Market Pulse
Monday, December 29, 2025
Over the past twelve months, global financial markets have experienced ample volatility. Amidst trade uncertainty, geopolitical tensions, and uneven growth, 2025 was a complex year for investors.
And yet despite that complexity, overall market performance ended up surprisingly robust:
This performance underscores one important fact: Even when investor anxiety is mounting, markets have a powerful capacity to surprise to the upside. While investors shouldn’t ignore risks, neither should they assume that short-term noise will derail long-term growth.
As we look toward 2026, investors appear optimistic about the year ahead. Forecasts generally point to steady economic growth and continued market strength. And while uncertainty hasn't disappeared, 2025’s performance shows that markets can remain resilient in the face of enduring risks.
Since April, the question of whether US tariffs would incite a global recession has loomed over markets. So far, tariffs have not appeared to substantially dent global growth.
According to most major banks, that strength will continue in 2026:
Many forecasters have also pointed to global disinflation as a strong pro-growth trend in 2026. In Morgan Stanley’s 2026 Economic Outlook, the bank noted that cooling price pressures in the US, Japan, and China will provide more room for rate cuts next year.
But despite that positive global context, the economic picture is more nuanced in certain countries. In fact, domestic growth in the UK may struggle to keep pace with the rest of the world.
The British economy is ending 2025 in a fragile place. This week, Q3 GDP growth was confirmed at just 0.1%, indicating an economy on the knife-edge of a sustained contraction.
Looking toward 2026, forecasters generally see the UK economy continuing to grow. But there’s a narrow margin for error.
Should the economy perform below expectations, the UK could slip into recession:
Still, there are potential bright spots for the UK economy. With inflation having stabilised, the Bank of England could have more room to support growth. While expectations point to just two rate cuts from the BoE next year, additional easing could boost markets and the economy.
Moreover, Keir Starmer continues to navigate voter frustration and internal dissent over Labour’s tight fiscal policy. Depending on how conditions evolve, that may motivate the party to loosen the purse strings. Greater public spending could help accelerate expansion in the near term, albeit with complex implications for Britain’s long-term fiscal condition.
Of course, no forecaster has a crystal ball. But these positive expectations for the global economy should provide some degree of optimism heading into 2026. And while the UK’s outlook is somewhat gloomier, few forecasts are calling for an actual downturn.
However, the eventual outcome of the year will likely depend on a few key trends, including:
1. Continued expansion and investment in AI.
It should come as no surprise that AI will be a deciding factor in how 2026 unfolds. AI stocks have driven a large share of global gains this year, with the tech-dominated ‘Magnificent Seven’ now accounting for about a third of the S&P 500.
This trend isn’t merely about investor enthusiasm. 2026 could also be the year in which we begin to see evidence of meaningful productivity enhancements from the AI rollout. In any case, next year will likely reveal the extent to which AI excitement translates into fundamental economic changes.
2. Economic sensitivity to rate cuts.
Investors widely anticipate global rate cuts in 2026, led by central banks like the Fed and the BoE. Yet few have stopped to ask how effective these cuts will be in supporting growth.
That question matters, since there’s a growing body of research indicating that modern economies may not be very sensitive to interest rate changes. As a result, there’s a risk that efforts to support the economy may not be as powerful as anticipated, even if rate cuts materialise.
3. Evolution of UK public finances.
Finally, there’s one UK-specific trend that will play an influential role in determining the path of the domestic economy in 2026: the evolution of the country’s public finances. With a public debt-to-GDP ratio eclipsing 100%, the UK’s fiscal challenges have been well-documented. But a repeat of the autumn budget, which featured painful tax hikes in an effort to balance the books, could be a significant headwind for the UK economy.
Right now, major adjustments appear unlikely in Reeves’ 2026 spring statement. After that, the outlook becomes far murkier. How the government responds to economic pressures in the latter half of 2026 could prove decisive for Britain’s growth.
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𝘗𝘭𝘦𝘢𝘴𝘦 𝘳𝘦𝘮𝘦𝘮𝘣𝘦𝘳, 𝘪𝘯𝘷𝘦𝘴𝘵𝘪𝘯𝘨 𝘴𝘩𝘰𝘶𝘭𝘥 𝘣𝘦 𝘷𝘪𝘦𝘸𝘦𝘥 𝘢𝘴 𝘭𝘰𝘯𝘨𝘦𝘳 𝘵𝘦𝘳𝘮. 𝘠𝘰𝘶𝘳 𝘤𝘢𝘱𝘪𝘵𝘢𝘭 𝘪𝘴 𝘢𝘵 𝘳𝘪𝘴𝘬 - 𝘵𝘩𝘦 𝘷𝘢𝘭𝘶𝘦 𝘰𝘧 𝘪𝘯𝘷𝘦𝘴𝘵𝘮𝘦𝘯𝘵𝘴 𝘤𝘢𝘯 𝘨𝘰 𝘶𝘱 𝘢𝘯𝘥 𝘥𝘰𝘸𝘯, 𝘢𝘯𝘥 𝘺𝘰𝘶 𝘮𝘢𝘺 𝘨𝘦𝘵 𝘣𝘢𝘤𝘬 𝘭𝘦𝘴𝘴 𝘵𝘩𝘢𝘯 𝘺𝘰𝘶 𝘱𝘶𝘵 𝘪𝘯.
