Market Update – January 2026

Executive summary

• • Inflation has broadly come down from the highs of 2021–2023 but remains uneven across regions and categories in 2025. Interest rates have settled at materially higher levels than the pre-pandemic era and central banks are navigating a delicate path between supporting disinflation and avoiding tipping economies into recession.
  • Global equities delivered strong returns in 2025 led by China and the Emerging Markets and largely driven by AI-exposed technology names.
  • Bonds had a more subdued year with yields settling into a new, structurally higher range around the 3–5% band for core government bond markets.
  • For 2026, the dominant themes for investors will be:
    1. central bank comments and the timing/pace of rate cuts
    2. the impact of AI
    3. the resilience of consumer spending and corporate margins
    4. the path of real (inflation-adjusted) yields which will determine the valuation multiple investors are willing to pay for growth

Macro

• • By late 2025 the global economy looked like one of modest growth with important regional differences. Advanced economies generally showed positive but below-trend growth:
    • The US managed to avoid a recession and posted continued expansion through 2025, supported by services activity and corporate investment in AI infrastructure.
    • The euro area trod water with manufacturing weakness offset by resilient services. The UK showed signs of slower but steady growth.
    • Emerging markets were mixed; China’s growth continued to be a focal point for global demand and investors, with its cyclical ups and downs affecting commodity exporters and regional trade flows.

• • Inflation cooled materially from the double-digit shocks in some categories earlier in the decade. Nowcasting and official data in November 2025 pointed to year-over-year CPI/PCE readings in the low-to-mid single digits in the US, with the Cleveland Fed’s inflation nowcast indicating headline CPI around 3% year-on-year for November 20251 and core measures trending near that level suggesting that while headline readings have fallen, core-service inflation such as shelter and wages remain a source of stickiness.
    • In the euro area, headline inflation was running modestly above target in late-2025 but had eased to roughly 2.1% (October 20252), evidence that disinflationary progress had been made though not uniformly across components.
  • Across advanced economies labour markets remained relatively tight versus pre￾pandemic norms – unemployment rates are low in the US, Europe and the UK but by late 2025 some indicators such as job openings, and hiring intentions showed signs of softening. Wages dynamics are one of the principal determinants of persistent inflation.

• • Central banks ended most of 2025 in a “higher for longer, data-dependent” stance. The US Fed kept rates restrictive through most of the year while markets increasingly priced the timing of the next cut before the end of 2025, but this decision is highly sensitive to incoming inflation and employment data.
    • The Bank of England in November 2025 had maintained Bank Rate (around 4% as of the November meeting) while acknowledging signs of peaking inflation and some internal divergence on the committee regarding future cuts.
    • The European Central Bank similarly had moved policy into a less hawkish posture as inflation approached 2% in the euro area, but the pace and timing of further easing remain uncertain.
  • The macro backdrop entering 2026 is one of slower-but-positive growth, softening inflation, and central banks that will be highly reactive to incoming data.

Equity Markets in 2025

• Global equities finished 2025 strongly and leadership was largely concentrated in mega￾cap technology and AI-exposed sectors. The strongest performing markets to end November 2025 have been China, the Asian & Emerging Markets and many markets were led by large cap names. In markets outside of the US, value indices outperformed growth where defence names and financials dominated investors’ attention in markets such as Europe.
• Valuation dispersion widened in 2025. Top-line growth and margin expansion in AI beneficiaries were seen as the justification for above-average multiples for a subset of large cap tech firms, while many cyclical and smaller cap companies traded at lower multiples reflecting slower earnings growth and recession risk pricing.
• Corporate earnings in 2025 benefited from a combination of cost discipline, productivity gains especially where AI tools were deployed, and still-resilient consumer demand in many services sectors.

Bond Markets in 2025

• Long-term government bond yields settled into a higher structural range in 2025 compared with the ultra-low environment of the previous decade. The US 10-year Treasury yield – an anchor for global rates – was around the low-to-mid 4% area in late November 20253, reflecting both sticky real yields and persistent inflation expectations.
• Yield curve shapes varied over the year, including episodes of inversion (whereby short yields are above long yields) signalling recession worries at times. More recently, yield curves steepened when markets priced the potential for rate cuts.
• Corporate credit spreads tightened during the risk-on parts of 2025, helped by strong demand across markets and healthy balance sheets across many firms.
• Real bond yields (which are those adjusted for inflation) rose from their historically depressed levels as investors demanded higher compensation for risk and for inflation variability. Markets expected inflation to remain above the recent historical 1–2% norms for several years, albeit lower than near-term peaks.

Our Portfolios in 2025

• • Our portfolios delivered strong gains in 2025 driven by a relatively large exposure to the strongly performing equity markets.
  • We made two prime adjustments to the asset allocation of our portfolios, where appropriate and mandates allowed across the year, both of which were reductions in the equity markets exposure.
    • In January we reduced the exposure to US equities, where valuations looked stretched and added to bonds to take advantage of the elevated yields.
    • In May, we further reduced equities in favour of alternatives after the strong rebound post the Liberation Day tariff announcements in early April which initially led to a sharp sell off in equities before markets then staged a strong recovery.
  • The more diversified portfolios positioning reflects the higher levels of volatility anticipated in markets across the next couple of years.

Outlook for 2026

• • • The most likely scenario, in our view, appears to be a so-called soft landing for the global economy with orderly cuts in interest rates.
      • This would see inflation continuing to drift down toward central bank targets, labour market easing gradually without a spike in unemployment. Central banks would continue a measured sequence of cuts in interest rates across 2026 depending on the data.
    • The other most likely scenario, we think, is one in which inflation proves stickier, driven by services/shelter or wage pressures, so central banks then delay cuts in rates. Growth then slows but still likely avoids a recession. Bond yields remain elevated.
    • We will be keeping an eye on the following items in 2026:
      • Monthly inflation prints and employment data which will set the tone for the US Federal Reserve, the ECB and the Bank of England.
      • Central bank meeting minutes and guidance; their decisions and communications of balance-sheet strategy are central to moves in yields in the bond markets.
      • Earnings season surprises; the extent to which AI investments translate into earnings and profits will be important in determining whether this segment of the markets continues to be the dominant theme.
      • Geopolitical shocks could lead to energy or food supply disruptions and general market uncertainty and would potentially risk a return to higher headline inflation.
      • Trump and the political landscape.
      • Credit spreads and corporate issuance; a rapid widening in bond yield spreads can be a sign of broader risk aversion.

Entering 2026, investors face both opportunity and crosswinds. The central banks are on a knife-edge between cutting rates which may stoke inflation and not doing so and thereby choking off growth. The rise of AI and related capex is a genuine structural force that has powered much of 2025’s returns, but concentration risk, valuation dispersion, and the uncertain path for bond yields argues for our continued diverse portfolio construction.

1 – Cleveland Fed inflation nowcasting (November 2025 inflation nowcasts) plus TradingEconomics.com

2 – TradingEconomics.com

3 – FRED / US Treasury 10-year yield series/TradingEconomics.com

Important Information

This document is issued by Hockney Stevens Chartered Financial Planners. Isle of Man Company Number: 101829C. Directors: J Hockney / B Hockney. Hockney Stevens Chartered Financial Planners is the registered business name of Hockney Stevens Investment Services Ltd. Registered office: Kerrowglass /Stockfield Road / Kirk Michael / Isle of Man / IM6 1HP. Licensed by the Isle of Man Financial Services Authority. Nothing in this document shall be deemed to constitute financial or investment advice in any way. This document shall not constitute or be deemed to constitute an invitation or inducement to any person to engage in investment activity. Past performance is not a guide to future returns and the value of capital invested and any income generated from it may fluctuate in value.