Wrapping Up the Year

December topped off a great year for global stock markets which, for Sterling Investors, climbed by 11% in 2025. Non-US stock markets outperformed the US over the year, bucking a multi-year trend. December brought downward surprises to inflation as well as interest rate cuts in the US and UK, helping to deliver modest gains for most markets in December. Further East the Bank of Japan’s rate hike avoided causing upset as we have seen in the past.

In a welcome move, the Federal Reserve (Fed) cut interest rates by 0.25% in December. Views on the committee remain divided and we saw another split vote as one member voted for a larger cut of 0.5% and two members voted for no cut at all. On the one hand, US growth is proving very robust – the economy expanded in the third quarter at the fastest pace in two years, surpassing most economists expectations and suggesting resilience despite some upset over trade policies earlier in the year. Meanwhile, the latest inflation reading in the US fell by more than expected (to 2.7%), strengthening the case for more interest rate cuts. Oil, which has dropped by about a fifth in 2025 due to an oversupply, has helped reduce these price pressures. The International Energy Agency forecasts this surplus will persist in 2026 – good news for consumer budgets although geopolitical tensions helped put a floor under oil prices last month. Washington has increased pressure on the Venezuelan government, who they are essentially accusing of being a drug-trafficking cartel with terrorist connections, likely to force regime change. In December, the US Coast Guard captured oil tankers off the coast of Venezuela, causing havoc with a vital source of revenue for the country and pushing up global oil prices from a mid-month low.

In a less widely reported area of policy, the Fed started purchasing short-term US government bonds to aid the smooth functioning of lending markets. While not labelled as a stimulus, this action adds money into the market and should, therefore, be supportive for assets. This works similarly to further cuts by keeping short-dated rates low. Furthermore, Treasury Secretary Bessent expects households will see “very large refunds”, estimated at $1,000 to $2,000, in the tax filing season early in 2026 following changes to rules made in 2025. Therefore, although valuations remain relatively high, US stocks gained modestly in December as tailwinds remain for US consumers and corporate profits.

In the UK, the Bank of England also cut interest rates by 0.25% with a split vote (four out of nine members voted for no change). The cut was popular amongst mortgage-holders while the split vote created the feel of a “hawkish cut” and helped Sterling recover from recent lows. With further similarity to the US, inflation fell by more than expected, to 3.2%, with weaker food and clothing prices weighing on the aggregate measure. As inflation is still above the 2% target, some committee members remain reluctant to cut rates. Nonetheless, unemployment has increased from 4.3% to 5.1% over the last year which should weigh on wages, inflation, and economic activity. As such, investors expect two more interest rate cuts in 2026. There are stark differences between the US and the UK. Data showed that UK growth disappointed in October and the economy is at risk of quarterly contraction unless a sharp turnaround materialises in the November and December data. Despite this negativity, UK equities rose in December, capping off a strong year for the market. Specifically, mining stocks have benefitted from huge gains in metal prices, financials have continued to profit from elevated interest rates, and geopolitical tensions have boosted defence stocks.

Bucking the global trend, the Bank of Japan unanimously decided to increase interest rates by 0.25% in December to 0.75% – a thirty-year high! Japan is emerging from decades of ultra-loose policy which was in place to fight deflation. The move was widely expected – inflation has been above target for over three years, PM Takaichi has unveiled huge stimulus plans, and the Japanese Yen has weakened close to 10% against the USD since April. In contrast to some previous periods whereby interest rate rises have led to significant drawdowns, December’s well telegraphed move created no such shock, and the Japanese stock market ended the month higher.

Bottom Line

December brought a calm end to 2025, a great year for stocks with most major markets achieving double-digit returns. We must continue to be vigilant as we enter 2026 but we believe tailwinds will continue, something we shall discuss further in our year ahead publication.

Noteworthy

What is meant by the K-Shaped Economy?

The phrase “K-Shaped Economy” has gained prominence amongst market participants as a way of describing the widening divergence in economic outcomes, specifically in the US. It refers to a population splitting into two distinct economic trajectories, with one segment continuing to grow and accumulate wealth, forming the upward arm of the “K”, while another experiences stagnation or decline, forming the downward arm. Those on the upper half of the K are typically asset rich and have benefited from higher interest rates on savings alongside strong US stock market performance driving their portfolio values to record highs. In contrast, those on the bottom half have seen their spending power eroded by persistent inflation and stagnant real wage growth thus creating a sizeable cohort of the population that feels increasingly left behind and does not participate in the tech-driven market and economic expansion currently underway in the US. This is evident in the data; US household wealth stands at record levels whilst unemployment is creeping up and the share of US credit card and auto loan debt falling into delinquency continues to rise. For markets, these diverging outcomes do matter. They could create winners and losers across equity sectors, and we expect our active managers to allocate accordingly. Moreover, rising inequality can create unpredictable political outcomes (see President Trump or Brexit) and this clearly brings the risk of market volatility over coming years. At North Capital, we remain constructive on the US economy and the US as an investment destination, while continuing to monitor the risks associated with a K-shaped economy.

Rise of the UK Market

While financial media and market commentators continue to fixate on developments across the Atlantic in the US, the UK’s large-cap (UK 100) index, representing the country’s one hundred largest companies, has quietly stood out. The index was up more than 20% in 2025, outperforming global equities and delivering its strongest total return since the post financial crisis rebound of 2009.

In a year marked by heightened political, trade, and market uncertainty, the UK 100 has provided exactly what investors have been seeking, with a broad and diverse range of stocks contributing to performance. Long criticised for being “old-world”, this characteristic has in fact worked in the index’s favour in 2025, as mining, defence, and banking stocks have led the gains. Importantly, this year’s success is not a flash in the pan. The UK market has generated positive returns in eight of the past ten years, averaging close to 9% per annum over that period, including dividends. Looking ahead to 2026, should the index deliver another positive year, the UK index will surpass the 10,000-point mark for the first time, surely an achievement worthy of a bank holiday.