As 2026 begins, it is worth reflecting. And our market commentary is here to help with just that. Volatility has been everywhere, but that has not translated into widespread losses. Quite the opposite, in fact. In 2024, the focus was on monetary normalisation. In 2025 it was tariffs, geopolitics and, more recently, anxiety around AI valuations and US technology dominance. When markets are hitting record highs in both the UK and the US, the question quickly becomes what might go wrong. That often distracts from how much has already gone right.

Below we look at December’s market developments and how they frame the start of 2026.

UK

At its 17 December meeting, the Bank of England cut Bank Rate by 0.25% to 3.75%. This was the fourth reduction of 2025, although the 5–4 vote shows how finely balanced the outlook has become.

Inflation is easing but not yet comfortable. CPI fell to 3.2%, still above target but moving in the right direction. The Bank was explicit that further cuts are likely, but that decisions are becoming more marginal. Since August 2024, rates are down 1.5% in total.

Markets welcomed this. UK equities rallied on the CPI data and on expectations that lower rates could help support growth. That support is still badly needed. OBR projections and ONS data show an economy that is growing, but only just. GDP rose by 0.1% in the three months to September, and the labour market is softening. Unemployment has edged up to 5.1%, while payroll numbers are falling year on year.

Wage growth remains uneven. Regular earnings rose 4.6% overall, but with a sharp split between the private sector at 3.9% and the public sector at 7.6%. That divergence is unlikely to be sustainable.

Retail data paints a familiar picture. Black Friday has reshaped spending patterns, often pulling demand forward and dampening December sales. This year Boxing Day made a partial comeback, with spending expected to reach £3.8bn, up 2% on last year. Consumers remain price sensitive, and surveys suggest many are holding back as they look into 2026.

One area benefiting from this caution is DIY. Fewer house moves and more incremental home improvement have supported demand, with Wickes a notable beneficiary following the closure of Homebase.

Despite all this, the FTSE 100 ended 2025 close to a record high, up 22% over the year. It reached the 10,000 level in early January, just 171 days after passing 9,000. That pace is unusual and reflects how the UK market’s sector mix, often criticised for being dull, has helped during a year of tariff disruption and technology valuation concerns.

United States

The Federal Reserve cut rates by 0.25% in early December, taking the target range to 3.5%–3.75%. It was the third cut of the year, despite limited data following the government shutdown.

Dissent within the committee is growing. One member wanted a larger cut, while two preferred to hold rates steady. Chair Jerome Powell’s tone suggested a pause-and-assess approach heading into 2026, with labour market data now carrying as much weight as inflation.

Political pressure remains a background risk. Powell has faced regular criticism from President Trump, and with his term ending in May 2026, speculation about his successor is building. Markets may like the idea of a pro-growth appointment, but concerns about central bank independence are real.

The US dollar fell sharply in 2025, driven by rate cuts and tariff policy. A weaker currency supports exports but reduces consumers’ purchasing power. Tariffs amplify that effect by pushing up import prices, which is why inflation data continues to be watched so closely.

The bigger question for global markets is US equity valuations, particularly in technology. AI optimism has concentrated capital into a small number of stocks. Bubbles and repricing are part of market history, and any adjustment would be felt well beyond the US. Diversification has mattered again in 2025, with European equities benefiting from investors rotating away from US technology exposure.

The S&P 500 still delivered a 16.4% gain for the year, its third consecutive year of double-digit returns.

Europe

European equities finished strongly, led by banks, commodities and defence. Fiscal stimulus has played a role, particularly in Germany, and that has lifted confidence going into 2026.

Inflation and rates are broadly under control, allowing policymakers to focus on growth. A resolution to the conflict in Ukraine would help, but political uncertainty remains, especially in France where budget disputes continue to dominate headlines.

Europe is not immune to global policy risk. US trade decisions matter, and structural challenges persist in industries such as German autos facing competition from Chinese electric vehicle manufacturers. Even so, growth has been more resilient than expected.

The ECB left rates unchanged at 2% in December, with inflation close to target. Growth forecasts for 2025 were revised up to 1.4%, and labour markets remain relatively strong. There is even some discussion about rate rises in 2026, although that will depend heavily on early-year data.

For 2025, the CAC 40 rose 10% and the DAX 40 gained 22%.

Far East

China’s GDP growth slowed to 4.8% in the third quarter, down from earlier in the year, although the 5% annual target still looks achievable. The property downturn is weighing heavily on sentiment, particularly given how much household wealth is tied up in housing.

New home sales fell more than 11% by value in the first eleven months of the year. That has knock-on effects for consumer confidence at a time when export prices have dropped around 20% since early 2022.

Government support has favoured technology, AI and electric vehicles, while smaller, traditional businesses have struggled. This may prove to be a transition phase as China reshapes its growth model.

Key priorities for 2026 include stabilising trade relations with the US and ensuring that recent fiscal measures translate into stronger domestic demand. The gradual appreciation of the renminbi against the dollar has also helped ease trade tensions.

Hong Kong led global IPO fundraising in 2025, with Shanghai and Shenzhen also ranking highly. Japan will be another focus in 2026 as stimulus and defence spending expand, even as demographic and debt challenges remain.

Emerging Markets

India overtook Japan to become the world’s fourth largest economy in December, according to government figures. Independent verification will follow, but the growth story is clear. GDP has doubled over the past decade, and recent quarters have seen growth above 8% despite external pressures.

Equity markets have been volatile, but the combination of high growth and relatively low inflation has underpinned confidence. Across emerging markets more broadly, a weaker dollar and expectations of further US rate cuts supported returns in 2025. Technology-heavy markets such as Taiwan and Korea were more exposed to the turbulence seen in US tech stocks.

Summary

If you only listened to the headlines, 2025 might sound like a year to forget. In reality, markets delivered strong results, particularly from April onwards. Much of the anxiety about 2026 reflects how well investors have done.

Those without exposure to markets have missed those gains and may find it harder to see the positives. That disconnect is becoming a familiar problem across many economies.

We cannot predict the future with precision, but we can control some important variables. Diversification still matters. Using tax allowances effectively still matters. Behaviour still matters most of all.

The market sell-off in early April, following tariff announcements, was a useful reminder. Patience was rewarded, panic was not. That lesson will almost certainly be tested again in 2026, and our role remains to help clients stay focused when emotions run high.