The global economy in 2025 showed modest growth at around 2.8%. However, this growth hid significant regional differences and ongoing risks.
Monetary Easing Across Advanced Economies
The key story in monetary policy was the shift towards easing. Major central banks started their largest coordinated rate-cutting cycle in over a decade. The US Federal Reserve lowered the Fed Funds rate to between 3.5% and 3.75% by year-end, framing the cuts as a matter of risk management. The ECB kept rates steady while the Bank of England reduced its rate to 3.75% amid differing opinions.
Inflation Dynamics
Inflation generally decreased toward central bank targets, but there were differences. US core inflation remained high at 2.6-2.7%, approximately one percentage point above the target, with tariff pass-through seen as a major factor. Services inflation stayed persistent due to tight labour markets, while goods inflation showed signs of increasing.
Emerging Markets
More than 45 central banks worldwide cut rates at least once during 2025. This reflected easing inflation and efforts to boost domestic demand.
US Trade Policy and Global Reactions
In 2025, the significant reversal of US trade openness shaped policy more than anything else. The administration enacted sweeping tariffs averaging about 17%, the highest since 1950.
The Liberation Day Shock
The announcement of tariffs caused market chaos in early April. The S&P 500 suffered its largest two-day drop in value since March 2020, losing about $5 trillion in market capitalization. Policy uncertainty reached its second-highest level ever. Chinese imports faced effective tariffs of 37.1%, Japan 16.4%, and the EU 9.2%. Mexico and Canada enjoyed lower rates due to USMCA exemptions.
Revenue Impact and Economic Consequences
From January to August, the US government collected around $149 billion in tariff revenue, which was about 10.2% of the value of imported goods. Consumer goods faced the highest effective tariff rate at 16%, followed by industrial intermediate goods at 11.5%.
Global Trade Reconfiguration
Trading partners had to restructure their supply chains. Chinese exports to the US dropped by 28.6% year-on-year, while overall Chinese exports increased by 5.9%, showing aggressive diversification. Southeast Asian countries benefited significantly, with Chinese exports to the six largest ASEAN economies rising by 23.5%. Mexico imposed its own tariffs of up to 50% on Chinese goods to keep its favourable access to the US ahead of USMCA renegotiation.
Market Valuations, Sentiment, and Technology Sector Dynamics
Equity markets showed significant resilience during much of 2025, reaching record levels by mid-year before facing renewed volatility.
Equity Performance and Concentration Risk
International markets produced particularly strong returns, with emerging markets increasing by over 30% so far in US dollar terms. Global 60/40 portfolios yielded about 15% returns. However, performance masked concerning concentration risk, with the “Magnificent Seven” technology stocks largely driving US index results.
Technology Sector and AI Enthusiasm
Valuations in the technology sector, especially for AI-related stocks, remained high. Spending on AI through hyperscaler capital expenses rose by 69% in 2025, with expectations for an additional 33% increase in 2026. Financial authorities cautioned about high valuations and fear of missing out dynamics. Occasional sell-offs in large-cap technology stocks reflected their sensitivity to earnings reports and macroeconomic changes.
Despite concerns, supporters argued that today’s technology leaders had solid business models with strong cash flows, which differed greatly from the unprofitable speculative ventures of earlier bubble periods.
Historical Parallels: The 1920s Question
Debate grew about whether current conditions resembled the environment before the crash in the late 1920s. Several notable parallels appeared: excitement over transformative technology (AI today, electricity then), high market concentration, widespread belief in a “new economy” where traditional valuation metrics no longer applied, and low interest rates that encouraged speculation.
Key differences included more regulated leverage, technology companies showing solid profit fundamentals, modern transparency requirements and oversight, government understanding of how to handle crises, and current valuation metrics not yet reaching the extreme highs of 1929 or 2000.
The consensus was that while there were concerning parallels, the strong balance sheets of leading technology firms and a better regulatory framework set the current environment apart from 1929. Still, concentration, high valuations, and enthusiastic retail participation called for careful attention.
Investor Sentiment
Gold prices surged by 65% year-to-date, while global investment-grade bonds increased by 7.9%, showing the advantages of diversification during stressful times. The Chicago Fed’s financial conditions index suggested roughly 60 basis points of support for GDP growth, with historical patterns indicating such accommodating conditions usually boosted equity gains.
Risk Assessment: What Investors Fear and What They Ignore
The risk landscape presented a complicated mix of acknowledged concerns and possibly underestimated threats.
Widely Recognized Risks
Trade Policy Volatility: Ongoing uncertainty around tariff policy, pending Supreme Court decisions, and the upcoming 2026 USMCA renegotiation kept trade-related risks top of mind.
Monetary Policy Trajectory: Questions remained about the right path for interest rates given persistently high inflation and mixed signals from the labour market. The possibility of appointing a new Fed chair in 2026 created additional uncertainty.
China Growth Slowdown: The slowdown of the world’s second-largest economy, especially in domestic demand and real estate, posed a clear risk to global growth.
Credit Market Stress: High-profile bankruptcies in the auto supply chain and rising consumer credit delinquencies underlined vulnerabilities.
Underappreciated Risks
US Dollar Dominance Erosion: The dollar’s 10% decline in the first half marked its worst start in 50 years. Analysis from the Bank for International Settlements indicated that US Treasuries’ usual safe-haven characteristics had weakened significantly.
Climate and Demographic Shifts: Long-term structural challenges from climate change and a declining population received insufficient attention relative to their potential effects on growth and fiscal health.
Private Credit Market Opacity: Beyond the headline-grabbing bankruptcies, broader concerns about the structure and transparency of the private credit market remained under-examined.
Geopolitical Fragmentation: The trend toward economic decoupling and regionalizing supply chains represented a structural change with long-term impacts on efficiency, inflation, and growth.
Currency and Reserve Diversification: Central banks’ efforts to reduce their reliance on dollar-denominated reserves, while proceeding slowly, posed a long-term challenge to
US policy flexibility.
Speculative Asset Sell-offs: Bitcoin and Cryptocurrency Markets
Speculative assets, especially cryptocurrencies, faced significant volatility and sharp declines in the latter part of 2025. This reflected a broader risk-off sentiment.
Bitcoin and the wider cryptocurrency market saw large drops in late 2025, wiping out much of their earlier gains. The sell-offs were closely linked to macroeconomic tensions, rising real interest rates as inflation persisted along with central bank easing, and a general move towards safer assets.
The downturn in cryptocurrency coincided with a reduced risk appetite among retail investors, serving as an indicator of speculative excess unwinding. As traditional safe-haven assets like gold surged 65% year-to-date, cryptocurrencies’ failure to attract safe-haven investments highlighted their ongoing classification as risk assets instead of inflation hedges.
The regulatory environment remained unclear, with ongoing discussions about suitable oversight frameworks adding to volatility. Institutional adoption advanced more cautiously than supporters had predicted, with many investors maintaining limited holdings or taking a wait-and-see approach.
The steep sell-offs reminded everyone that in times of genuine risk aversion, correlations among risk assets tend to rise, which limits diversification benefits.
Credit Incidents in the Automobile Sector: Factoring Company Failures
The automobile sector had some of the most significant credit incidents of 2025, revealing weaknesses in private credit markets and supply chain finance structures.
The First Brands Group Collapse
The bankruptcy of First Brands Group, a major auto-parts manufacturer, sent shockwaves through private credit markets. The company’s downfall revealed enormous debt levels and problematic factoring arrangements that had been hidden by complex financial structures and unclear reporting.
This collapse was especially noteworthy because it highlighted flaws in the factoring model. This model allows suppliers to sell receivables to specialized financial firms at a discount. Aggressive factoring combined with poor business performance created instability. Lenders like Jefferies faced substantial losses, leading to a broader reassessment of private credit risks in the automotive supply chain.
Broader Auto Sector Credit Stress
The bankruptcy was a sign of more considerable stress. Consumer credit metrics provided additional warning signals: auto loan delinquencies rose throughout 2025, mainly among younger and lower-income borrowers. Student loan delinquencies surged as forbearance programs ended, while credit card delinquencies remained high.
Private Credit Market Implications
These incidents showcased troubling features:
– Opacity: Complex structures and limited disclosures made it tough to gauge true risk exposures until after failures occurred.
– Interconnectedness: Factoring relationships and vendor financing created networks of exposure that could amplify shocks.
– Covenant Erosion: Competition for deals weakened protective covenants.
– Mark-to-Model Risk: The illiquid nature of private credit meant valuations relied on models instead of market prices.
These incidents raised concerns about whether other sectors held similar risk pockets, particularly where tariffs, rising costs, and weak demand created challenging operating conditions.
Bond Market Performance: Navigating the Rate Cycle
Bond markets in 2025 faced a challenging environment marked by changes in central bank policies, fiscal issues, and shifting inflation trends.
From Underperformance to Stabilization
After the harsh bear market of 2022-2023, fixed income markets gained more stability. The move toward easing created favourable conditions, with yields dropping from earlier highs. Global investment-grade bonds generated returns of about 7.9% year-to-date, a welcome change.
Yield Curve Dynamics
The yield curve showed complex behaviour. As the Fed began lowering short-term rates, the curve steepened a bit, with long-term yields remaining high due to ongoing inflation and fiscal worries. Long-term yields faced mixed pressures: easing by central banks pushed yields down, while concerns about fiscal health kept yields elevated. In France, Germany, and Japan, 10-year yields rose by about 55 basis points on average.
Regional Variations
United States: Treasury yields fell from their peaks in April, but BIS analysis indicated the safe-haven status of US government bonds seemed weakened. The correlation between Treasuries and other safe assets approached zero.
Europe: European government bond markets dealt with increased supply as fiscal discipline shifted to defence spending and economic stimulus, especially in Germany.
Japan: Japanese government bonds saw significant volatility as the Bank of Japan moved toward normalizing policy, raising rates to 0.75%, the highest level in 30 years. JGB 10-year yields reached their highest point since 1999.
Emerging Markets: Emerging markets benefitted from global easing and a weaker dollar in the first half of the year, though worries remained about potential disruptions from Japan’s monetary policy changes.
Credit Markets
Credit spreads stayed relatively narrow, reflecting strong corporate fundamentals and plenty of liquidity. However, credit issues in the auto sector and rising consumer credit delinquencies indicated some areas of stress.
The Retail Investor Ascendancy: Influence and Potential Fatigue
One of the key features of 2025’s market dynamics was the ongoing and growing impact of retail investors. Their participation in equity markets reached levels not seen since the meme stock craze of 2021.
Retail Dominance in Market Flows
Retail investors made up about 20-25% of total equity trading activity. Their interest in thematic investments, technology stocks, and high-growth stories drove the strong performance of large technology companies. Options market activity increasingly showed retail involvement, with single-stock options volume hitting record highs.
This influence appeared in heightened volatility surrounding earnings announcements for stocks with significant retail following, maintained high valuations in “momentum” stocks, increased correlation between social media sentiment and price movements, and rising trading volumes in after-hours and pre-market sessions.
The Democratization Trade-off
The rise in retail participation was both a positive change—providing better market access and chances for wealth creation—and a potential source of instability. Retail investors typically showed more reactionary behaviour than institutional investors, purchasing enthusiastically during market rises and potentially selling abruptly during dips.
Signs of Evolving Sentiment
By late 2025, several indicators suggested that retail enthusiasm might be slowing down:
Sentiment Surveys: Various measures indicated falling bullish sentiment compared to earlier in the year. While not reaching extreme bearish levels, this moderation hinted at less euphoric positioning.
Options Activity: After a frantic first half, options market activity cooled, with purchases of speculative call options declining compared to protective put buying.
Cash Flows: Retail flows in Europe and the UK showed occasional withdrawals from equities, shifting funds toward fixed income. US retail flows remained positive but decreased compared to earlier periods.
Engagement Metrics: Financial social media platforms and investment forums reported lower engagement numbers.
Valuation Implications
If retail investors shifted to more cautious positions, this could remove significant buying pressure that had supported valuations. However, the more experienced retail investor base seemed more informed and potentially more resilient than stereotypes suggested.
Retail Investor Caution: Evidence and Implications
Beyond anecdotal signals, several concrete data points showed that retail investors were becoming more cautious.
Portfolio Positioning Changes
Brokerage data revealed subtle but meaningful shifts: increased cash holdings, higher allocations to fixed income, growing interest in defensive sectors, and more purchases of index funds and diversified ETFs instead of individual stocks.
Risk-Taking Indicators
Margin Debt: Although still high, margin debt balances stabilized and showed signs of slight decline.
Speculative Options Activity: The ratio of call options to put options dropped from extreme levels. Speculative out-of-the-money call purchases decreased compared to more defensive strategies.
Cryptocurrency Exposure: Many retail investors reduced their cryptocurrency holdings following sell-offs in late 2025.
Behavioural Indicators
The AAII sentiment survey indicated a significant drop in bullish expectations. Search interest in investment-related terms fell from peak levels. Downloads of trading apps and new account openings at retail brokerages moderated significantly.
Contributing Factors
Experience of Volatility: Sharp market swings around Liberation Day served as a strong reminder of the risks involved.
Inflation Impact: Persistently high inflation reduced disposable income available for investment.
Rising Alternative Returns: Risk-free rates in the 4-5% range set a higher hurdle for equity investments.
Fatigue: The 24/7 nature of markets created exhaustion among some highly engaged retail investors.
Market Implications
Reduced retail buying pressure might lead to more modest equity returns, especially in segments favoured by retail. However, more diversified and defensive positioning could also lessen downside volatility and improve overall market stability.
China: From Growth Engine to Economic Uncertainty
For decades, China was the main driver of global growth. However, 2025 marked a clear turning point as structural and cyclical challenges led to significant deceleration in Chinese growth.
The Scale of the Slowdown
Projected GDP growth of about 4.8% for 2025 represented a significant decline from historical norms and concealed deep weaknesses in certain sectors. This overall figure hid a divided economy: manufacturing and exports remained strong while large parts of the domestic economy showed ongoing weakness.
Property Sector Distress Deepens
In the first eleven months, fixed asset investment dropped 2.6% year-on-year, the lowest rate since June 2020. Property investment specifically fell by 15.9%. New home prices in the 70 largest cities declined by 2.4% year-on-year, the biggest drop since August. Major cities saw substantial price reductions: Beijing -2.1%, Shanghai -5.1%, Guangzhou -4.3%, Shenzhen -3.7%.
The downturn in the property sector impacted more than just real estate. Household wealth dropped significantly, creating negative wealth effects that reduced consumer spending.
Anaemic Consumer Spending
Consumer spending remained stubbornly low. Retail sales grew only 1.3% year-on-year in November, the slowest increase since December 2022. Automotive sales fell by 8.3%, and sales of appliances and audio-visual equipment plunged by 19.4%. Chinese officials acknowledged that “the economy still faces multiple challenges… as well as insufficient effective domestic demand.”
Manufacturing Strength and Export Resilience
In sharp contrast, China’s manufacturing sector showed impressive resilience. Industrial production increased by 4.8%, while exports jumped by 5.9%, the highest growth in eleven months. The strength in exports reflected a strong geographic diversification away from the United States (where exports dropped by 28.6%) toward other markets. Exports to the EU increased by 14.8%, to ASEAN by 8.2%, and to Australia by 35.8%.
Chinese automotive exports illustrated competitive strength, rising by 16.7%, although this sparked rising protectionist sentiment in recipient markets.
The Growing Current Account Surplus
The combination of strong exports and weak import demand led to a rapidly increasing current account surplus, expected to reach nearly 1% of global GDP over the next 3-5 years, potentially the largest national surplus on record. China’s trade surplus soared past $1 trillion in 2025.
Global Implications
Reduced demand from China affected commodity markets. Coal imports fell by 33.5%, refined oil by 19.3%, and natural gas by 14.3%. China’s manufacturing competitiveness increased pressure on producers in Europe, Japan, and Korea. Germany increasingly experienced trade deficits with China in capital goods categories.
Chinese Policymakers Response: Stimulus Challenges
With growing signs of economic weakness, Chinese policymakers introduced various monetary, fiscal, and regulatory measures throughout 2025. However, the effectiveness of these efforts was limited.
Monetary Policy Easing
Chinese monetary authorities reduced required reserve ratios and cut policy interest rates, including the loan prime rate. They also provided targeted lending facilities and reduced mortgage rates. Despite these moves, credit growth remained modest, failing to stimulate the investment and consumption response that policymakers wanted.
Fiscal Stimulus Measures
Authorities announced plans for infrastructure spending, tax relief, and subsidies for property developers. They also provided consumer subsidies for appliances and support for local governments facing debt challenges. However, the fiscal response remained limited due to concerns about public debt.
Structural Reform Imperatives
The International Monetary Fund urged China to speed up structural reforms. These included addressing local government debt issues, tackling problems in the property market, enhancing the social safety net to lower precautionary household saving, and encouraging consumption instead of investment-led growth.
President Xi Jinping emphasized the need to focus on domestic demand to create a strong domestic market. However, turning this rhetoric into effective policy proved difficult.
Policy Effectiveness Constraints
Confidence Deficit: Household and business confidence remained low despite policy support.
Structural Overcapacity: Some sectors faced excess capacity, requiring adjustments instead of more stimulus.
Diminishing Returns: China’s credit-to-GDP ratio had risen significantly, indicating reduced benefits from more credit expansion.
Alternative Policy Tools
Some economists recommended appreciating the currency to lower import costs and increase household purchasing power. They also suggested providing direct support to households instead of subsidizing specific products, along with investment in healthcare and social safety nets to reduce precautionary saving.
Ongoing Promotion of Export Competitiveness
Despite claims of focusing on domestic demand, Chinese policy continued to support export competitiveness, especially in strategic sectors. These included industrial policies backing electric vehicles, renewable energy, and advanced manufacturing, along with R&D support and export credit programs.
The European Economy and ECB Policy
The European economy faced a tough situation in 2025, balancing slow growth with ongoing structural challenges, increasing competition from China, and the impacts of changing US trade policies.
Economic Performance and Outlook
The eurozone economy was expected to grow by about 1.3%. This growth rate seemed decent but hid significant differences among countries. Germany undertook major fiscal expansions, moving away from strict fiscal discipline. Spain performed well, with consumer spending rising around 3% and successfully diversifying its economy into services.
The ECB Policy Stance
The European Central Bank kept key policy rates stable through the end of 2025. President Christine Lagarde indicated that the rates were “set correctly”. Inflation in the eurozone increased by 2.2% year-on-year in November, nearing the target. Core inflation stayed steady at 2.4%.
Services inflation needed close attention, rising by 3.5% year-on-year, which was the highest since April 2025. Since services are labour-intensive and represent a large share of consumer spending, this indicated that the labour market remained tight and wage pressures continued.
Lagarde described the economy as “resilient”, while also acknowledging that trade tensions would “remain a drag on growth”. This reflected the balancing act facing policymakers.
Structural Challenges
Beyond short-term issues, European policymakers dealt with significant structural challenges:
Demographic Decline: An aging population and low birth rates limited growth in the workforce and increased social spending pressures.
Regulatory Burden: The European economy remained heavily regulated compared to competing jurisdictions, which could hinder innovation.
Energy Costs: Energy costs in Europe stayed higher than in the United States or Middle Eastern countries.
Fragmentation: Although there had been progress toward integration, the eurozone still had barriers to capital and labour mobility.
Defence Spending Requirements: Meeting increased NATO commitments would consume significant fiscal resources.
Outlook
The outlook showed modest, slow growth interrupted by occasional external shocks. Fiscal stimulus offered some relief, but Europe’s long-term growth potential looked limited without major productivity improvements or solutions to demographic challenges.
Latin American Economies: Divergent Trajectories
Latin America in 2025 displayed a mix of varying economic paths, with some economies showing resilience while others struggled with persistent inflation, fiscal issues, and political uncertainty.
Regional Overview
Overall Latin American growth remained positive but uneven. Several common themes characterized the region: vulnerability to commodity prices, enduring inflation issues, fiscal pressures from high public debt, and exposure to the US dollar.
Country-Specific Developments
Mexico: Mexico’s economic situation was primarily influenced by trade policy. As the largest trading partner of the US, Mexico imposed tariffs of up to 50% on Chinese automobiles and products from nations without trade agreements, affecting 1,400 items. This pre-emptive step aimed to secure preferential US market access ahead of the 2026 USMCA renegotiations.
Mexico also benefited from nearshoring trends, as manufacturers sought to diversify supply chains away from China. However, uncertainty regarding the USMCA negotiations created cautious investment attitudes.
Brazil: Brazil faced a complex environment, balancing growth goals with inflation worries. The central bank kept interest rates relatively high despite more relaxed global monetary conditions. Agriculture exports remained strong, but political developments affected economic policy.
Argentina: Argentina continued working on economic stabilization under new political leadership. The government implemented orthodox policies to combat hyperinflation and restore fiscal health. This dramatic policy shift led to short-term contraction but aimed to lay the groundwork for sustainable growth.
Chile: Chile’s economy benefited from high copper prices, but it also faced challenges from political uncertainty and debates over constitutional reforms. The country’s advanced financial markets and strong institutions provided some resilience.
Colombia: Colombia worked to balance growth and inflation concerns. The central bank navigated the dual objectives of supporting growth while maintaining price stability, with oil exports offering fiscal relief.
Peru: Despite political instability, Peru showed resilience, with mining exports supporting the economy. However, social tensions and governance issues limited long-term investment confidence.
Regional Integration and Trade
Efforts toward regional integration in Latin America continued, but progress was slow. Chinese involvement in the region grew, with initiatives in infrastructure financing, commodity purchase agreements, and investment in manufacturing.
Policy Responses and Outlook
Latin American central banks generally took part in global monetary easing, though inflation remained higher than target levels in several countries. Fiscal policies were constrained by high levels of debt. The outlook continued to show modest and uneven growth along with persistent inflation and fiscal challenges.
Canadian Policy Response: Reducing US Dependence
In 2025, Canada grappled with its heavy economic reliance on the United States, where about 75% of Canadian exports went. This concentration posed risks in a time of increasing US protectionism.
The Imperative for Diversification
The trade policy shocks of 2025 underscored the necessity for Canada to lessen its reliance on the US. While the USMCA offered some protections, the political landscape showed that treaty obligations were not always reliable.
Trade Diversification Initiatives
Canadian trade policy focused on several key strategies:
Asia-Pacific Engagement: Canada accelerated its efforts to strengthen trade ties with Asia-Pacific nations, engaging more deeply with CPTPP partners, exploring trade agreements with ASEAN countries, and increasing trade promotion activities.
European Partnerships: The Canada-EU CETA served as a framework for boosting transatlantic economic connections.
Emerging Market Opportunities: Canada examined opportunities in Latin America, Africa, and the Middle East.
Domestic Industrial Policy
In addition to trade diversification, Canada introduced industrial policies aimed at enhancing domestic economic resilience:
Critical Minerals and Resources: Canada used its resources of critical minerals crucial for clean energy transitions, streamlining permits for mining projects and attracting investment in processing capacity.
Clean Technology and Energy: Canada aimed to be a supplier of clean energy and technology, taking advantage of its abundant renewable energy resources.
Advanced Manufacturing: Efforts to move up the value chain included support for automotive electrification, development of the aerospace sector, and the fields of pharmaceuticals and biotechnology.
Fiscal Support for Diversification
Canadian fiscal policy backed the diversification strategy through infrastructure spending to support trade with non-US markets, export finance programs, research and development tax incentives, immigration policies to attract skilled workers, and regional development initiatives.
Challenges and Constraints
Despite determined efforts, Canada faced numerous challenges. Its geographic situation naturally made the US the primary trading partner. The country also dealt with limitations in scale as a smaller economy, investment needs for diversification, sectoral concentration within closely linked supply chains, and competitive pressures.
The USMCA Renegotiation Context
All diversification efforts took place amid the upcoming 2026 USMCA renegotiation. Canadian negotiators aimed to secure as much access to the US market as possible, maintain dispute resolution processes, protect key industries, and resist US demands for more favourable terms.
Outlook
Canadian officials viewed diversification as a long-term project. They sought gradual progress, aiming to reduce the US export share from 75% to around 60-65% over ten years. However, the United States would likely remain Canada’s main economic partner for the foreseeable future. As such, Canada is keeping its ‘elbows up’ against the United States, but not too high.
Questions Remain as Markets Look to 2026
The year 2025 will be remembered for major changes in policy and market assessments. Several key themes emerged:
Policy Trumps Fundamentals: Market performance was driven more by policy decisions than by traditional factors. This made policy analysis vital in investment strategies.
Concentration Risk Realized: The dominance of a few large technology companies in equity markets created both opportunities and risks.
The Return of Active Risk Management: In 2025, investors saw the value of actively managing risk, diversifying, and taking defensive positions.
Inflation’s Persistence: The understanding that inflation would not easily return to 2% targets led to revised expectations.
China’s Transition Incomplete: China continued to struggle with shifting from investment and export-driven growth to consumption-focused domestic demand.
Fragmentation Over Integration: The trend toward economic separation and regional supply chains picked up speed, marking a significant shift from years of closer integration.
Several key questions dominate the 2026 outlook:
Will Inflation Moderate or Persist? How inflation behaves will shape central bank policies and expected returns across different assets.
Can Labour Markets Stabilize? The balance between a cooling labour market and outright weakness will affect both monetary policy and consumer spending.
How Will Trade Policy Evolve? Supreme Court decisions on tariff authority, outcomes of USMCA renegotiations, and ongoing trade tensions will influence business investment and market sentiment.
When Will China’s Stimulus Gain Traction? If Chinese policies succeed in boosting domestic demand, the impact on global growth could be significant.
Can Europe Compete? Europe’s ability to tackle structural challenges while dealing with Chinese competition will determine if the continent faces decline or can adapt successfully.
Will Credit Stresses Spread? Issues in the auto sector raised concerns about possible hidden strains in private credit markets.
Can Geopolitical Tensions De-escalate? Ongoing conflicts and strategic competition present risks that could significantly impact economic and market outcomes.
Investment Implications
For investors, the lessons from 2025 suggest several considerations:
– Maintain diversification across regions, asset classes, and factors
– Monitor policy changes as closely as traditional analysis
– Recognized that traditional assets’ “safe haven” status may have changed
– Focus on quality and strong balance sheets due to uncertainties in credit markets
– Stay alert to concentration risks in equity portfolios
– Prepare for ongoing high volatility
– Balance growth investments with defensive positions
– Seek inflation protection given it remains above targets
The path ahead is uncertain. Optimistic scenarios include successful policy navigation, AI productivity gains, and reduced geopolitical tensions. Pessimistic ones involve recession, market disruptions, and escalating conflicts. In this context, being humble about forecasts, flexible in strategies, and strong in risk management is essential.
The events of 2025 showed that in a time of dominant policy and geopolitical shifts, investment success requires not only financial analysis but also geopolitical awareness, policy knowledge, and scenario planning. As markets move into 2026 and beyond, these skills will grow more important.
Garnet O. Powell, MBA, CFA, is the President & CEO of Allvista Investment Management Inc., a firm that manages investment portfolios on behalf of individuals, corporations, and trusts to help them reach their investment goals. He has more than 25 years of experience in the financial markets and investing. He is also the Editor-in-Chief of the Canadian Wealth Advisors Network (CWAN) magazine. He can be reached at gpowell@allvista.ca