Economic growth and corporate earnings nicely exceeded expectations in 2025, with the strongest gains outside the United States. US growth remained steady, but much of the surprise came from Europe, where early pessimism at the start of the year was more intense than the data supported.
European stocks, which favour value sectors, performed well. MSCI Europe ranked among the best in developed markets, not because risks disappeared, but because outcomes were closer to “manageable” than “menacing.”
A notable feature of 2025 was how uneventful inflation turned out to be. Global money supply growth, especially M2, remained limited and returned to normal after the extraordinary spike during the pandemic years. Remember, inflation didn’t show up immediately in 2020; it emerged later, once excess liquidity began circulating. The same delay works in reverse.
With money growth returning to the long-term trend, positive real interest rates, and fiscal deficits well below emergency levels, the monetary push driving inflation has diminished. Where inflation still exists, it appears more a result of steady growth than of overheating.
Long-term interest rates mostly remained within a range, and broader commodity markets did not signal a renewed inflation cycle. For investors expecting another surge, reality proved much calmer.
The tariff debate followed a similar pattern. Early-year volatility around “Liberation Day” made markets very concerned. The headlines were loud, and uncertainty was palpable.
As 2025 progressed, the macro impact proved more modest than feared. Trade slowed at the margins but did not seize up. Corporate margins bent in most sectors, but did not break. Global equities ultimately benefited, not because risks vanished, but because worst-case scenarios failed to materialize.
The same applies to volatility itself. 2025 felt dramatic, thanks to “Liberation Day” triggering a US market correction and continual political churn. Yet daily moves of more than 1% stayed close to long-term norms. By historical standards, volatility was ordinary. Remember, volatility is a temperature reading, not a compass.
Valuations resurfaced repeatedly as a concern. P/E ratios remain above long-term averages, making it tempting to assume a calamity must follow. Thankfully, history suggests otherwise: there is little consistent relationship between initial valuations and market returns 1, 3, or 5 years out.
Since 1929, US bear markets have typically been triggered by either a major negative surprise for most everyone or widespread euphoria that clouds fundamentals. Well-telegraphed risks are not the standard. Bear markets also tend to begin quietly. They roll over rather than collapse (like corrections), often declining by around 2% per month for the first few months, which is meaningful but not an instant collapse.
Underneath the hood, the global economy still looks broadly normal. GDP growth has been steady. Business surveys remain in expansion territory. Global trade continues chugging along despite tariff rhetoric. Loan growth has cooled from post-pandemic surges but appears to be normalizing rather than contracting. In aggregate, that backdrop supports continued revenue and earnings growth.
Layoffs continue to draw attention and are painful for those affected, but they have not yet signalled systemic weakness. Jobless claims remain low, often an early warning sign of downturns, but not one that is currently flashing red.
US policy uncertainty still remains, but is fading, particularly around trade. Remember that over the shorter term, sentiment is greatly affected by headlines, but over the longer term, markets move more on outcomes. That principle explains much of 2025.
Despite valuations, inflation, tariffs, and volatility dominating the media in 2025, economic growth and profitability consistently cleared a bar set too low. Markets spent the year climbing a familiar wall of worry. Those worries are not a problem. They restrain expectations, and restrained expectations create room for upside surprise. Skepticism, more often than optimism, sets the stage for durable gains.
Growth broadly exceeded expectations in 2025, inflation cooled without economic damage, and monetary conditions normalized quietly. Money growth is no longer excessive, real rates are positive, and post-pandemic excesses are being digested rather than amplified.
Looking ahead, 2026 may not deliver the same degree of upside surprise as 2025, but it doesn’t need to for a good year.
Sentiment, meanwhile, remains broadly cautious except in some narrow categories where it is getting frothy. Concerns about policy, valuations, and the maturity of the economic cycle persist, keeping expectations restrained. And when expectations stay disconnected from an “okay” reality, markets find room to move higher without requiring perfection.
That said, 2026 is unlikely to be a straight line. It will likely have a back-end loaded year (common in US mid-term election years), and returns may be less dramatic than in 2025. But with normalized monetary conditions, manageable inflation, and an economy that looks functional rather than fragile, the backdrop remains positive.
The wall of worry is still active, but it looks like what the path forward in 2026 needs. So, expect another good year in markets.
