A Time to Reflect
As the year draws to a close, it is natural for investors to look back and reflect on the events that have shaped markets and to consider the performance achieved. 2025 has been marked by upheaval in the global trading order, volatile geopolitical relations, and continued military conflict. Yet, despite these challenging political circumstances, it has still been a strong year for global equity markets. This shows that headlines don’t always tell the full story and that while politics is important, trends in interest rates, industry, and economics should not be ignored.
A Brief History
Back in 2022, markets experienced a difficult time as the latent effects of the pandemic combined with war in Ukraine pushed inflation to levels not seen since the early 1980s, necessitating a sharp rise in interest rates. 2023 was a year of stabilisation, while 2024 saw a significant recovery, although this was mostly concentrated in the US. In contrast, 2025 has delivered another impressive return for equities, but this time with gains more globally diversified.
Unsurprisingly, the most talked-about person of the past year has been Donald Trump, given his return to the White House. His “liberation day” tariff announcements on April 2nd led to a brief period of market losses, but a recovery quickly developed as the imposition of these trade blockages proved less restrictive than initially feared. This was dubbed the “TACO” trade – Trump Always Chickens Out – highlighting that stock and bond market performance matters to the US president and can cause him to backtrack on the most damaging policies.
UK politics has also been destabilising. Despite winning a large parliamentary majority in last year’s general election, Keir Starmer and Rachel Reeves have spent considerable time shoring up support among Labour backbenchers. Economic growth is still claimed as their priority, yet their policy choices suggest otherwise. They have backed away from cost-saving measures, forcing them to balance the books another way, with Reeves now having delivered two major tax-raising budgets. These moves have been unpopular with businesses, and combined with rising minimum wage requirements, have suppressed economic growth, increased unemployment, and added to inflationary pressures.
Yet, despite these challenges, stock markets are near or at all-time highs. So, why is this?
Interest Rates
Following the October 2022 peak of 11.1%, UK inflation, as measured by CPI, fell to a low of 1.7% in September 2024, but since then has rebounded to a high of 3.8% in July 2025. While this resurgence in price growth has slowed the Bank of England’s path of interest rate cuts, the Bank remained confident that inflation will fall again. This has played out over recent months, with Wednesday’s CPI release of 3.2% for November 2025 allowing space for further interest rate cuts, the first of which is widely expected on Thursday, 18th December.
The Bank Rate is predicted to drop to 3.75%. From the 5.25% rate that spanned late 2023 and early 2024, this is a significant decline and, when considered alongside similar moves from other global central banks, has provided a major stimulus for both bond and equity markets over the last 18 months. These monetary policy adjustments have helped restore confidence, allowing moderate economic growth to create a positive environment for corporate earnings.
AI
A second point of optimism for markets in recent times has been the boom in Artificial Intelligence. AI offers a technological leap forward which, if it fulfils its promise, could deliver a surge in corporate productivity across most industries. Consequently, it has captured investor imagination.
With the real-world benefits yet to be fully realised, the rewards have mostly gone to the large technology firms investing vast sums in the data centres and associated infrastructure needed to unleash the technology’s potential. These early beneficiaries are mostly found in the US, but there are also some in Asia, particularly among South Korean and Taiwanese stocks sensitive to AI momentum.
While there is undoubtedly more to tell in the story of AI, and risks are certainly present, in explaining this year’s market strength, it is an important piece of the puzzle.
China
The third main factor in this year’s market strength has been the resilience of China. As the world’s second-largest economy, its direction is an important factor in global prosperity. Driven by a property crash that began in December 2021 and a regulatory crackdown on profitable tech firms around the same time, the Chinese economy has struggled in recent years.
This has been a heavy drag on Asian and Emerging Market stock indices over the period, and as Trump’s second presidential term commenced, it appeared that China would face further pressures, with Beijing seemingly the primary target of the US president’s tariff-dominated trade war.
Yet, despite Chinese exports to the US falling heavily this year, exports to other nations have accelerated, more than offsetting the American loss. Other governments argue this is not a sustainable trade model. Nevertheless, throughout what should have been a challenging year for the country, China has delivered a solid economic performance, evidenced by the IMF’s recent GDP forecast upgrade to 5% for the year overall.
Positivity Despite the Challenges
Broad global economic expansion is another aspect that has helped markets this year, but the three factors detailed above are likely the stories we will most look back upon. It has been an unstable political environment, with geopolitical norms rewritten by the US president and conflict still a major part of the societal landscape. Yet, with a trend of easing interest rates, the potential for technological advancement, and the stabilisation of the world’s second engine of growth, this has been a time that has benefitted those investing in equities on a global basis.
That is not to say that all looks rosy. There are significant risks around, notably high valuations in technology stocks and the potential for further inflation stemming from US fiscal and monetary policy. While bond markets have been more cautious on these factors (and so have delivered only mild returns this year), equity markets have so far discounted these risks.
What this balance of risk and reward means for markets throughout 2026 will be explored in our next article, which will be released in January. Until then, we take this opportunity to wish all our readers a Happy Christmas and a Prosperous New Year!