End of year outlook for markets

Last week’s highly anticipated UK Budget was well-received by markets, as the pound strengthened, major UK equities rose, and the cost of government borrowing fell.

Chancellor Rachel Reeves delivered a wide-ranging Budget which included £26 billion in tax rises and £11.3 billion in additional government spending. The day-to-day impact will be seen in some of the key measures that were announced, including a freezing of the thresholds for income tax until 2030-31, new per-mile charges for drivers of electric vehicles, changes to pension contributions made through ‘salary sacrifice’, plus higher taxes on income from property, savings and dividends.

Next year, consumer price inflation is expected to average 2.6% - still above the Bank of England’s 2% target, but lower than the 3.6% inflation recorded for October. This combination of higher taxes and above-target inflation is among the reasons that the Office for Budget Responsibility (OBR) recently lowered its forecasts for GDP growth. The OBR now expects the economy will grow by an average of 1.5% annually for the next five years, while productivity growth will be weaker, too.

With the Budget over, and the OBR’s fresh forecasts in mind, we expect the Bank of England will lower the base rate (at 4% currently) at a faster pace than markets are currently anticipating. This makes UK government bonds (known as ‘gilts’) more attractive – as interest rates fall, the price of bonds paying higher rates of interest increases. Another point to note is that Reeves’s Budget laid out lower forecasts for how much the government will need to borrow over the next 20-30 years. A reduced supply of gilts in future may also raise the prices at which they are traded.

Japan’s massive stimulus plans boost markets

The Japanese government has unveiled a massive economic stimulus package to spur growth and bring down high inflation.

The super-sized package worth $137 billion was agreed upon by Prime Minister Sanae Takaichi’s government in November, and it should bode well for Japanese equity markets – an area we have looked upon favourably for some time.

Key measures in the package include tax cuts, subsidies for household utility bills and cash handouts for families with children, to ease the cost of living.

Although some observers have raised concerns about the country’s debt levels, overall Japan’s public debt to GDP ratio is expected to decline and we are confident about the sustainability of its national debt.

Japanese equity markets rallied on the back of the announcement, as the stimulus measures should feed through into higher corporate earnings. Major Japanese equity indexes have already had good years, and have outperformed equity markets in US and Eurozone.

This is the biggest stimulus package that Japan has seen since the pandemic, and it demonstrates how Takaichi’s government is willing to support the economy and follow through with corporate reforms set in motion by previous Prime Ministers. We continue to think Japan is an attractive market for equity investors, and expect this growth plan will drive future market returns.

Latest corporate earnings bode well for 2026

November saw a bout of volatility in US equity markets, after an unusually smooth rally in US equities between May and October.

The broad market pullback was led by shares in companies related to the tech sector, and it happened despite the overall strong set of results reported by US companies for the third quarter (Q3). We note that “corrections” on the order of 5% are relatively frequent when looking at market history and performance over the long term, and investors should expect them as part of the investment journey. Short-term swings shouldn’t be cause for concern – and notably US equities rebounded equally sharply at the end of November.

The unusually strong performance of US stocks underscores the confidence that global investors have in the world’s biggest economy. We share that optimism and expect that falling inflation, the Federal Reserve cutting interest rates and ongoing growth in corporate earnings should all support equity markets during 2026.

Our outlook is reinforced by the Q3 results season that has just come to an end. Over 80% of companies posted positive earnings per share (EPS), while 76% beat revenue expectations. Both of these metrics are above the 10-year averages.

The most recent earnings season marked the fourth consecutive quarter of double-digit average earnings growth for US companies.

AI, of course, remains a dominant theme for corporate growth. A record number of companies referred to AI during their earnings calls with investors, which underscores the important role it is playing in business models. But progress with adoption of AI is still uneven. Companies are using AI in customer engagement, software development and marketing, but most firms remain in the early stages of implementation.

In future the full pay-off from investment in AI will become clear. For now, the trend to watch is the massive, fast-paced spending on AI that’s being done by ‘hyperscalers’, and the surge in mergers and acquisitions targeting companies with strong AI capabilities.

Information correct as of 4th December 2025.

Disclaimer

The information and opinion contained in this article should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy and are presented for information only. Any views expressed are based on information received from a variety of sources which we believe to be reliable but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.

Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and is not guaranteed. Investors may not get back the original amount invested.