2025 recap: volatility, resilience and records

Despite a volatile start to 2025, global equity markets ultimately delivered another year of solid returns, reinforcing the resilience of risk assets amidst political uncertainty and shifting macroeconomic priorities.

Early in the year, markets were shaken after President Trump brought the world to its closest point to a global trade war in nearly a century. US equities sold off sharply, with major indices declining close to 20% by April. However, a subsequent de-escalation in trade rhetoric, combined with supportive monetary policy, allowed markets to stabilise and recover strongly through the remainder of the year.

US equities were further supported by additional interest rate cuts from the Federal Reserve, as policymakers rebalanced their focus toward a slowing labour market, while inflation continued to ease from the elevated levels in prior years. For the third consecutive year, US equities delivered solid double-digit returns. Once again, technology stocks led the way, with the Nasdaq rising 21.0%, followed by the S&P 500 which gained 17.9%, and the Dow Jones Industrial Average which returned 14.9%.

Equity markets across Europe and Asia also performed strongly. In Asia, the Hang Seng Index rose 32.5%, while Japan’s Nikkei advanced 28.7%. European markets were similarly robust, with Spain’s IBEX 35 Index returning 56.5%, the UK’s FTSE rising 26.7%, and Germany’s DAX gaining 23.0%.

In contrast, the Australian equity market lagged its global peers, rising 10.4% over the year. Nonetheless, and in line with other global markets, the ASX 200 reached record levels in 2025. After a volatile first half, the index recovered steadily and in August closed above 9,000 points for the first time, marking a series of new all-time highs through the second half of the year.

As discussed earlier in our year-ahead outlook, the key structural challenge for the Australian market remains its high concentration in financials and resources. The financial sector, which represents approximately 33% of the ASX 200, returned 13.5% in 2025. The resources sector, comprising around 19% of the index at the start of the year, rebounded strongly, rising 38.0% after a disappointing 2024 in which the sub-sector fell 12.4%.¹

The index’s third-largest sector at the start of 2025, healthcare, which accounted for approximately 9.8% of the ASX 200, declined 23.6%, as a number of company-specific issues weighed on several of the sector’s largest constituents.¹

Markets to reward selective investors in 2026

The RBA implemented three interest rate cuts in 2025, taking the cash rate from 4.35% to a two-year low of 3.60% by August before holding steady in November due to a pick-up in inflation in the September quarter. In February 2026, the RBA reversed course, delivering a modest rate increase in response to renewed inflationary pressures, reinforcing its data-dependent and cautious approach to policy normalisation.

In the US, we anticipate further rate cuts in 2026 as economic momentum slows, labour market conditions soften, real interest rates remain elevated and consumer confidence remains subdued.

While technology and AI-related stocks have driven market performance in recent years, other sectors have lagged the recovery, offering the potential for broader-based returns ahead. Markets are increasingly focused on the substantial capital expenditure and energy requirements associated with large-scale AI investment. While AI adoption is expected to drive meaningful productivity gains over time, the key question remains how those gains will be distributed — between customers, workers and shareholders. Second-order effects, including the impact on employment, add further complexity.

Against this backdrop, we believe investors will be best rewarded by being selective in their stock allocations. After three consecutive years of strong equity market returns, outcomes are likely to be more discriminating. This was evident in 2025, with large divergences in stock performance, particularly around earnings announcements. While there may be pockets of excess in parts of the technology sector, overall market valuations appear reasonable, with attractive opportunities to deploy capital in high-quality businesses for investors prepared to take a medium- to long-term view.