US equities continued on their upwards trajectory last week on the back of strong corporate earnings reports and AI optimism – despite renewed tensions with China and fresh Russian sanctions. Elsewhere, bonds ended the week relatively flat. But the latest US Consumer Price Index data was released late on Friday and showed a 0.3% rise over the month, putting the annual inflation rate at 3%. This might alter investor sentiment over the coming weeks: the Federal Reserve Bank could announce a further interest rate cut when it meets later this week. This is the only official economic data that the Federal Government has released this month – the US Government is now on day 28 of its shutdown, and there is no sign of any resolution on the horizon.
Since it bottomed out back in October 2022, the S&P 500 Index has gained around 90% (or 98% if you include dividends). This is impressive, but not unusual. There is nothing extraordinary about the current bull market in terms of its strength or duration. Over the past 80 years or so, the 12 previous bull markets (excluding this one) have averaged gains of 200% and lasted around five years. Remarkably, eight have made it past the three-year time horizon, with the longest being 2009 to 2020 (11 years). So the current one could be regarded as being somewhere in the middle of its lifespan.
While history provides us with some useful data, it’s the fundamental conditions that will determine what might happen next. Bull markets do not die of old age: they are killed by recessions or simply by Federal Reserve Bank tightening. Neither of those seem likely next year.
Four factors tend to influence the length of bull market cycles: economic growth, interest rates, corporate profitability and innovation. All of these currently constitute a tailwind for markets, and there is every chance that they will be buoyed higher.
The ongoing US Government shutdown has delayed key economic data releases, including the jobs report, on which the Federal Reserve Bank relies to guide it on monetary policy decisions. However, the softer-than-expected CPI number for last month will give it a green light to cut interest rates at its 29 October 2025 meeting, with a potential follow-up cut in December. While inflation remains above the Fed’s 2% target, recent signs of labour market softness suggest that the central bank will continue moving towards a neutral policy stance. The Fed is unlikely to create any problems for the current bull market. Quite the opposite, in fact. It is likely to become increasingly supportive throughout 2026, keeping the market on its upwards trajectory.
Unless we get an end-of-year correction (remember – October is traditionally a difficult month for investors, but it is all but over), the S&P 500 Index is on track to record its third consecutive year of double-digit returns, pushing its price-to-earnings ratio to cycle hights.
Valuations are looking stretched on Wall Street. If investors become reluctant to pay the lofty multiples believed to be in the market at the current time, then a 5% to 10% pullback is highly likely. However, short-term dips do not signal a long-term trend reversal. Often, they are just excellent buying opportunities.
Currently, the investment backdrop looks supportive: US corporate profits continue to grow at a healthy pace (despite ongoing trade disputes, geopolitical uncertainty and a cooling labour market). Over the next couple of weeks, nearly 60% of the S&P 500 companies will report their results. These will include the tech companies that market pundits like to focus on. The Magnificent Seven are likely to post 15% year-on-year earnings growth – compared with 6.7% for the remaining 493 companies and 8.5% for the index overall.
We've enjoyed a long period of steady market gains. But it’s important to remember that investment returns can be impacted by volatility. The S&P 500 has had 100 days without a 5% pullback. And recent uncertainties may give rise to a pause or a period of consolidation before the index resumes its upwards trajectory. Despite near-term uncertainties, the foundations of the current bull market remain solid, and 2026 is shaping up to be another reasonable year with further gains.
The expectation is that Rachel Reeves will raise tens of billions of pounds in taxes in the forthcoming budget in order to meet her fiscal targets and prevent any loss of confidence in the UK bond market. Headline annual inflation, meanwhile, unexpectedly held steady at 3.8% for the third consecutive month. Surprisingly, UK retail sales grew for a fourth consecutive month. Heading into next year, the UK economy is set to experience slow growth – it will have to contend with a number of headwinds (global trade frictions, persistent or stubborn inflation and labour market trends). But for now, all attention is turned to the budget at the end of next month. Will taxes rise? If so, by how much?
The Japanese stock market rallied sharply following the election of new prime minister Sanae Takaichi. Japan's first female head of government will focus on the economy and proactive fiscal policy – this is bound to be positive for Japanese stock prices. Her party – the Liberal Democratic Party – has entered into a coalition with the Japan Innovation Party, so the government looks set to become relatively stable.
There is growing speculation that Takaichi might announce a large-scale stimulus package weighted on the yen, with the Japanese currency weakening further against the US dollar. By way of a parenthesis, the yield on 10-year Japanese Government bonds is higher than the yield on America’s S&P 500 Index. This has not happened since 2007. Why is this significant? It is likely that there will be less Japanese deployment of investment capital into Wall Street, and perhaps more into its domestic market.
The price of gold fluctuated throughout last week, with a notable pullback following a period of significant gains (fuelled by economic uncertainty). We then saw some profit-taking from investors, which is a normal part of the market cycle. The media was quick to report that gold had suffered its biggest fall for 12 years, sparking speculation that the yellow metal bubble was about to burst. However, despite this short-term wobble, many see the current price dip as a “buy on the dips” moment for long-term investors – particularly if they missed the recent rally.
Some large institutions – such as J P Morgan – believe that the recent pullback is normal: its target price for gold is US$6000 per troy ounce by 2028. Gold, it believes, should be viewed over a multi-year horizon.
There is consensus among market analysts that global stock markets are poised to finish 2025 on a higher note, driven by strong corporate earnings in tech stocks and emerging markets, favourable seasonal patterns, and supportive fiscal policies. However, valuations are stretched, and macroeconomic and geopolitical risks could trigger volatility or dips. Investors are advised to maintain a diversified portfolio and be prepared for some periods of stock market fluctuation in the last quarter of 2025.
So while the overall trajectory is positive, it is not without risks that could cause temporary setbacks or moderate overall returns by year-end. This nuanced outlook indicates the need for cautious optimism for higher global equity markets by the end of 2025.
Similarly, global equity markets are generally expected to rally throughout 2026, with moderate growth in earnings and better monetary conditions providing support. The US market is likely to lead. But watch for volatility and potential overvaluation risks: the emerging markets and Asia, notably China, are showing robust growth potential and we are fairly bullish on the region. The UK market is expected to do well, but may lag behind more growth-oriented regions. And of course, the political backdrop is far from clear. Overall, the outlook suggests a continuing bull market next year, but with a heightened need for selectivity and risk-monitoring, given potential drivers of volatility and changing market leadership.
