Taking Stock - How 2025’s nice-to-knows are 2026’s need-to-knows

Most will be aware that equities suffered a major drawdown following US President Trump’s tariffs in April, but how many know that the US market was close to registering a 20% fall between February and April? And yet, equities recovered to post impressive gains in 2025. Investors who stayed the course were rewarded, showing the value of staying invested in the market and having a diversified portfolio. 

Adjust for the 10% fall in the dollar during the year and the US equity market was up closer to 18% in local currency terms compared to the 9% sterling return. It’s not often currency has such a negative impact. Post Brexit, the dollar has been stronger against the pound and so has been a tailwind. 2025 was a reminder that the dollar can be a headwind too.

Much has been written about how expensive the US market is. But the main US stock market ended the year with the same valuation as it started with. Last year we spoke about how earnings needed to grow into the valuations shares were trading at to justify prices. And that's exactly what happened. With earnings growth of 13-14% currently pencilled in for 2026, a similar level to 2025’s 13%, 2026 could see a repeat performance—markets making further progress while valuations remaining largely the same.

There was much talk of an AI (artificial intelligence) bubble and yet only two of the Magnificent 7 outperformed the broader US market in 2025—Nvidia and Alphabet. If it wasn’t for these two stocks and their sizeable weightings, the Magnificent 7 would have underperformed the wider market.

Big tech looked set for another strong year at the half-way stage. This all changed in Q4 after Meta unveiled a US$20bn increase in AI spending to US$110bn and reportedly took on AI engineers at a cost of US$100m.  Oracle also announced plans to use debt to fund its AI plans. Investors began to ask questions. Where's the money coming from and going to? Is it going into a big black hole? The result? Both stocks finished the year very much on the back foot, highlighting how the market is being discerning when it comes to big tech, a departure from the 1999 dotcom bubble when all things tech were serially re-rated.

Sticking with tech, there were signs towards the end of 2025 that three privately owned mega companies might be preparing to come to market in 2026—SpaceX, Open AI and Anthropic. With a mooted valuation of up to a trillion dollars, Starlink owner Space X could become the biggest IPO in history. Meanwhile ChatGPT owner OpenAI and Anthropic, owner of Claude, would likely command valuations running into hundreds of billions of dollars. If these three mega IPOs do go ahead, the level of market demand for each issue and how they perform post listing will provide a useful gauge of market sentiment.

It wasn’t all about tech. European banks provided strong leadership in 2025. So much so, Deutsche Bank's book value is now trading slightly above its share price for the first time since the Global Financial Crisis. That’s partly down to banks operating in a normalised interest rate environment, thereby improving their return profiles, but it is also down to the German government’s plans to spend the best part of a trillion euros on infrastructure and defence—all that money has to go through the banks after all. Taken together, the favourable backdrop European banks enjoyed in 2025 could hold for 2026.

As for key risks for 2026, unpredictable US government policy features highly but so too does inflation.  At 2.7%, official US inflation remains elevated, but it’s worth noting that independent data provider Truflation puts US inflation at 1.9%, close to the Federal Reserve’s 2% target. Truflation uses around 100m datapoints to get to this figure so while only a snapshot it arguably provides a more realistic number. 

And speaking of inflation, stock market performance over the last five years has effectively caught up with what inflation has done. Since the depths of COVID, inflation is up around 30-40%. Equity markets are not far off that, so the gains seen make sense. This is a reminder that we should think about real returns as opposed to nominal returns—investors would have had to generate 30%ish gains over the last four or five years just to keep up with inflation.

Finally, a warning against complacency. The consensus for 2026 is cautiously optimistic: economic growth to remain respectable, some central bank interest rate cuts and inflation moderating further. This is a supportive environment for equity and bond markets. However, global equities have now had three strong years in a row. On average the equity market goes up three quarters of the time so after three strong years, markets may be due a pause. Although timing is always uncertain and we shouldn’t fall into the “Gambler’s Fallacy”, it’s important not to be lulled into complacency. Portfolios diversified according to sectors, geographies and asset classes offer protection.