Investor update: January 2026

At a glance:

• Most equity markets moved modestly higher in December to round out a strong year for stock markets overall.
• The main stock markets in the UK, Europe and Japan all outperformed the US for 2025, but it was emerging market equities that delivered the strongest regional returns for the year.
• As expected, the US Federal Reserve and Bank of England announced a rate cuts in December, but market movements suggest that bond investors are looking further ahead.

Towards the end of last year, you might have seen our Investment Outlook for 2026. In it, our investment team explored the key themes we expect to shape markets in the coming twelve months and beyond. These are the big, impactful topics we think will crop up a lot in the next year as we discuss what’s moving markets. If you haven’t already, check it out on the link below.

Read more: J.P. Morgan Personal Investing - Annual investment outlook | 2026

What happened in financial markets in December?

Equity markets mostly made modest gains in December, to round out a strong year for equities overall.

The US S&P 500 was fairly flat in December, having gained a little under 18% over the full year. The main equity indices in the UK, Europe and Japan all made modest monthly gains, but more notably, all delivered gains around the 24% to 25% mark to outperform the US for 2025 as a whole. Emerging market equities did better still, outperforming most developed markets both over the month and year. It is worth mentioning the weak performance of the US dollar, which declined against a number of major currencies by around 10% on average in 2025. This is likely to have impacted returns for British investors in US dollar-denominated assets.

In fixed income, a number of key government bonds yields rose. As a reminder, bond yields and bond prices move in opposite directions. Yields for the 10-year government bonds of the US, UK, Germany and Japan all climbed in December. Bonds issued by companies or ‘corporate bonds’, generated slightly stronger returns than government bonds.

What drove markets?

2025 certainly had no shortage of big events to discuss and December was no exception, but a couple of developments stood out.

The US Federal Reserve — or ‘the Fed’ — announced a largely-anticipated rate cut in December. It lowered its target range by 0.25 percentage points to between 3.5% and 3.75%. Fed policymakers explained that while inflation and unemployment are still higher than ideal, data overall indicates the US economy is still in good health. Murmurs of an AI-bubble appeared to fade, at least temporarily, and investors were happy to add to equities after the move.

As mentioned, the Fed’s decision to reduce rates was widely anticipated, and the last few Fed rate cuts have unfolded pretty much as expected. Two to three more rate cuts are currently expected in 2026, at which point interest rates will be at roughly the Fed’s ‘neutral’ range. The neutral range is an estimate of where Fed policy is neither stimulative nor restrictive of economic growth.

It’s perhaps no surprise then that bond markets showed signs that investors are looking slightly further ahead. Some evidence for this can be found in what we call the ‘yield curve’. The yield curve shows the yields that government bonds currently offer at various maturities, which is when investors will get their initial investment back. In December, yields rose for government bonds set to mature quite far in the future, 10-years or more, but shorter-term government bond yields declined.

Why would this be the case?

Well, President Trump’s tariff announcements in early 2025 caused a stir in markets that has now mostly faded, but set a precedent for fairly strident policy decisions from the White House. In recent days the US' Venezuelan intervention could be considered another example.

It all adds to the sense of longer-term uncertainty, as investors mull the possible outcomes of these decisions. Adding to this, a new Federal Reserve Chair is expected to take over from the current Chair Jerome Powell in May. This may have additional implications for monetary policy and the bond market.

In the UK, the Bank of England also announced a cut to the bank rate in December, and also by a quarter percentage point, which took the base rate to 3.75% from 4%. The central bank felt the cut appropriate because UK inflation, although above target, has been trending lower. Consumer price inflation fell to 3.2% in November from 3.6%. Where our investment team believe the UK differs from the US, is its underlying economic resilience. The UK economy is growing, but we think the growth looks more fragile.

The European economic recovery, meanwhile, has paused after a period of strength. However, the region is experiencing economic expansion with stable inflation, and fiscal policy — especially in Germany — remains supportive of growth.

How are we positioning portfolios?

We remain positive on equities overall, and the US in particular. This is expressed via broader market positions in the S&P 500 and NASDAQ indices, as well as more targeted exposure to US financials. We remain underweight UK equities relative to our long-term benchmark.

We are increasingly optimistic about Europe and have increased our position in European equities, especially banks.

We have increased our position in gold, having reduced portfolio holdings in long-term UK government bonds or ‘gilts’.

Elsewhere, we have been increasing our exposure to emerging market equities and are now slightly overweight relative to our long-term benchmark.

About this update: All figures, unless otherwise stated, relate to the month of December 2025.

Sources: MacroBond, J.P. Morgan Personal Investing and Bloomberg.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. Past performance and forecasts are not a reliable indicator of future performance. We do not provide investment advice in this update. Always do your own research.