Despite a tumultuous year, global markets ended 2025 strongly, with many major indices notching up double-digit gains over the year in the face of geopolitical instability and trade tensions. Concerns over stretched valuations among AI-related stocks continued, and the OECD warned against the risk of “potentially abrupt price corrections.”
- The Fed implemented a 25bp rate cut
- The “Mag 7” made up almost 35% of the S&P 500 at year end
- The Bank of Japan raised interest rates
A rollercoaster ride: despite a tumultuous year, global markets ended 2025 strongly, with many major indices notching up double-digit gains over the year in the face of geopolitical instability and trade tensions. Concerns over stretched valuations among AI-related stocks continued, and the Organisation for Economic Cooperation & Development warned against the risk of “potentially abrupt price corrections.”
“Everyone thought that growth in the euro area would fall very badly, and this hasn’t been the case” (Christine Lagarde)
AI continued to dominate: in the US, the “Magnificent Seven” stocks comprised almost 35% of market value at the end of December, according to S&P Global, and accounted for 42% of the 2025 performance of the S&P 500 Index, which rose by 16.4% in 2025. Meanwhile, the Dow Jones Industrial Average Index rose by 13% over 2025, and by 0.7% during December, posting two new closing highs in December, and 18 during the year.
Fed cut rates in December: the Federal Reserve cut its key interest rate by 25 basis points in December to a range of 3.5% to 3.75%. The annualised rate of consumer price inflation dropped sharply from 3% in September to 2.7% in November. The government shutdown meant that there was no October data, and this led to some scepticism over November’s unexpectedly large decline. The US economy grew by 4.3% year on year during the third quarter of 2025, partly boosted by an acceleration in consumer spending.
Strong returns from Germany: the European Central Bank (ECB) maintained its key interest rate at 2% and upgraded its economic growth forecast from 1.2% to 1.4 in 2025, and from 1% to 1.2% in 2026, citing stronger domestic demand. In an FT interview, ECB President Christine Lagarde commented: “When the tariffs hit, when uncertainty grew, when war was raging, everyone thought that growth in the euro area would fall very badly, and this hasn’t been the case.” The Dax Index rose by 2.7% over December, and by 23% over 2025.
Japan raises rates: in a bid to curb inflation, the Bank of Japan (BoJ) raised its key interest rate by 25 basis points to “around 0.75% in December. Japan’s rate of inflation remained above the BoJ’s 2% target rate in November, climbing by 3% year on year. The Nikkei 225 Index rose by 0.2% in December, but surged by 26.2% over the year, boosted by yen weakness . The broader-based Topix Index hit a new high during December and rose by 22.4% over 2025.
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