EXANTE Quarterly Macro Insights Q4 2025

We look at what has happened in the world of global economics and finance over Q4 2025 and what risks and events may affect markets in Q1 2026.

Q4 review

In Q4, global equities displayed resilience and diversity in performance amid significant monetary policy shifts and a complex economic environment. In the US, major indices posted moderate gains: the S&P 500 rose +2.35% in Q4 and the Nasdaq 100 gained +2.31%.

European equities outpaced their US counterparts, with Spain’s IBEX 35 surging +11.84% in Q4 followed by Stoxx 600 +6.09%, and the FTSE 100 returning +6.21%. Asian markets were buoyed by the AI-driven cycle, especially in North Asia, where South Korea’s KOSPI soared +23.06% in Q4, powered by robust semiconductor exports and corporate reforms. The MSCI AC Asia ex-Japan Index climbed +4.33% in Q4, marking its strongest annual performance since 2017. India’s markets were more subdued with Nifty 50 and Sensex up +6.17% in Q4 and +13.43% for the year, reflecting high valuations despite strong economic fundamentals and 8.2% GDP growth.

Monetary policy underwent notable changes, particularly in the US and Europe. The Fed shifted from a ‘data-dependent’ to a ‘risk management’ framework, responding to a weakening labour market with two rate cuts totaling 50 bps, bringing the federal funds rate to 3.50% – 3.75%. The December FOMC meeting revealed deep divisions, while projections signalled further measured easing into 2026. Inflation plateaued above target, with December’s CPI at 2.7% y/o/y. In Europe, the ECB achieved its 2.0% inflation target in December, though persistent services inflation led the central bank to keep rates steady after earlier cuts, emphasising a data-dependent stance. The BoE also delivered a debated rate cut amid moderating inflation.

The economic backdrop was mixed. The US economy saw asset prices hit records despite a 43-day government shutdown and labour market fragility, with job creation slowing dramatically. Liquidity conditions and retail investor engagement provided market support, even as economic indicators signalled caution. In Europe, growth remained subdued (0.3% in Q3), with manufacturing contracting and services sustaining employment. UK equities outperformed, but faced weak consumer demand and confidence, as households prioritised savings over spending. Asia benefitted from structural shifts in technology, with South Korea and India standing out for different reasons — AI hardware leadership and strong macro fundamentals, respectively. 

US Indices for Q4 2025 and 2026 YTD

S&P 500 +2.35% Q4 and +1.18% YTD
Nasdaq 100 +2.31% Q4 and +0.86% YTD
Dow Jones Industrial Average +3.59% Q4 and +2.35% YTD
NYSE +2.04% Q4 and +3.26% YTD

According to the S&P Sector and Industry Indices, 8 of the 11 S&P 500 sectors were up in Q4. The best performing sector in Q4 2025 was Health Care at +11.20%, followed by Communication Services at +7.05%, and Financials at +1.64%, whereas Real Estate was -3.68%, followed by Utilities and Consumer Staples at -2.11% and -0.71%, respectively.

It was a mostly positive Q4 for the Magnificent Seven: Alphabet +28.75%, Apple +6.77%, Amazon +5.12%, and Tesla +1.12%, while Nvidia -0.04%, Microsoft -6.63%, and Meta Platforms -10.12%.

In Q4 Energy stocks were +0.66% and lagged the S&P 500’s +2.35% due to concerns about global oversupply. Halliburton was +14.88%, ExxonMobil +6.73%, Shell +3.53%, and BP Plc +1.66%, while Chevron was -1.85%, Phillips 66 -5.13%, Baker Hughes -6.53%, Occidental Petroleum -12.97%, and Marathon Petroleum -15.62%.

Basic materials stocks were +0.66% in Q4. Performance was mostly positive with Albemarle Corporation +74.44%. In Q4, Freeport-McMoRan was +29.50%, Sibanye Stillwater +22.74%, Nucor Corporation +20.44%, Newmont Mining +18.43%, and Yara International +13.55%, while CF Industries Holdings was -13.78%, and Mosaic -30.54%.

For Q4 2025, according to FactSet, the estimated y/o/y earnings growth rate is 8.3%. The proportion of S&P 500 companies issuing positive EPS guidance is above historical averages. Of the 107 companies in the index that have provided guidance for Q3 2025 to date, 50 have issued positive EPS guidance, while 57 have issued negative guidance. The resulting rate of 47.0% for positive guidance is higher than both the 5-year average of 42.0% and the 10-year average of 40.0%.

The estimated net profit margin for the S&P 500 in Q4 2025 is 12.8%. While lower than the previous quarter’s 13.3%, it remains above the year-ago margin of 12.7% and the 5-year average of 12.1%.

Sector-specific analysis indicates that just two sectors are projected to see a y/o/y increase in their net profit margins for Q4 2025 compared to the same period in 2024. Information Technology is expected to lead this growth with a 1.7 percentage point rise, moving from 26.8% to 28.5%. Additionally, Materials net profit margin is expected to increase by 0.6 percentage points to 9.4% from 8.8%. On the other hand, Real Estate is expected to report the most significant contraction in its net profit margin on an y/o/y basis, decreasing 1.3 percentage points from 35.1% to 33.8%.

Five sectors are anticipated to report net profit margins for Q4 2025 that exceed their 5-year averages. Information Technology is expected to demonstrate the most significant increase, with a 3.8 percentage point difference, reaching 28.5% in Q4 2025 compared to its 5-year average of 24.7%.

Conversely, six sectors are projected to report Q4 2025 net profit margins below their respective 5-year averages. Health Care is the most notable in this group, with an anticipated decrease of 2.2 percentage points, from 9.3% to 7.1%.

European Indices Q4 2025 and 2026 YTD

Stoxx 600 +6.09% Q4 and +3.27% YTD
DAX +2.55% Q4 and +3.25% YTD
CAC 40 +3.21% Q4 and +2.23% YTD
IBEX 35 +11.84% Q4 and +2.24% YTD
FTSE MIB +5.19% Q4 and +1.29% YTD
FTSE 100 +6.21% Q4 and +2.55% YTD

As of 8^th January, according to LSEG I/B/E/S data for the STOXX 600, Q4 2025 earnings are expected to decrease 3.9% from Q4 2024. Excluding the Energy sector, earnings are expected to decrease 5.0%. Q4 2025 revenue is expected to decrease 2.6% from Q3 2024. Excluding the Energy sector, revenues are expected to increase 1.2%. One company in the STOXX 600 has reported earnings to date for Q4 2025. It reported earnings exceeding analyst estimates, in a typical quarter 54% beat analyst EPS estimates. However, it reported revenue that fell short of analyst estimates. In a typical quarter 58% beat analyst revenue estimates.

The STOXX 600 expects to see shareweighted earnings of €131.3 billion in Q4 2025, compared to share-weighted earnings of €136.6 billion (based on the year-ago earnings of the current constituents) in Q4 2024.

Four of the ten sectors in the index expect improved earnings compared to Q4 2024. The Real Estate sector has the highest earnings growth rate for the quarter at 5.6%, while Consumer Cyclicals has the highest anticipated contraction of -23.0% compared to Q4 2024.

The forward four-quarter price-to-earnings ratio (P/E) for the STOXX 600 sits at 15.1x, above the 10-year average of 14.2x.

During the week of 12^th January, there are no companies expected to report quarterly earnings.

Analysts expect positive Q4 earnings growth from nine of the sixteen countries represented in the STOXX 600 index. Austria (111.3%) and Finland (10.8%) have the highest estimated earnings growth rates, while Ireland (-34.0%) and Belgium (-20.7%) have the lowest estimated growth.

Global Indices for Q4 2025 and 2026 YTD

Hang Seng -4.56% Q4 and +5.34% YTD
MSCI World +3.13% Q4 and +2.00% YTD

Fixed Income for Q4 2025 and 2026 YTD

US Treasuries 10-year yield +2.0 bps Q4 and -3.3 bps YTD to 4.139%
Germany’s 10-year yield +14.4 bps Q4 and -4.1 bps YTD to 2.819%
Great Britain’s 10-year yield -22.2 bps Q4 and -13.4 bps YTD to 4.344%

Contrary to the volatility often associated with political dysfunction, the US bond market was surprisingly calm in Q4. The interplay between a fractured Congress and an assertive Executive branch introduced a distinctive risk premium in US assets.

The record breaking 43-day federal government shutdown demonstrated the deep ideological divisions over fiscal priorities.

However, the benchmark 10-year US Treasury yield was range-bound; it began the quarter at 4.152% and ended at 4.172%, moving only +2.0 bps higher. This stability occurred even as the yield curve steepened. Short-term rates fell -13.4 basis points on expectations of Fed easing, while 30-year yields rose +11.3 bps on concerns around debt levels and sustainability.

As the Fed implemented rate cuts, yields on cash equivalents such as Treasury bills likely began to trend downward toward 3.5%. Investors extended duration along the curve during Q4, seeking to lock in yields within the 5- to 7-year maturity range and showing a preference for corporate credit over Treasuries to capitalise on the available spread.

Across the Atlantic, European government bonds mirrored their US counterparts over the quarter, except for German bunds, where yields ended the quarter higher across the curve. The German yield curve steepened significantly. With the ECB anchoring the short end and fiscal supply lifting the long end, the term premium expanded.

The political risk premium on French debt (OATs) escalated throughout the quarter as the minority government led by Prime Minister Sébastien Lecornu faced a legislative impasse over the 2026 budget. On 22^nd December, the French 10-year yield spiked to a ten-year high of 3.623%. The OAT-Bund spread widened to a volatile range of 70 - 85 bps in Q4.

In a reversal of historical roles, Italy emerged as a haven of stability in Q4 2025. The Italian sovereign bond market (BTPs) outperformed both Bunds and OATs, driven by a virtuous cycle of fiscal discipline and rating upgrades. On 21^st November, Moody’s upgraded Italy’s sovereign rating to Baa2 from Baa3, changing the outlook to stable.

Throughout the quarter, the German 10-year yield rose 14.4 bps, while the 2-year Schatz advanced +10.0 bps. On the long end, the 30-year yield increased +19.6 bps. Italy’s 10-year yields rose +0.5 bps to 3.550%, leaving the spread over Bunds at 69.0 bps, a contraction of 13.9 bps throughout Q4. French 10-year yields advanced +1.8 bps to 3.559%, consequently, the premium over Bunds contracted by 12.6 bps through Q4 given Bunds’ emerging risk premia.

Commodities in Q4 2025 and 2026 YTD

Gold spot +12.08% Q4 and +7.26% YTD to $4,627.52 an ounce
Silver spot +51.38% Q4 and +30.72% YTD to $93.15 an ounce
West Texas Intermediate crude -9.36% Q4 and +6.34% YTD to $61.05 a barrel
Brent crude -9.21% Q4 and +7.63% YTD to $65.56 a barrel

Q4 presented a stark divergence in the performance of global commodities. This period was defined by a complex interplay of monetary easing by the Fed, escalating trade uncertainties, and shifting supply-demand dynamics that disproportionately impacted oil and gold in opposing directions.

A pivotal event for the energy sector was the OPEC+ meeting in December 2025. Despite the group’s ongoing efforts to manage market stability, production data revealed cracks in compliance and capacity. As detailed by S&P Global Platts, total OPEC output fell to 28.40 million barrels per day in December, a decline of 100,000 barrels per day from November. However, this headline figure masked underlying issues; while some members attempted to increase quotas, capacity constraints and compensation cuts from Iraq and the UAE effectively neutralised planned output growth. The IEA further dampened sentiment by downgrading its demand growth forecasts, citing economic deceleration in major industrial economies.

Conversely, the gold market experienced a powerful rally, benefitting directly from the same macroeconomic factors that weighed on industrial commodities. Gold rose +12.08% in Q4 and +64.72% for the year, reaching several record highs, as a weakening dollar and geopolitical risk kept central banks, retailers and investors buying. Silver was up 51.38% in Q4 and had an amazing +149.06% annual return due surges in demand by industrial producers, supply constraints, growing geopolitical resource nationalism, and strong inflows into silver ETFs as investors sought out safe haves. 

Note: Data as of 5 pm EST 14 January 2026

Regional news

The USA

Q4 will be remembered as a period when market participants chose to look past the political noise in Washington and instead focus on the prevailing liquidity conditions. In spite of a record-setting government shutdown and a concerning labour market backdrop, robust liquidity driven by the anticipation of Fed easing and heightened retail investor engagement propelled asset prices to all-time highs.

The S&P 500 Index posted its third consecutive year of double-digit returns, rising +2.35% in Q4 to close at 6,845.50. However, this rally masked a deteriorating macroeconomic foundation. The US labour market has shifted from a state of tightness to one of fragility, generating only 584,000 new jobs in 2025 — a significant decline from the 2.0 million jobs created in 2024, or an average of about 49,000 per month compared to 168,000 per month in 2024. Q4 data indicates a growing labour market weakness. The economy lost a revised 173,000 jobs in October. While initially attributed to hurricane effects, subsequent analysis revealed the primary driver was the government shutdown, which triggered ‘deferred resignation packages’ and furloughs that bled into private sector hiring freezes.

Furthermore, the anticipated recovery in hiring post-shutdown did not materialise. November saw a modest addition of 64,000 jobs, while December added only 50,000. The absence of a strong recovery suggests that corporate caution has become entrenched, likely stemming from White House trade policy uncertainty.

Complicating the Fed’s mandate, inflation in Q4 2025 demonstrated the difficulty of the last mile in the disinflationary process. The Consumer Price Index (CPI) for December 2025 rose 0.3% m/o/m, translating to a 2.7% y/o/y rate, unchanged from November.

The Fed's actions in Q4 represented a decisive shift from a ‘data-dependent’ framework to a ‘risk management’ framework. Confronted with the asymmetric risks posed by a weakening labour market versus slightly elevated inflation, the FOMC opted to prioritise the former.

During Q4, the Fed implemented two rate cuts, reducing the federal funds rate by a total of 50 bps — once on 20th November and again on 10th December — bringing the target range to 3.50%–3.75%. The December decision revealed the deepest division within the FOMC in years, resulting in a rare 9-3 vote: Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid dissenting in favour of maintaining current rates, while Fed Governor Stephen Miran advocated for a deeper 50 bps cut.

Looking ahead, the Fed’s Summary of Economic Projections (SEP), released in December, outlines a continued but measured path of monetary easing, with the median forecast anticipating a federal funds rate between 2.9% and 3.6% by the end of 2026.

The eurozone

Throughout Europe, the corporate credit markets demonstrated notable resilience in the face of persistent macro-political challenges and subdued economic growth, which registered at 0.3% in Q3. IG spreads tightened to their lowest levels in fifteen years, a trend fuelled by robust demand for high-quality yield and unprecedented inflows, even as the primary market absorbed record-breaking Q4 issuance volumes. Q4 ended with headline inflation aligning with the ECB’s 2.0% target. Nevertheless, concerns around high services inflation have caused policymakers to start 2026 with a measured, data-dependent approach.

The eurozone economy expanded by a modest 0.3% q/o/q in Q3, consistent with a soft landing scenario but providing limited evidence of a strong recovery. This aggregate performance, however, masked a clear divergence between the industrial core and the more services-driven periphery.

Leading indicators throughout the quarter signalled a further deceleration in momentum as the year drew to a close. The HCOB Eurozone Composite PMI declined steadily, reaching 51.5 in December from 52.8 in November. While readings above 50.0 indicate expansion, the direction pointed to a cooling economic environment.

The manufacturing sector remained the principal impediment to growth, with the Manufacturing PMI Output Index falling to 49.7 in December, thereby ending a nine-month span of tentative expansion and re-entering contractionary territory. This weakness was particularly pronounced in Germany, where the industrial sector grappled with elevated energy costs and diminished export demand from China. By contrast, the Services PMI, while softening to 52.4 in December from 53.6 in November, continued to support growth, underpinned by a robust labour market that maintained unemployment at a record low of 6.3%.

In Germany sentiment indicators reflected the disparity between current conditions and future expectations. The Ifo Business Climate Index, which gauges executives’ assessments of present circumstances, declined to 87.6 in December, its lowest point in seven months, amid concerns over declining order volumes and geopolitical uncertainty. Conversely, the ZEW Indicator of Economic Sentiment, surveying financial analysts’ expectations, surged to 45.8 in December.

Euro area annual inflation was estimated at 2.0% in December 2025, down from 2.1% in November, thereby achieving the central bank’s medium-term target.

However, this convergence toward the target was primarily attributable to volatile elements, particularly energy prices, which declined by 1.9% y/o/y. Underlying inflationary pressures remained persistent, with services sector prices —representing the most labour-intensive and domestically driven component —increasing by 3.4% in December, little changed from 3.5% in November.

As a result, the ECB staff’s projections in December revised the 2026 inflation forecast upward to 1.9%, from the previous estimate of 1.7%, explicitly citing the persistent dynamics within the service sector. This move signalled to markets that the last mile of disinflation would require keeping rates steady. The Governing Council opted to keep key interest rates unchanged at both the October and December meetings, prioritising the anchoring of inflation expectations. President Lagarde reaffirmed that the ECB does not adhere to a ‘predetermined path,’ and emphasised the data-dependent policy stance.

Performance across European equities was broadly positive in Q4. Spain's IBEX 35 was the strongest performer, rising by +11.84%, followed by Stoxx Europe 600 at +6.09%, France’s CAC 40 at +3.21% and Germany's DAX at +2.55%. In Q4, European equities outperformed their US counterparts, echoing their Q1 outperformance, which had been the strongest in 20 years.

In Q4, sector performance exhibited a distinct bias towards the Basic Resources and Banks sectors, and those that would be more isolated to trade frictions, in addition to those that would benefit from increased government spending. Sector-wise, Stoxx Euro 600’s top performers included Basic Resources +19.43%, Banks +13.95%, Health Care +10.88%, Utilities +10.62%, and Personal & Household Goods +7.62%. Conversely, Chemicals -2.81%, Technology -0.46%, Industrial Goods +0.10%, Autos & Parts +0.91%, and Telecom +1.85% lagged behind.

The Granolas in Q4: GSK +15.88%, Roche -14.29%, ASML +11.27%, Nestlé +7.76%, Novartis +5.16 %, Novo Nordisk -5.63%, L'Oréal -0.52%, LVMH +23.92%, AstraZeneca +23.32%, Sanofi +5.31%, and SAP -8.58%.

The UK

Q4 demonstrated notable resilience within UK assets, marked by a divergence of domestic equity performance from the technology-driven volatility that prevailed in US markets. Despite subdued economic growth and persistent inflation, UK financial markets were supported by a rotation toward value stocks and a rate cut by the Bank of England in December.

Data from the Office for National Statistics (ONS) indicated that UK GDP expanded by 0.3% in November. Although this rebound from a 0.1% fall the previous month, high-frequency indicators from October and November pointed to this being, at best, economic stabilisation.

Moreover, following an increase to 3.8% in August — largely attributable to base effects and energy prices — the CPI moderated to 3.2% by November. Although this figure remains above the BoE’s 2% target, the downward trend was sufficient to persuade policymakers that the secondary impacts of wage growth were subsiding.

The FTSE 100 distinguished itself among global equity benchmarks, surpassing the 10,000 level in early January 2026, following a return of +6.21% in December.

Investor sentiment shifted away from concentrated US technology positions toward prominent UK sectors such as Financials and Mining. In particular, Antofagasta and Fresnillo achieved double-digit gains during the Q4, spurred by a recovery in copper and precious metals prices. With the dividend yield of the FTSE 100 remaining appealing relative to declining bond yields, defensive sectors—including Utilities and Staples—experienced renewed investment inflows.

Despite the resilience observed in UK financial markets during the final quarter of 2025, underlying data revealed significant challenges facing British households — a divergence that introduces considerable risk heading into 2026. The typical consumer remains acutely concerned about the cost of living.

Traditionally regarded as the Golden Quarter for retail, Q4 instead proved disappointing. In October, retail sales contracted by a revised 1.1%, marking a sharp decline. November saw another 0.1% drop in sales as expectations of a Black Friday surge were unmet. Retailers were compelled to offer substantial discounts to clear inventory, which in turn eroded profit margins. December was characterised as a ‘drab Christmas’ by the British Retail Consortium, with non-food sales falling 0.3% y/o/y.

Further underscoring consumer caution, the GfK Consumer Confidence Index remained negative at -17 in December. Although this represented a modest improvement from November's reading of -19, sentiment remained firmly subdued.

Although real wages increased because inflation slowed faster than wages rose, there was still a drop in consumer spending, highlighting a paradox in the economic indicators. This suggests that households are focussing on reducing debt or increasing savings over discretionary consumption. The likely rise in the savings ratio diminishes the impact of any fiscal or monetary stimulus, as precautionary saving becomes a rational response to tax increases (such as threshold freezes) announced in the Autumn Budget and heightened concerns over potential unemployment.

Asia ex-Japan

In Q4, the AI investment theme underwent a notable shift, progressing from a speculative CapEx phase to a focus on delivering tangible earnings. By the end of the year, companies with substantial AI involvement comprised approximately 30% of the Asia ex-Japan index, serving as the principal driver for revisions in EPS.

This trend was most evident in North Asia. South Korea, in particular, solidified its leadership within the memory chip segment — especially in High Bandwidth Memory (HBM), which is essential for AI accelerators. The resulting demand was notably price-inelastic, effectively shielding the Korean technology sector from broader cyclical downturns affecting consumer electronics such as smartphones and personal computers. The strength of this cycle was highlighted by the divergence between semiconductor exports, which increased by 22.1% y/o/y in 2025, and display panel exports, which declined by 9.5% y/o/y. This contrast underscores how AI-driven demand has offset weaknesses in legacy technology sectors.

Asian equities, excluding Japan, were robust in Q4 2025, closing the year with significant upward momentum. The MSCI AC Asia ex-Japan Index advanced +4.33%, contributing to a full-year gain of +33.02% in US dollar terms. This represented the region’s strongest annual performance since 2017 and a marked outperformance relative to the MSCI ACWI, which returned +22.87%.

An analysis of these returns reveals that the market was propelled by ‘barbell’ dynamics: there was substantial strength in deep-value markets undergoing reform, such as China and South Korea, alongside continued momentum in growth-oriented sectors like technology. In contrast, defensive sectors lagged behind. Although the so-called ‘everything rally’ buoyed most asset classes, the dispersion of returns illuminated distinct catalysts at the country level.

South Korea emerged as arguably the most volatile yet rewarding market in 2025. During Q4, Korean equities returned +23.06%, and +75.63% for 2025, rebounding from significantly depressed valuations in 2024. The KOSPI index benefitted from both the AI hardware cycle and the ‘Corporate Value-up’ initiative, which compelled large conglomerates (chaebols) to enhance shareholder returns through increased dividends and share buybacks.

Indian equity markets, represented by the Nifty 50 and Sensex, lagged the broader region in terms of price momentum during Q4, posting a moderate return of +6.17%. For the year, Indian equities delivered a return of +13.43%. This relative underperformance primarily reflected elevated starting valuations; India entered 2025 trading at considerable premiums relative to China and South Korea, prompting global investors to rotate toward more attractively valued markets.

Despite subdued price action, India’s economic fundamentals in Q4 were the strongest in the region. The economy experienced robust growth and low inflation. Real GDP expanded 8.2% in the quarter ending September (as reported in Q4), surpassing consensus expectations. CPI inflation declined to 1.33% in December.

Currencies in Q4 2025

Q4 witnessed pronounced volatility across major currency pairs, driven by divergent monetary policy trajectories, significant fiscal announcements, and evolving political landscapes. The US Dollar Index demonstrated resilience despite Fed easing, while the euro stabilised amid ECB pause expectations. Sterling faced headwinds from expansive fiscal tightening, and the Japanese yen experienced heightened pressure from domestic political uncertainty and eventual BoJ normalisation. There was substantial volatility in both cross-currency basis swaps and spot rates throughout the quarter. Nevertheless, the Dollar Index strengthened by +0.56%.

The ECB ended its easing cycle in Q4 2025, holding key interest rates unchanged at its18^th December meeting. This pause reflected the Governing Council's assessment that inflation would stabilise at the 2% target medium-term, following earlier cuts that brought the deposit facility rate to 2.75%. ECB President Christine Lagarde's communication emphasised data dependency and rejected pre-defined cutting paths, reinforcing market confidence in policy stability. The euro was +0.10 against the US dollar in Q4.

In October, Sanae Takaichi was elected as Japan’s first female Prime Minister. Known as a fiscal dove, her platform of ‘responsible fiscal expansion’ initially triggered a sell-off in the yen and JGBs. Furthermore, Japan's ¥21.3 trillion stimulus package was finalised on 16^th December. It focuses on household support, promoting AI/semiconductor investment, and boosting strategic spending. Takaichi's victory initially spurred a reflation trade, pushing the Nikkei 225 to record highs and JGB yields to multi-decade peaks.

On 19^th December, the BoJ’s Policy Board unanimously voted to increase the uncollateralised overnight call rate by 25 bps, bringing it to 0.75% — the highest level observed since 1995. Governor Kazuo Ueda attributed this decision to the development of a virtuous cycle between wages and prices, as evidenced by Tokyo’s core CPI remaining stable at 2.8%. The BoJ further emphasised that real interest rates continue to be substantially negative, thereby necessitating this policy adjustment. Despite the narrowing spread between US and Japanese rates, the yen depreciated -5.56% against the US dollar through Q4.

On 26^th November, UK Chancellor Reeves unveiled a budget that signalled a decisive shift toward higher taxation and investment-driven growth. The fiscal plan introduced £120 billion in capital expenditures and elevated the overall tax burden to a record 38% of GDP, primarily through increases in National Insurance contributions.

Toward the end of Q4, Gilt yields experienced an upward drift, with the benchmark 10-year closing Q4 at 4.478%, as markets priced in both the substantial issuance schedule and persistent inflation expectations.

The expansionary budget implied a higher for longer path for BoE rates, particularly in comparison to the Fed, thereby supporting the GBP/USD exchange rate via interest rate differentials. Nevertheless, the MPC opted to reduce the policy rate to 3.75% in December due to a weakening labour market and a slowing economy. This finely balanced decision reflected a careful weighing of persistently high service sector inflation against the downside risks to growth posed by the increased tax burden on businesses. Through Q4, the British pound rose slightly, +0.20% against the US dollar.

Cryptocurrencies in Q4 2025 and 2026 YTD

Bitcoin -23.15% Q4 and +11.24% YTD to $97,507.93
Ethereum -19.74% Q4 and +13.41% YTD to $3,365.91

Bitcoin and Ethereum had a tough Q4 following the $19 billion liquidation that took place on 10 October following President Trump’s announced 100% new tariffs on Chinese imports. Bitcoin had reached an all-time high of over $126,000, but after October’s sell-off, it declined over 23% during Q4 2025, dramatically underperforming nearly every major asset class. Bitcoin rebounded after the Fed delivered a 25 bps interest rate cut in December, then pared gains amid uncertainty over further easing. Spot Bitcoin ETFs that had previously attracted strong institutional flows earlier in the year saw outflows accelerate in Q4. However, with the greater clarity coming from the US Senate in terms of two crypto bills expected to be decided this month, increased institutional adoption also expected as the SEC allows more crypto ETFs, and dollar liquidity likely to increase in Q1, Bitcoin could see a rebound.

According to CoinGlass data, Ethereum fell by -28.28% in Q4 2025, marking the fourth worst Q4 performance in its history. As noted by The Block, Spot Ethereum ETFs also witnessed slower demand in 2025 than many anticipated, but still generated around $9.8 billion in net inflows overall — outpacing last year's net inflow total of approximately $2.7 billion. And despite its Q4 drops, it was a breakthrough year for Ethereum in that it attracted $12.94 billion in total inflows, bringing category AUM to around $24 billion. Ethereum is also seeing an improvement in its on-chain data. New wallet creation, according to 99Bitcoins, recently hit a record, pushing total non-empty wallets to 173 million.

Note: As of 5:00 pm EDT 14^th January 2026

What to think about in Q1 2026 

Economic data have been mixed with uncertainties around the strength of the US labour market likely to dominate the Fed’s decisions in Q1. The ECB is widely expected to continue to hold rates as inflation holds at target. The UK is expected to have two more rate cuts, due to growth concerns, but much will depend on wage inflation. However, January stands out as the strongest month for equity capital deployment.

This year is an important year for the US (and the wider world) due to the mid term elections in November. Trump’s generally weak popularity rating means he may need to energise core supporters in a way that could make US policy even less institutionally anchored and even more transactional. Trump may thus be even more susceptible to targeted pressure from lobbying groups. This will have wider implications for trade policy and international alliances.

Among the scenarios that could develop in Q1, we see a strong potential for Q1 being marked by a pronounced dichotomy between prevailing narratives of economic deceleration and the persistence of resilient — albeit distorted — macroeconomic indicators. High-frequency measures such as the Atlanta Fed’s GDPNow estimate of 5.3% point toward a reacceleration, often described as a ‘no landing’ scenario. However, this headline strength likely obscures underlying vulnerabilities, as much of the apparent growth is artificially bolstered by a sharp narrowing of the trade deficit and inventory accumulation, with importers aggressively bringing forward goods to circumvent anticipated tariff increases. Beneath these aggregate figures, the organic private sector faces considerable friction, resulting in a complex environment for capital allocation.

A significant factor contributing to these economic headwinds is the transition of tariff expenses from corporate balance sheets to consumer prices. Throughout late 2025, retailers predominantly absorbed increased duties to protect market share; however, Q1 marks a decisive end to this absorption. Corporate earnings reports now indicate a structural shift, with businesses increasingly passing these costs onto consumers. This is likely to keep inflation elevated and well above the Fed’s target. This cost-push inflation could be further exacerbated by the administration’s fiscal policies, most notably the front-loaded defense expenditures mandated by the ‘One Big Beautiful Bill Act’.

Concurrently, the labour market is experiencing a profound supply-side shock, driven by demographic change: a drop in the labour force participation rate, fewer workers and negative net migration. This fundamentally alters the benchmark for employment growth, implying that lower monthly payroll increases may now reflect full capacity rather than diminished demand. This scarcity of workers, particularly within the service and industrial sectors, may sustain upward pressure on wages and further complicates efforts toward disinflation. As a result, the US economy may face a unique form of stagflation-lite, wherein nominal growth is sustained by government spending, while the private sector contends with rising input costs and persistent labour shortages.

Monetary policy is entering a period of heightened uncertainty, as the Fed faces unprecedented political pressures. The ongoing Justice Department investigation into Fed Chair Jerome Powell, alongside speculation of a more dovish successor, introduces a distinct risk premium to US assets. Markets must now contend with the possibility of a policy pivot driven less by economic data than by executive influence — raising the risk of unanchored inflation expectations and a steeper yield curve. This tension between an expansionary fiscal stance and tightening monetary policy creates volatility in fixed income markets, especially as the bond market grapples with the surge in Treasury issuance required to finance the fiscal deficit.

In contrast, the eurozone presents a narrative of cyclical stabilisation, with inflation returning to target. This divergence signals the potential for euro appreciation against the US dollar as the year progresses and the temporary fiscal support for US GDP fades. For investors, this environment calls for a defensive approach, emphasising quality and income. Sectors with strong pricing power and limited exposure to tariff-driven cycles provide prudent havens. Ultimately, Q1 2026 demands navigation of a landscape where nominal growth remains elevated, yet real economic stability is elusive, favouring strategies that hedge against both persistent inflation and the risks of policy misstep.

Economic and Geopolitical Risk Calendar

In addition to monetary and fiscal policy changes, there are other factors that could affect market performance in Q1 2026. As evidenced by the US sweeping in and arresting the Venezuelan president in the first few days of January and threatening the take-over of Greenland, the territory of a NATO member state, geopolitical tensions remain high.

Despite efforts by President Trump to get Russia to agree to a permanent ceasefire in Ukraine and a 20 point peace plan being largely agreed by Ukraine, there still appears to be no real action on the ground towards peace as Russian President Putin refuses to give up territory, potentially further destabilising the oil situation as Ukraine will continue to target Russian energy installations and sanctions against Russian oil will continue until a peace deal is reached. 

In addition, the Middle East may become further destabilised if the regime in Iran is overthrown this year. The wider Middle East may see radical change, further upsetting energy markets, not just from the potential overthrow of the Islamic republic of Iran, but on other geopolitical alignments as Turkey seeks to join Saudi Arabia and Pakistan’s military pact agreed last year. The region is still coming to terms with a cooling of relations between Saudi Arabia and the UAE following December 2025’s actions by the UAE-backed Southern Transitional Council (STC) against Yemen’s Hadhramaut and al-Mahra regions, which resulted in them seizing key territory across the south and near the Saudi borders. This ties into wider Saudi concerns around the UAE taking actions in regions such as the Horn of Africa that may threaten its security and control over the Red Sea shipping lanes.

Investors also need to be mindful of US actions that can further upset China, such as the shipment of $11 billion worth of arms promised to Taiwan in December or further forays by the US into Latin America, which features strongly in China’s latest five year plan within the Belt and Road initiative. This could provoke retaliation by China. 

Other potential policy and geopolitical risks for investors that could negatively affect corporate earnings, stock market performance, currency valuations, sovereign and corporate bond markets and cryptocurrencies include: 

January 2026

18 January Presidential election, Portugal. The president is elected for a five-year term with a two-term limit, has the discretionary power to dissolve parliament and presides over the consultative Council of State. Polling by Catolica University published by Publico daily on Wednesday, with a +/- 2.2%, puts Andre Ventura, the far-right, anti-establishment leader of the main opposition party Chega, marginally ahead on 24% of voting intentions, closely followed by Socialist Antonio Jose Seguro on 23%, and Joao Cotrim de Figueiredo, a member of the European Parliament from the pro-business Liberal Initiative party, at 19%.

19-23 January World Economic Forum (WEF), Davos, Switzerland. World leaders from government, business, civil society and academia will once again convene in Davos to hold discussions on the following themes: cooperation in a contested world, unlocking new sources of growth, investing in people, deploying innovation responsibly, and building prosperity within planetary boundaries.

22 January Bank of Japan Monetary Policy Meeting. The BoJ is likely to pause on a rate rise at this meeting given that headline Japanese inflation eased to 2.0% y/o/y in December from November’s 2.7% and core inflation also slowed, to 2.6% vs 2.8% in November. Although 2 rate hikes are expected in 2026, this will likely not happen until the BoJ confirms that core inflation will remain above 2%.

27-28 January Federal Reserve Monetary Policy meeting. The Fed is likely to keep rates on hold this meeting as indicated by Chair Jerome Powell in December’s meeting.

February 2026

4 February New START Treaty expiration. When New START expires, the US and Russia will face a future without any legally binding restrictions on their nuclear forces. Given the ongoing war in Ukraine and the US moving into Russia’s “sphere of influence”, this could further push NATO members into overdrive with defence budget allocations likely to be increased further. 

4-5 February ECB Monetary Policy Meeting. With headline inflation in the eurozone at the 2% target, the ECB is not expected to cut rates again at this meeting. Instead, policymakers such as ECB Vice President Luis de Guindos, are focusing on increased geopolitical uncertainties which could trigger abrupt shifts in wider market sentiment.

5 February BoE Monetary Policy Meeting and Monetary Policy Report. With GDP rising 0.3% in November and growth in December expected to bring y/o/y GDP to above the 0% forecast, it will take greater signs of the labour market softening for the MPC to cut rates.

8 February General Elections, Thailand. This election will place the Bhumjaithai party against the progressive People’s Party and the Pheu Thai party. Latest polls indicate that the formation of a government is likely to take several months amid complex coalition discussions. 

March 2026

8 March General Election, Colombia. Tensions between Colombia and the US are rising with US President Trump threatening military action against Colombia. The left-leaning Historic Pact coalition is expected to reach the run-off, though projections indicate they will likely lose to a more moderate or right-wing candidate. 

17-18 March Federal Reserve Monetary Policy Meeting. The Fed will likely be under continued pressure to cut rates. However, the Fed will likely only cut if there is significant labour market weakening.

18 March Bank of Japan Monetary Policy Meeting. With rising wage pressures from labour market shortages, there will be increasing pressure to resume the rate hike cycle at this meeting. 

18-19 March European Central Bank Monetary Policy Meeting. The ECB will likely be looking to see what impact the new US tariff regime, combined with improved growth prospects for the eurozone following a region wide commitment to new defence spending, will have on the inflation outlook. 

19 March Bank of England Monetary Policy Meeting. The BoE will likely be watching for continuing softness in the labour market and in the economy. 

26-29 March World Trade Organization Ministerial Conference. The biannual WTO ministerial conference will take place in Yaoundé (Cameroon) during which trade ministers from around the world review the state of the multilateral trading system.

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