Monthly Investment Briefing: The Wall of Worry

Q4 2025 Market and Economic Review

As we close the chapter on 2025 and look ahead to 2026, US markets find themselves in a rare position following three consecutive years of double-digit returns across major equity indices. This resilience has come despite an imperfect economic and geopolitical backdrop. The year was marked by persistent global tensions, the ongoing war in Ukraine, instability in Gaza, China’s growing influence on the world stage, and deepening political polarization across Western democracies. Yet, equity markets continued to “climb the wall of worry” focusing instead on structural themes that have so far transcended these headwinds.

• AI: From Hype to Reality: Artificial Intelligence (AI) remained the dominant force shaping markets, extending a trend that began with the mainstream release of ChatGPT in early 2023. While enthusiasm persisted through 2025, the second half of the year saw a shift in leadership and rising questions about the profitability of AI, given the trillions invested, in a circular economy by leading tech firms. Nevertheless, the genie is out of the bottle, AI is now embedded across industries and everyday life, driving efficiency gains and transforming workflows. It is a technology that is here to stay.

• Macro Backdrop: Inflation and Policy: Inflation moderated through 2025 compared to prior years, and concerns about job losses and slowing growth emerged. In response, Western central banks pivoted cautiously, initiating rate cuts and, in the U.S., ending quantitative tightening. These moves have helped improve liquidity in the system, providing a tailwind for global risk assets.

• Policy and Politics: Trump’s Industrial Push: Donald Trump’s return to office in January was a defining feature of 2025. By April, his administration launched an aggressive tariff agenda, prompting rapid trade negotiations to avoid punitive measures. According to the ‘Tax Policy Centre’, tariffs are projected to raise $2.3 trillion between 2026 and 2035, including $247 billion in 2026 alone. Coupled with the passage of the “Big Beautiful Bill,” these policies aim to spark an industrial renaissance, offering substantial incentives to attract business back to U.S.

• The ‘K-Shaped’ Economy: The term “K-shaped economy” captured the consumer landscape in 2025. At the top end, asset owners and higher earners continued to thrive, while lower-income households, facing stagnant wages and limited participation in asset markets, struggled with constrained discretionary spending. This divergence remains a growing challenge for policymakers.

Overall despite geopolitical turbulence, corporate earnings and affluent consumers drove strong market performance in 2025. Beneath the surface, however, rising unemployment and pressure on lower-income households signal vulnerabilities that will likely determine future policies.

the year was marked by persistent global tensions, yet equity markets continued to "climb the wall of worry."

Outlook for 2026

After three years of robust gains, we expect 2026 to bring greater volatility. Questions around AI’s long-term profitability and elevated valuations could weigh on sentiment. Geopolitical uncertainty and uneven economic conditions will likely add to market crosswinds.

However, there are positives, including, the expectation for continued rate cuts where a more dovish policy stance should support equities. While short-term rates are expected to fall, longer-term yields may remain under upward pressure amid persistent inflation concerns. In such environments, select equities, particularly those with strong margins and pricing power, tend to outperform.

We anticipate opportunities to add high-quality names aligned with our core themes: technology, future energy, and healthcare. We remain cautious on UK markets, where fiscal risks loom. Whilst we are not currency traders, we keep a close eye on GBP against global currencies. Over the short term we expect GBP to trade in a slightly wider range against global currencies as the markets supported the recent budget. However, should the UK fiscal picture deteriorate, we would expect GBP to weaken.

Portfolio Activity

In Q4, we maintained a slight underweight to equities, reflecting valuation concerns, and a modest overweight to fixed income via short-dated Treasuries and money market funds. This liquidity provides flexibility to deploy capital when targeted holdings reach attractive levels. We also “gardened” portfolios where appropriate, taking profits on winners and topping up underweights, to ensure portfolios are in line heading into 2026.

Portfolio Positioning

As we enter the new year, portfolios are positioned with discipline and flexibility. Elevated liquidity offers a buffer against potential volatility and the ability to act swiftly on opportunities. We remain confident that our thematic, global approach, through high quality companies, can deliver compelling returns for investors over the medium to long term.

Will de Baer-Investment Director