2025 was a year of intriguing opportunities but also unprecedented global trade uncertainties. We think that this year’s headwinds will turn into next year’s tailwinds, and an environment of investor optimism will start to shine through

2025: Non-US markets stepped up

We started 2025 with a call to overweight equities, and investors who managed to hold for the full year have been well rewarded.  Many major indices, including the US’s S&P 500, Germany’s DAX, China’s CSI 300 and Singapore’s STI are up by 15 – 20 percent so far this year.

That said, markets were unsettled over the course of the year. While many of us expected President Trump to intensify trade tensions in his second term of office, sky-high tariff threats, policy flip-flops and mounting US debt levels did much to sour investor sentiment.

We responded by staying invested, while managing risk through diversification across asset classes, sectors, and geographies. This strategy has served us well, with the MSCI All World ex-US index almost double that of the S&P500 over the past year, powered by markets like Japan (Nikkei 225: up 28 percent), Hong Kong (Hang Seng: up 31 percent) and Korea (KOSPI: up 62 percent).

Greener pastures ahead

As we wrap up 2025 and look ahead into 2026, we think there are three good reasons for investors to lift their foot off the brakes, at least a little.

1. More supportive US economic trends
   
   With trade tariffs leading to weaker wage growth and fewer new jobs, US consumer confidence hit extreme lows in 2025.  But as we approach 2026, we are impressed yet again by the resilience of the US economy.  We expect massive AI investments to prop up the economy. Meanwhile, positive wealth effects from equity and bond markets should help stabilise consumer spending.
   
   We also expect the US economy to get more support from the significant tax incentives that was passed into law last year. These include income tax benefits and incentives for capital expenditure. Combined with the three or more rate cuts forecast for end-2025 and 2026,  the stage looks set for easier economic conditions. So far, the US economy has shown that it can get past the economic dangers posed by higher tariffs, giving us more confidence about the US’s resilience.

2. Not yet a full-scale AI bubble
   
   It was in 1996 amid the internet revolution when US Fed Chairman Alan Greenspan described equity markets as “irrationally exuberant”.  While there was truth in that assessment of valuations, markets would go on to have several more strong years. It wasn’t until 2000 that markets started a prolonged downturn.
   
   History tells us that markets can stay expensive for several years until a catalyst triggers weaker conditions.  We were concerned that the US economic slowdown could be such a catalyst.  However, this did not happen and in fact, many AI-linked companies are enjoying good corporate conditions. They are less leveraged than during the dot com bubble debt and other high valuation periods, and are supported by high levels of cash earnings.
   
   As we start 2026, we think the risks of an AI bubble-burst have moderated somewhat. The current period seems to be more comparable to the period around 1997, when markets continued to rally strongly, than the end-of-cycle period around 1999.

3. Strong corporate profit growth
   
   Despite macro-economic challenges, US corporates continue to demonstrate strong, if not stunning, earnings and revenue growth.  In 3Q 2025, with 95 percent of S&P 500 companies reporting actual results, over 80 percent reported positive earnings surprises, and over 70 percent reported positive revenue surprises.
   
   This suggests that the blended 3Q year-on-year growth rate will come in at over 13 percent for S&P 500 company earnings and over 8 percent for revenues. This would mean a fourth consecutive quarter of double digit earnings growth and the highest quarter of revenue growth since 3Q 2022.
   
   2026 consensus earnings growth forecasts are equally promising – 13 percent for the US, 11 percent for Europe, 10 percent for Japan and 18 percent for Asia ex Japan.  In the past, double digit earnings growth rates have tended to translate into double digit gains for equity markets. Even faced with increased trade barriers, corporates around the world appear able to enhance their productivity and improve their margins.

Dance to multiple tunes

We continue to think that while the music is playing, we have to keep dancing, but this doesn’t mean that there is only one tune, and diversification remains key. Here’s a summary of our views for 1Q 2026 and beyond:

• We are tilting slightly more positively toward equities in 2026, but we remain committed to broad diversification geographically and by asset classes. Our overweight is focused on Asia and the US.
• We continue to be comfortable with global fixed income in a world of easing rates and stable credits. Diversification in fixed income categories will be useful as valuations risks grow.
• We expect 10-year US Treasury bond yields to range between 4.0 to 4.5 percent in 1Q 2026. Our forecast is for the US Fed to ease their rates to 3.25 percent by the middle of 2026.
• We see the USD as structurally weak for the coming years, but expect it to be rangebound to 1Q 2026.