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Financial markets had another strong year in 2025. Improving inflation sentiment, rate cuts from major central banks and artificial intelligence (AI)-induced investment propelled equity market indices higher.  

Geopolitical tensions in Europe and the Middle East remained a key focus early in the year but eased as the year passed with a resolution to the Russia-Ukraine war increasing in probability while tensions with Iran in the Middle East abated. Tariff announcements caused volatility as expected, in particular around April time though worst fears did not materialise, however, as most of President Trump’s initial rolling tariff blows were later watered down.  

The US dollar depreciated during the year as the US administration talked the currency down from elevated valuations. Gold and silver delivered record setting gains on strong Asian demand while interest rate levels proved more supportive to non-yielding assets. 

Inflation and Rates

Inflation remained sticky in the US and Europe through the year, but expectations improved as the US labour market started to weaken and wage pressures in Europe abated. The Fed had feared that the imposition of tariffs would put upward pressure on inflation, but the impact looked to have been weaker than expected while in Europe, the diversion of Chinese exports placed downward pressure on prices. Japan experienced a different trend with inflation moving higher. 

The improved inflation outlook in the west led the Federal Reserve and the European Central Bank (ECB) to cut intertest rates and many other central banks followed suit. Markets expect rates to be cut further in the US and UK while in Europe the ECB came closer to the end of its rate cutting cycle. The Bank of Japan in contrast is expected to raise interest rates against the background of stronger inflation and growth boosting policies of the government. 

Equities 

Global equity markets performed well again in 2025, posting double digit gains in local currencies, though international returns in euro terms were tempered by the weaker US dollar. The prospect of more stability on tariffs, rate cuts from central banks and fiscal stimulus in Europe, lent support to risk assets. Coupled with further euphoria in anything AI-related, equity market performance was strong. The S&P advanced 4% (in Euro terms), the STOXX 600 rallied 21% and the Nikkei rallied an impressive 14% (in Euro terms).  

The global equity market rally, however, was mainly underpinned by multiple expansion rather than earnings growth. This was characterised and largely driven by the boom in AI-related equities as market participants priced in marked revenue increases from the new technology. Performance, therefore, remains concentrated. The top 10 stocks in the S&P make up 38% of the index and delivered 13% return (in Euro terms) in 2025 versus the equal weighted index return of -2% (in Euro terms). 

Fixed Income 

Short-dated sovereign bonds largely performed well over the course of the year in response to central bank rate cuts. Longer maturity yields remained elevated, largely on lingering fiscal concerns, more so in Germany than elsewhere as increased fiscal expenditure was announced to boost defence spending.  

Credit markets performed well as the yield premium over sovereign debt narrowed close to all-time tights, benefiting from the positive risk on sentiment emanating from equity markets. Emerging markets debt performed particularly well with improving inflation trends and a lower US dollar making valuations attractive. 

Japan proved an outlier to this global trend. Improving economic activity fed through into higher inflation and a more hawkish Bank of Japan who communicated the likelihood of further rate increases in addition to the 25bps hike of January. Japanese government bond yields increased markedly in response, rising to levels not seen since 2007.  

Conclusion 

In summary, 2025 saw a healthy performance of global financial markets. Calming geopolitical tensions, reduced tariff fears, easier monetary policy and AI-related optimism have supported risk sentiment. Valuations in some areas like tech companies and credit now look somewhat stretched, however. Though there is reason to be optimistic given the momentum behind these positive trends, some caution is merited going into 2026 and we'll publish our outlook for the new year in the coming days.