This year has felt like a whirlwind in markets. It started with the explosion onto the scene of Chinese tech company DeepSeek, before US president Donald Trump and his ‘Liberation Day’ tariffs took centre stage.
The back half of the year has been more benign, culminating in a year when every major market rose. European stocks led the way, while US companies were (for once) the worst place investors could have put their cash.
Looking ahead to next year, it is easy to expect more of the same – especially as many of the drivers that moved markets in 2025 remain in place.
For example, fears that the US tech giants are overvalued still exist, meaning there could be capped upside to the US market next year.
Meanwhile, 2025’s winners (Europe and the UK) are comparatively cheap still, with price-to-earnings ratios far lower than the US market.
This means they should continue to rise again next year if investors keep reallocating their capital away from America.
But investors should be wary. Over the past decade, the S&P 500 has made the highest returns in seven years (2015-2024), although it has failed this year.
Anytime the market has not been the best place to invest, the following year it has roared back to the top. This includes 2022, when interest rates rocketed, 2020 during Covid and in 2017, when emerging markets knocked it off the top spot.
Of course, this time could indeed be different and the US could fail (relatively) again in 2026, especially with concerns that the air could start to come out of the artificial intelligence (AI) bubble.
For once, it seems America is the anti-consensus pick, making it one for the contrarians. Who would have thought it?
But is anywhere else much better? There are concerns that the easy money has now been made in Europe, as defence stocks and other market leaders have risen sharply over the past year.
Yet investors will want to put their cash somewhere if reallocating away from the US. Earlier this month, Rob Burnett outlined a very persuasive argument as to why Europe will do well again in 2026 – far better than I could.
Elsewhere, while there is optimism that the UK could recover from its low starting valuations, fund flow data shows investors continue to pull their money out rather than adding it back in. Without a catalyst, 2026 could be another year of ‘what if’ for domestic stocks, but things can change quickly.
Emerging markets are expected by most experts to be the big winner next year, but even here there is danger. China makes up 28.8% of the index but is coming off the back of three strong years – up more than 20% in 2023, 2024 and 2025.
The last time it made positive returns in three consecutive years (2019, 2020 and 2021), it suffered a 20.9% drop the following year.
And if investors are worried about the air coming out of the AI bubble, the top holding in the emerging market index is Taiwan Semiconductors (11.4% of the index) – a crucial cog in the technology boom.
This makes it such a challenge to know how to invest. Of course, in a year’s time this will all be redundant, as the prognostications at the start of the year often look outdated 12 months later.
My strategy will be to continue to invest in a select group of active fund managers I trust to do the right thing with my money. I may tinker with allocations at the margins, but I still have conviction in the people I have entrusted with my cash, so will let them make the hard choices.
However you invest, we wish you the best of luck next year. And whichever way markets turn, we will be here to bring you the latest news, data analysis and fund inspiration.
As this is my last column of the year, allow me to wish a merry Christmas to those who celebrate and a happy new year. I will see you all in January.