Lessons learnt from 2025, and my biggest worry for the year ahead

Tom Stevenson | Fidelity International

Lessons learnt in 2025

I have been watching and writing about the markets for longer than I care to remember. One of the reasons I continue to do so is that every year is different. There is always something to learn. And 2025 has been no exception.

Five of this year’s lessons are worth repeating - two have come from simply observing what has happened; two resulted from crunching the numbers in a bid to understand what was going on; one was simply the consequence of looking in the mirror.

The first observational lesson was a reminder in the spring and over the summer that reacting to apparently negative news can lead us into expensive mistakes. The tariff tantrum between February and April saw US shares fall 19 per cent, narrowly missing the traditional definition of a bear market. Seeking safe havens looked rational after the announcement of swingeing tariffs on America’s trading partners. It was also wrong.

Between early April and the end of October, the S&P 500 index rose by nearly 40 per cent. Almost no-one predicted that the market would bounce back so strongly. To do so you would have had to ignore what others were saying. Buying the dips is not always the right thing to do, but when the market has fallen by a fifth in a few weeks, the odds are stacked in your favour. If the best time to buy is when it feels hardest, then because it is so difficult, it makes sense to mechanise the process by investing regularly through the ups and downs. And to ignore how you feel as you do it.

A second useful observation this year has been that picking winners is important but hard. In the six years before this one, US equities had been the best performing stock market four times, notching up total returns of more than 25 per cent in three of the periods. With just a few trading sessions left this year, Wall Street is bringing up the rear. Japan, Asia Pacific and the UK have done twice as well. Europe and emerging markets have been two and a half times as profitable.

Almost all of this has been counter intuitive. Donald Trump’s election promised to put America First. The UK is navigating a set of well-understood economic challenges. You might think that export-focused emerging markets would be obvious victims of a trade war. Europe is politically fragmented, bureaucratic and dealing with a nasty war in its backyard. If you predicted the stock market leaderboard this year, you are better at this than I.

Moving on to the lessons learned from my own analysis. Two of the big market-moving stories this year have been AI and inflation. To try and understand how they would play out in the markets I put a cold towel around my head and crunched the numbers. In both cases I learned something useful.

Deciding whether or not we are in an AI bubble has kept investors busy all year. It is an understandable fear, but bubbles are only ever clear with hindsight. Spotting them in real time is guesswork. Instead, I looked back at the internet bubble of 25 years ago to see what lessons could be learned. And what might be applied today.

Looking at various combinations of old-economy defensive and new-economy growth stocks, held through a range of periods leading up to and following the bursting of the internet bubble, I concluded that the reward for market timing and stock selection can be small. In the absence of a crystal ball telling us what will outperform and when, generally it makes more sense to hedge our bets with a broad-based portfolio of the voguish shares inflating the bubble and the defensive stocks that will protect you on the way down.

My number crunching around the year’s second big story, inflation, reached a similarly fatalistic conclusion. I was shocked by how devastating even a modest overshoot of the inflation target can be. My research showed that an inflation rate of 3.6 per cent could lead to a pensioner running out of money 11 years earlier than if the Bank of England had achieved its target of 2 per cent inflation. I was also struck by the remedial impact of delaying retirement for just a year or two or achieving even a modestly higher investment return. It’s the power of small numbers magnified by time. The lesson is clear: save more than you think you’ll need and find work you enjoy. You may need to do it for longer than you think.

Which brings me to my look in the mirror moment. The biggest lesson I learned in 2025 is that if you are wholly dependent on the superannuation savings you have accumulated over a working lifetime, having never had the good fortune of working for an employer offering a final salary super payment, the markets look very different at the age of 60 than they did at the age of 30. Time is no longer on your side.

All five of this year’s lessons are variants of ‘the more I learn, the more I realise how little I know’. And that is fine. Not knowing what the future holds is just how it is. It’s how you prepare for the inherent uncertainty in the markets that matters.

You learn not to be surprised when the market rises 40 per cent from an apparently dark place. You realise that this year’s winners will not be what you expect and may or may not be the same as last year’s. You learn that bubbles are hard to predict and harder to time. And that the biggest risk you face as an investor may not be a falling market but rising inflation. Above all, you learn that your children can and should be a lot more relaxed about the ups and downs of the market than you can afford to be.

My biggest worry about 2026

Having looked at the lessons I could take from 2025, it’s time to turn my attention to 2026. After three years of rising markets, it’s natural to be optimistic, but prudent to temper that with caution. There’s a good case to be made for a fourth year of decent returns. It would nevertheless be wise to put some protections in place.

I think four strategies are worthy of consideration next year. The first is to stay invested, but with a wary eye on the unfolding cycle. The economic outlook is benign even if some cracks are starting to show in the jobs markets on either side of the Atlantic. Growth continues, and is expected to be boosted in 2026 by modest monetary easing. Bear markets or big corrections are rare in the absence of a recession, and that looks unlikely.

A good framework for viewing the market cycle is Goldman Sachs’s four-part rotation from Despair to Hope, Growth and then Optimism. The arrival of Covid six years ago marked the start of a very short Despair Phase, while the rest of 2020 can be viewed as the Hope segment in which the market rebounded strongly on the back of rising valuation multiples.

The third, Growth phase, in which earnings typically pick up the baton, was also shorter than usual. It began at the start of 2021 and lasted through the market’s interest-rate-fuelled de-rating through most of 2022.

We have been in the final, Optimism stage of the cycle through the last three and a bit years, in which investors have become more confident, edging towards complacency in some corners of the market. In this period, as usual, valuations started to rise again and built on earnings growth. It’s a bit unusual for this phase to go on as long as it has or to deliver the 70 per cent or so inflation-adjusted market growth that we have enjoyed. But that doesn’t mean it can’t continue, if the fundamentals allow it.

They just about do. Earnings growth is forecast to be in the low double digits both next year and in 2027. That would not have been predicted during the tariff tantrum last April. It will go some way to justifying valuations, which in many cases are towards the top end of their 20-year range. In America, they have already pushed through into uncharted territory. Only in Europe, the UK and China do they sit closer to average levels.

It is the divergence in market valuation and, as I discussed last week, in the relative performance of different regions that leads to the second key strategy for 2026 - diversification.

It worked well in 2025 because the US, which has led the pack for so long, finally underperformed its international peers, in Europe, Japan, and especially in emerging markets. I see no reason why this should not continue next year. China, in particular, is making similar progress to the US in terms of technology and innovation, but investors are only just spotting the opportunity and valuations are low.

Our analysts see Japan as a source of optimism. It is emerging from years of low inflation and matching interest rates. Wages are rising, pushing consumer spending power higher. Corporate reforms have fed the market and are being matched in Korea too.

It’s not just geographical balance that will pay off next year. As value sectors like financials and mining feel the benefit of a spillover of technology capital spending, the old economy is playing catch up. The Magnificent Seven is still expected to deliver nearly half of the S&P 500’s earnings growth next year, but that is less than this year as growth from the other 493 accelerates.

Which leads to my third strategy for 2026 - a shift from passive index trackers to active stock-picking. For much of the past decade or so, beating the market has been nigh on impossible in the face of strong returns from a handful of market leaders. The only thing that mattered was owning the Mag Seven. That won’t be the case as attention shifts from the hyper-scalers to the broader beneficiaries of the AI revolution, and investors focus on sifting the winners from the losers.

It is this increase in uncorrelated returns within markets and sectors that argues for my fourth and final strategy - putting in place protection against what I expect to be heightened late-cycle volatility. The final push through the Optimism phase is often characterised by choppy markets which can test even the coolest investors’ zen.

The extent to which you wish to put in place stabilisers and hedges will be determined by many factors - not least your tolerance for risk and your age. The returns from cash will start to dwindle through 2026 as interest rates retreat and that will increase the appeal of other income payers - infrastructure and equity income stocks will have a role to play.

Political developments may trigger further ups and downs next year. A new US Federal Reserve chair will raise questions about the US central bank’s commitment to keeping inflation in check. November will bring US Mid-Term elections, which may change the balance of power in Congress.

What’s my biggest worry about 2026? The fact that no-one seems unduly concerned is top of the list. The outcome most often predicted by market strategists - a flatter but still rising trajectory - is not a common outcome. Bull markets usually go out with a bang not a whimper. To predict a 10 per cent gain after three years of 20 per cent-plus advances feels like a triumph of hope over experience. I expect 2026 will be rather better or considerably worse than this.

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All prices and analysis at 5 January 2026.  This document was originally published in Livewire Markets on 5 January 2026. This information has been prepared by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia). The content is distributed by WealthHub Securities Limited (WSL) (ABN 83 089 718 249)(AFSL No. 230704). WSL is a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited (ABN 12 004 044 937)(AFSL No. 230686) (NAB). NAB doesn’t guarantee its subsidiaries’ obligations or performance, or the products or services its subsidiaries offer.  This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice.  Past performance is not a reliable indicator of future performance.  Any comments, suggestions or views presented do not reflect the views of WSL and/or NAB.  Subject to any terms implied by law and which cannot be excluded, neither WSL nor NAB shall be liable for any errors, omissions, defects or misrepresentations in the information or general advice including any third party sourced data (including by reasons of negligence, negligent misstatement or otherwise) or for any loss or damage (whether direct or indirect) suffered by persons who use or rely on the general advice or information. If any law prohibits the exclusion of such liability, WSL and NAB limit its liability to the re-supply of the information, provided that such limitation is permitted by law and is fair and reasonable. For more information, please click here.