A volatile year but markets march higher

For investors, 2025 will likely be remembered as a year where Donald Trump’s return to the White House kept markets on edge and dominated headlines. Markets were repeatedly jolted by Trump-related announcements, including tariffs (and reciprocal tariffs), political pressure and threats to the Fed’s independence, the passing of the “One Big Beautiful Bill”, the longest US government shutdown on record, and rising geopolitical tensions with the risk of US involvement.

All of this made 2025 feel like a challenging year to be invested – and to stay invested. Yet, despite the ups and downs along the way, markets continued to march higher, delivering a third consecutive year of gains as the impact of tariffs proved less severe than first feared and company earnings and global growth held up well.

In New Zealand dollar terms, global shares rose a solid 19.6% over the year. Returns were broad-based, with Europe up 32.3%, Emerging Markets gaining 30.8%, the UK rising 26.9%, Japan up 22.7%, and US shares advancing 13.3%. It wasn’t just equity investors who benefited. Fixed interest also played its part, with New Zealand bonds finishing the year up 5.5%.

It was another positive for growth and income assets

Looking ahead to 2026: Opportunities with perspective

As 2026 gets underway, the geopolitical turmoil that punctuated 2025 has continued, with recent events in Venezuela, Greenland and Iran highlighting ongoing risks. Despite this, companies enter the year in good shape, with strong balance sheets and solid earnings growth expected. In the current US earnings season, 76% of S&P 500 companies that have reported to-date have beaten expectations, with earnings up 13% from a year earlier – the fifth consecutive quarter of double-digit growth and a clear reminder of the strength of these businesses.

If earnings expectations for 2026 are met, markets could see another year of gains. That said, as in 2025, ups and downs are likely, as excitement around AI continues to bump up against the reality of expected returns from the massive investment currently happening. We do not see the current rally in AI as a bubble that is about to burst. In our view, AI is not a passing fad. It represents a structural shift in how economies, businesses and consumers operate. The scale of investment, breadth of adoption and early evidence of productivity gains point to a powerful, enduring trend.

While valuations will inevitably fluctuate, AI is reshaping industries in fundamental and lasting ways. The current investment cycle is being driven by some of the world’s most profitable companies that are responding to genuine demand. Today’s market leaders combine strong balance sheets with disciplined reinvestment, which is why we view AI as a structural driver rather than a short-term trend.

At the same time, expectations need to be realistic. After several years of strong returns, valuations in general are higher than in the past, and much of the recovery in global growth is already priced in. Inflation is easing but remains above central bank targets in many regions, which may slow the pace of interest rate cuts. In this environment, even small surprises could trigger outsized swings, highlighting the importance of diversification and a focus on quality companies.

With some markets stretched and gains in 2025 concentrated in just a few sectors, avoiding recency bias in 2026 is essential. Ensuring portfolios are diversified and rebalancing back toward long-term strategic allocations will help to keep portfolios resilient and adaptable as market conditions change.

As 2026 unfolds, opportunities and challenges are likely to go hand in hand. Companies are fundamentally strong, AI is reshaping industries, and markets continue to reward quality and resilience. Maintaining balance, staying diversified, and focusing on long-term goals can help investors participate in sectors shaping the future while navigating volatility.

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