Review of 2025
Markets remain resilient
2025 was a rollercoaster year, with geopolitical events introducing volatility in markets throughout the year. The most significant event over the year in markets was the introduction of new US import tariffs in April, which sent ripples throughout global markets. Investors responded poorly to the announcement and sell-offs caused developed market indices to fall over 16% in the immediate aftermath. However, markets quickly rebounded as sentiment improved, and the second half of the year saw positive gains across all major asset classes. Notably, 2025 was the first year since 2019 that all major asset classes delivered positive returns in US dollar terms.
Equities
Global equities posted their third consecutive year of gains, with Artificial Intelligence (AI) being the primary talking point for investors. The relatively new technology has been the subject of substantial capital expenditure from some of the biggest technology companies in the world. This wave of investment has been described as heavily front-loaded; spending aggressively now in anticipation of significant future returns. While questions remain about whether this capital expenditure will ultimately pay off, the current market sentiment is clearly highly optimistic.
The US market underperformed all other major equity markets for the first time in two decades, with the S&P 500 index and Nasdaq index returning 16% and 20% respectively in dollar terms. Emerging market (EM) equities delivered the highest asset class return of the year, with China’s benchmark CSI 300 index posting a gain of around 27%, whilst the South Korean Kospi index surged over 75%, both in local currency terms.
UK and European equities performed well, supported in part by the relative appreciation of the euro and sterling against the US dollar. In local currency terms, the Stoxx Europe 600 and FTSE 100 rose around 17% and 21% respectively
Bonds
The bond market also delivered exceptional returns in 2025, driven in part by EM economies which benefitted from the weakening of the US dollar. Many EM economies issue debt in US dollars, known as hard-currency debt. When the dollar weakens, the servicing costs in the domestic currency become cheaper which improves debt sustainability and supports stronger returns for bond investors.
Bonds also performed well in developed markets. The US investment-grade credit market returned around 7%, its strongest performance since 2020. Credit spreads – which represent the additional yield over government bonds – tightened over the year, making older, higher-coupon corporate bonds more attractive to investors, which in turn drives up prices. US short-term interest rates decreased as the Federal Reserve resumed their rate cutting cycle, whereas long term rates – which are used for loans such as mortgages – edged up slightly, reflecting investor caution about the long-term economic outlook for the world’s largest economy.
The Euro and UK high-yield sectors have continued their strong runs since the selloff in 2022, with the average total return over the year around 10% and 7% respectively. High-yield bonds tend to be more closely correlated with stock performance than investment-grade bonds due to their correlation with the overall health of the economy and higher sensitivity to changes in credit spreadst.
Commodities
Precious metals were the standout performer of 2025. The price of silver rose 146% over the course of the year, eclipsing the still very impressive performance of gold, which saw a gain of 65%. The increase in demand for silver was driven by its dual appeal as both a safe haven asset and its use as an industrial raw material, as well as its classification as a critical mineral in the US in November which drove investor demand. Gold saw its strongest return since 1979, buoyed by an environment of dollar weakening and declining interest rates.
Some industrial metals also performed well over the course of the year. Copper – largely seen as a proxy for the health of the global economy, due to its uses in construction, energy, and tech – saw its price rise 43%. An increase in demand is largely driven by data centres for AI; Fidelity International estimate the increase in electricity demand to run data centres will require nine million kilometres of additional cabling by 2050.
Oil prices fell significantly in 2025, driven by increased OPEC+ production and excess supply from oil producing states. The two main global benchmarks, Brent Crude and the West Texas Intermediate fell by 19% and 20% respectively over the course of the year, bringing the price of oil to around $60 a barrel. This partially offset some of the gains from precious and industrial metals, which saw the commodity market as a whole finish the year around 16% in the black.
Foreign Exchange (FX), Interest Rates and Inflation
Across the globe, major central banks continued to cut their respective headline rates in response to cooling inflation and warning signs of weakening labour markets. In the US, the Federal Open Market Committee (FOMC) elected to cut rates by 25bps on three consecutive occasions towards the end of the year, bringing the target range to 3.5% to 3.75%. Despite the observed marginal upticks in consumer price inflation over the year, the Bank of England (BOE) completed four independent 25bps cuts, closing the year at 3.75%. The European Central Bank also cut its headline rate four times to 2.0% by year-end, finishing a cycle of eight consecutive cuts that began in June 2024.
Unlike their Western counterparts, the Bank of Japan (BOJ) began a rate-hiking cycle in 2025, ending a long period of loose monetary policy in the country to address concerns around deflationary pressures. The BOJ uplifted the headline rate by 25 bps to 0.5% in January, and a further 25bps to 0.75% in December.
As mentioned previously, interest rate cuts, as well as trade policy and broader geopolitical events resulted in a notable weakening of the US dollar over the year against most major currencies, with the trade-weighted US dollar falling by 7.0% over the year. As at year-end, the US dollar traded at 1.35 against sterling and 1.17 against the euro, compared to 1.25 and 1.04 at the start of the year.
What to watch in 2026
Unsurprisingly, in 2026 investors will continue to closely monitor developments in global geopolitical conflicts, in the hope that swift and peaceful resolutions will reduce inherent volatility in markets.
As ever, central bank policy will continue to be a key factor in investment decision making as major economies continue to tackle different inflationary and labour market situations. We are starting to see some global divergence in monetary policy; the Federal Reserve and Bank of England are in the middle of a rate cutting cycle, Europe is holding rates steady and Japan has started hiking. This disconnect may create opportunities for global bond investors to pursue active returns amid emerging volatility.
In equity markets, concerns around the future of AI and diversification are likely to continue to drive market sentiment in 2026. US company valuations are at their highest levels since just before the dot com bubble, essentially a view that large capital expenditure in AI over the next few years will help produce future earnings that are meaningfully higher than today.
The Cambridge Team
enquiries@cambridgeinvestments.co.uk
Your contact details are securely held within our database either because you have subscribed to The Cambridge Weekly Market Update or your Financial Planner has requested that we send it directly to you. It’s very important to us that any information we send you is relevant and useful.
If anybody wants to be added or removed from the distribution list, please email
enquiries@cambridgeinvestments.co.uk
This material has been written on behalf of Cambridge Investments Ltd and is for information purposes only and must not be considered as financial advice. We always recommend you seek financial advice before making any financial decision.
Past performance is not a guide to future performance.
The value of your investments can go down as well as up and you may get back less than you originally invested.
Source of financial market data: MorningstarDirect.