Q4 2025 market summary

Trade concerns dominated financial news in the first half of the year, as the US announced a series of tariff increases that spooked global markets.

These developments, along with the arrival of the Chinese AI model DeepSeek, contributed to heightened volatility, with investor confidence wavering between January and May.

The second half of the year, however, told a very different story.

Following the tariff announcements in April, developed markets fell by as much as 16.5%. By the end of the year, they had rebounded to deliver returns of 21.6%.

Emerging markets were the standout performers, returning 34.4% across the year.

In the UK, markets also performed well, particularly in the final quarter. The FTSE All-Share gained 6.4% in Q4 and finished the year up 24%. Meanwhile, the FTSE 100 returned over 20% across 2025, marking its strongest year since 2009.

Elsewhere, European markets and the US S&P 500 lagged slightly behind global peers, but still delivered strong annual returns of 20.1% and 17.9%, respectively.

Notably, 2025 became the first year since the pandemic in which all major asset classes delivered positive returns. Alternative assets also played an important role, and the strong performance of gold and silver highlighted the value of commodities as a source of returns as well as a means of diversification.

Inflation remained above central bank targets in many regions throughout 2025, although there was a gradual return towards more normal levels.

By the end of the year, US inflation stood at 2.7%. In the UK, inflation had been steadily declining since September, although December figures showed a slight uptick to 3.4%, up from 3.2% in November. Meanwhile, Eurozone inflation fell to 1.9%.

As inflation eased, central banks began to reduce interest rates.

In the UK, the Bank of England reduced the base rate over the course of 2025, ending at 3.75%, having started at 4.75%. The Bank also signalled that further cuts are likely in 2026, provided inflation continues to move back towards the 2% target.

Similarly, the US Federal Reserve reduced its key interest rate in December to a range of 3.5% to 3.75%.

Economic growth was positive across most regions, but generally sluggish outside the US. In the UK, growth reached 0.7% in the first quarter before slowing to 0.2% in Q2 and 0.1% in Q3. The Office for Budget Responsibility estimates GDP growth of 1.5% for 2025 and 1.4% for 2026.

The Eurozone also experienced modest growth, with the latest data showing an expansion of 0.3% in Q3.

By contrast, the US continued to stand out among developed economies. After contracting by 0.6% at the start of the year, the economy rebounded strongly, growing by 3.8% in Q2 and 4.4% in Q3, with estimates suggesting that Q4 will be higher still.

While the market performance in 2025 is encouraging, it’s worth viewing with measured optimism.

Making investment decisions in response to short-term movements, whether positive or negative, can increase your risk and may not best serve long-term goals. Just as dips can be followed by strong recoveries, periods of growth can be followed by renewed volatility.

Maintaining a diversified portfolio with a focus on long-term trends rather than short-term movements remains key. Diversification helps portfolios weather volatility, while staying invested over time allows you to benefit from the market’s long-term tendency towards growth.

As we begin the new year, there are a few key themes to keep an eye on:

Although it’s easy to be influenced by the latest headlines, the market dips at the start of 2025, followed by strong gains later in the year provide a reminder of value of focusing on long-term trends rather than short-term market movements.

Despite periods of volatility, markets delivered strong returns across the year.

With inflation above target levels in the UK and other regions, investing continues to be one of the most effective ways to help portfolios keep pace with rising prices and protect against inflation over time.

By having a well-diversified portfolio built around your long-term goals, you help ensure your financial planning remains disciplined and on track, rather than susceptible to short-term noise.