Best Wishes for the Festive Break

Tuesday 23rd December 2025

Markets - brief review and outlook

At the end of last year, we were broadly positive on equity markets for 2025, and that view proved correct — although it was certainly not a smooth journey. Markets faced notable volatility early in April following Trump’s tariff announcements, but global equities have since performed strongly. This strength has been supported by resilient corporate earnings, moderating inflation, and growing expectations of lower interest rates in 2026, particularly following the December rate cuts in both the U.S. and the UK.

Artificial Intelligence (AI) remained the dominant driver of market gains in 2025, especially in the U.S. However, concerns are growing around the valuation levels of the so-called “Magnificent 7”, raising the risk that market concentration could become a headwind.

The “Mag 7” refers to the seven largest U.S. mega-cap technology companies:
• Microsoft
• Apple
• Alphabet (Google)
• Amazon
• Nvidia
• Meta Platforms
• Tesla

Together, these companies now account for around 35% of the S&P 500 index. In other words, just seven stocks represent over a third of a 500-company index. This concentration means index performance is increasingly driven by a small group of companies rather than the broader market. If these stocks continue to lead, index investors benefit. However, if they stall or decline, markets could struggle even if the wider economy remains resilient. This is particularly relevant for index-tracking funds and reinforces why we believe actively managed funds may be better positioned in 2026, with greater flexibility to navigate changing leadership.

Following our recent annual meetings with fund managers, the consensus view is steady but unspectacular growth for 2026 — not a boom, not a bust, but cautious optimism.

Why 2026 should be okay

• Interest rates are likely to be lower than in recent years, supporting business confidence
• Inflation expectations are more controlled
• Technology and AI continue to drive productivity and profits
• Corporate earnings are expected to be more stable
• Reduced reliance on a narrow group of U.S. mega-caps

What could hold markets back:
• Slower global economic growth
• High levels of government debt
• Geopolitical tensions or unexpected shocks, including trade disputes
• Valuations, particularly among the “Mag 7”, already looking expensive

What to expect as an investor:
• Continued volatility and short-term swings
• More moderate returns than recent strong years
• Long-term investing remains more effective than trying to time markets

Budget and Planning

Recent budgets have added complexity, most notably with an additional 2% tax tax on dividends from April 2026, and 2% additional taxation on property income and interest from 2027. Managing taxable income and planning ahead will therefore be increasingly important. Indeed, the budgets of 2024 and 2025 have significantly increased the need for professional advice, reinforcing the value of the proactive planning rather than reactive decision.

Closing Thoughts

As we move into 2026, markets are likely to reward discipline, diversification, and long-term thinking rather than short-term speculation. While returns may be more measured, careful portfolio construction and ongoing planning remain key to navigating both investment and tax changes ahead. We feel well placed to advise you with Neil joining the team this year to strengthen our advice and a welcome addition.

We look forward to reviewing your position next year to see how these developments may affect your personal situation, plans and objectives. In the meantime we hope have you have an enjoyable festive break and leave you with a yuletide quote by Charles Dickens:

I will honour Christmas in my heart and try to keep it all the year.

Best wishes as always.