2025 proved to be another broadly positive year for both equity and bond markets. Global indices closed out the year close to record highs, and investors in fixed income and alternative assets also enjoyed strong returns throughout last year. Despite ending the year in good spirits, prevailing market conditions present a challenging conundrum for investors. We look at six key themes that are set to shape market direction during 2026.
- Falling Interest Rates
Base interest rates in the US and UK fell during 2025, with the Federal Reserve lowering rates by 0.75% and the Bank of England Monetary Policy Committee (MPC) going further, reducing base rates by a whole percentage point.
We expect this trend to continue, as slower economic growth and falling inflation support continued central bank easing. The change of leadership at the Federal Reserve in May could herald a more dovish position, with the new Fed Chair expected to be sympathetic to President Trump’s calls for lower interest rates as the US heads into the mid term elections. We expect the Bank of England MPC to take a more cautious approach, reducing rates by up to a further 0.75% by the end of the year. Central banks will, however, need to remain alert for signs that inflation begins to increase once again, which remains a possibility due to the impact of global tariffs.
- Increasing Debt
Debt – be it corporate, consumer or government – may well be a key driver of investor sentiment during 2026. Government debt levels continue to spiral, with yields on both UK and US Government bonds remaining elevated. Tech giants, such as Meta, Alphabet and Oracle, have massively increased corporate debt levels to fund Artificial Intelligence (AI) infrastructure. Whilst the increased leverage is necessary for expansion, the pace at which debt levels are rising is concerning, and signs of stress could spread quickly across the sector. Personal debt levels are a further concern, with households borrowing more to cover the elevated costs of housing, food and essentials. Consumer delinquency is rising quickly in the US, with missed payments on car loans hitting the highest level for 15 years at the end of 2025.
- Consumer confidence (or lack thereof)
Consumer confidence remained subdued throughout 2025, and this trend is set to continue amidst general pessimism about the state of the UK economy. The UK unemployment rate jumped to 5.1% in the three months to October, which together with the higher overall tax take, are leading households to rein in discretionary spending and be more cautious. Recent surveys have indicated that consumers may be even more cautious in 2026 than they were last year, particularly when considering big ticket items. We expect the gloom to continue to weigh on house prices, which may remain broadly static during 2026, despite the positive influence of falling interest rates.
- Testing tech valuations
The second half of 2025 was dominated by the growth in AI and the prospects of future returns from heavy capital expenditure on AI infrastructure. The performance of a handful of global giants, such as Nvidia, Microsoft, Apple and Alphabet, made a significant contribution to returns last year, although valuations are now demanding. Revenue growth from the biggest US tech names will need to continue to outperform to match lofty market expectations, with the risk that disappointment could see significant downside from current levels. Given the representative index weight of the largest US tech stocks, even modest falls from current levels would weigh on index performance.
- Focus on quality names.
One trend that may become apparent as we head through 2026 is a further broadening of returns from global equities, where the focus may well shift from global tech giants to high quality, large cap stocks with consistent earnings and lower valuations, offering better value. Lower inflation and anticipated rate cuts may help support the outlook for quality stocks, which may also be less impacted by lower economic growth. Given the expectation of lower returns from global equities during 2026, stocks offering an attractive dividend yield may also be in demand, with total returns from capital and dividend income becoming increasingly valuable.
- Continued tariff threat
2025 saw global trade turned on its head by the tariffs introduced by President Trump. As we enter 2026, expect to see further uncertainty as the US Supreme Court rules on the legitimacy of the sweeping tariff announcements. Trump will certainly counter a decision that rules the broad tariffs announced under the International Economic Emergency Powers Act are unlawful, by making use of more targeted tariffs on individual sectors of the economy, which may be time limited.
As the year progresses, we will have a clearer picture of the impact of tariffs on global growth and how companies have dealt with increased costs. Whilst the immediate risk posed by trade tensions may have eased, major question marks remain over negotiations with key trading partners such as China, where tensions could reignite.
Time to review portfolio allocations
After two years of strong returns from both equities and fixed income, 2026 may prove more challenging for investors. As always, nimble investors can continue to seek out good opportunities by careful asset allocation and portfolio positioning. As we enter a new year, this may be a good time to reassess your investment goals for 2026, consider the impact of expected trends on your portfolio, and review existing cash positions in a year when interest rates are likely to fall further.
Our experienced advisers can provide an independent review of your existing arrangements, to consider how you are positioned for the year ahead. Speak to one of the team to start a conversation.
