will likely continue to come down gradually but cautioned that future decisions will be a close call.
Since August 2024, the Bank Rate has dropped 1.5%. The UK stock market responded well to the rate cut news and the falling inflation, rallying on hopes that more rate cuts could boost the economy.
However, growth remains fragile. The Office for Budget Responsibility (OBR) reported modest GDP growth of 0.1% in the third quarter of 2025. Meanwhile, the labour market showed signs of strain. Unemployment ticked up to 5.1%, and the number of payrolled employees dropped by 171,000 compared to the previous year.
Wage growth was mixed—4.6% overall, with 3.9% in the private sector and a stronger 7.6% in the public sector.
Retail trends also shifted. Black Friday’s arrival from the US has changed how Brits shop—softening December’s traditional spending rush. Yet, Boxing Day sales bounced back with an expected £3.8 billion spent in one day, a 2% increase over last year.
Interestingly, a KPMG survey found many consumers are holding back on spending due to worries about the economy and household costs. This caution seems to be helping the DIY sector, where people are choosing to fix up their homes rather than move. Retailers like Wickes have benefitted, especially with competitors like Homebase closing down.
Despite the challenges, the FTSE 100 hit record highs in December, ending the year close to 9,923 and gaining 22% over 2025. It finally crossed the 10,000 mark on 2 January 2026—the fastest jump between 1,000-point milestones since its launch. This is good news for Chancellor Rachel Reeves, who wants to encourage more investment in the UK. The UK market may not be flashy like the US tech sector, but its focus on banking, natural resources, and defence has proven steady during turbulent times.
United States
The US Federal Reserve cut interest rates by 0.25% in early December, the third cut in 2025, bringing the target range to 3.5%–3.75%. This happened despite a government shutdown that limited economic data.
The decision wasn’t unanimous: one member wanted a larger 0.5% cut, while two preferred to keep rates steady. Fed Chair Jerome Powell gave cautious guidance, saying future cuts depend on data—especially the weakening labour market—not just inflation.
Powell faced criticism from President Trump throughout 2025. With Powell’s term ending in May 2026, speculation about his successor is heating up. Trump wants someone pro-growth, which markets might like, but political interference raises concerns about the Fed’s independence.
The US dollar saw a steep decline in 2025 due to rate cuts and Trump’s tariffs. While this helps US exports, it weakens consumers’ purchasing power for imports, potentially squeezing budgets further.
One big question for 2026: will the US tech sector face a correction related to the so-called “AI bubble”? A lot of money is concentrated in a few tech giants, so some price adjustments seem inevitable. This uncertainty reinforces the importance of a well-diversified portfolio. Some European stocks, for example, have benefited from investors looking to spread risk beyond US tech.
The S&P 500 delivered a solid 16.4% gain in 2025—marking three straight years of double-digit growth.
Europe
European stocks ended 2025 on a strong note, with gains in banking, commodities, and defence. Government stimulus, especially in Germany, has helped boost infrastructure and defence spending, fueling optimism for 2026.
Inflation and interest rates in the Eurozone have been stable, allowing focus on economic growth. A peaceful resolution in Ukraine would be a big plus, but political uncertainty remains, especially in France, where ongoing budget battles could last into 2027.
Europe also faces challenges from global politics, like US trade policies. Traditional industries such as Germany’s auto sector are under pressure from Chinese electric vehicle makers.
Still, the European Central Bank kept rates steady at 2% in December, with inflation around 2%. Growth surprised on the upside, with GDP expected to hit 1.4% in 2025, better than earlier forecasts. The labour market remains strong.
There’s some talk that the ECB might raise rates in 2026 if inflation stays stubborn, but they’ll wait to see early data first.
The CAC 40 (France) rose 10%, and Germany’s DAX 40 jumped 22% in 2025.
Far East
China’s economy grew roughly in line with its 5% target for the first three quarters of 2025, but growth slowed to 4.8% in Q3—the lowest in some time.
A property slump has weighed on confidence. Home sales dropped 11.2% by value in the first 11 months of 2025, denting household wealth and potentially hurting domestic consumption.
The government has supported tech industries like AI and electric vehicles, but many traditional businesses are struggling.
Looking ahead, success depends on a few key factors: finalising a trade deal with the US to boost exports, seeing results from recent fiscal stimulus, and strengthening domestic demand. The People’s Bank of China has also been quietly strengthening the renminbi against the dollar, easing trade tensions.
Hong Kong led the world in IPO funds raised in 2025, with Shanghai and Shenzhen also ranking in the top 10.
Japan is another focus for 2026 as its new Prime Minister’s stimulus and defence plans roll out. The country is slowly shifting away from years of deflation, but challenges remain with an aging population and growing debt.
Emerging Markets
December saw a milestone: India overtook Japan as the world’s fourth largest economy. India’s government expects to surpass Germany within a few years, with GDP forecast to hit $7.3 trillion by 2030.
India’s economy continues to grow fast, with GDP expanding 8.2% in Q2 of 2025–26 despite steep US tariffs related to Russian oil imports. Its stock market had some ups and downs, but solid growth and low inflation keep the economy strong.
Overall, emerging markets finished 2025 well, helped by a weaker dollar and hopes for more Fed rate cuts. However, tech-heavy markets like Taiwan and Korea faced challenges, mirroring turbulence in US tech stocks.
Final Thoughts
If you only listened to the headlines, 2025 might seem like a tough year for investors. But markets delivered solid returns—especially since April.
The big question for 2026 is: what could go wrong? The truth is, much of the worry stems from how well 2025 performed. Those not invested missed out on these gains, which is a challenge in many countries.
Predicting the future isn’t easy. But here’s what we can control: building a diversified portfolio, using your tax allowances smartly, and avoiding rash financial moves when emotions run high.
Remember April 2025, when markets dipped after tariff news? That moment showed patience pays off and panic can cost you. As 2026 unfolds, your patience may be tested again. We’ll be here to support you, giving you the confidence to make the best decisions.
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