A solid end to 2025 as equity indices explored new highs, rates and credit spreads were steady amidst cuts from the Fed and the BoE, the ECB remaining on hold. The FTSE 100 Index has joined in, breaching 10,000 for the first time. There are signs that the rally in the US is broadening out from AI/Tech leadership. There is also lots of talk about how the AI trade itself needs to broaden out and this is the year for it to start to ‘deliver’ rather than continue purely as an arms race. The AI tech story is spreading into other asset classes as expansion using equity funding is replaced by debt funding. 2025 saw big tech companies issuing record amounts of debt, >$250bn, and one forecast has expansion in AI and datacentres needing $1.5tn by 2028.

New bond issues by Alphabet ($25bn), Meta ($30bn) and Oracle ($18bn) have all been snapped up, with Meta gaining a book size of $125bn. Issuing that scale of debt into previously lightly geared balance sheets does have consequences and formerly conservative Oracle has seen its Credit Default Swaps (the cost of insuring its debt) jump to levels not seen since 2022, and now six times the cost of insuring US Treasuries.

There are more forecasts for 2026 than ever. In a recent podcast, TS Lombard condensed more than sixty-five of them into a consensus that 2026 will be a rerun of 2025. 10% up for US equities, inflation falling back to target, growth remaining steady, interest rates reaching neutral, so, a ‘Goldilocks’ picture. Let’s see, a Trump dominated Fed could easily lead to a policy mistake.

Geopolitical risk is back to the fore (a ‘new world order’) as Trump started the year with aggression towards neighbouring Venezuela. Framed as dealing with ‘narcoterrorists’, and bizarrely the use of machine guns (?), apparently it is about their reserves of heavy oil, which the US, despite being a net oil exporter, does not have. China is the biggest consumer of Venezuelan oil and has lent the country more than $70bn in oil-backed loans. Greenland remains in Trump’s sights, and it is probably only a matter of time before he acts.

Stability in US job growth has enabled the Fed to focus more on inflation, however, fiscal dominance means Treasury and Presidential pressure remains intense on the FOMC to cut rates further. The Justice Department is politicised too and has launched a criminal investigation into the Fed Chairman, Jerome Powell, over building renovations, prompting a widespread show of support for Powell. The FOMC did deliver a consensus 25bp cut, although it was accompanied by dissents amongst the committee and a hawkish press conference to play down further easing. Overall, the cut looks to have been less hawkish than anticipated and Powell was more upbeat about prospects for 2026 than expected.

Attention now turns to the appointment of Powell’s successor as Fed Chairman in May and the future composition of the FOMC. If heavily political, as expected, we could face the prospect of a Trump inspired/directed series of further cuts in the face of an accelerating economy which might unsettle markets and provoke volatility. Kevin Hassett, currently Director of Trump’s National Economic Council, is favourite and appears to have changed long held views to suit Trump’s agenda. Recent strong growth figures had nominal GDP rising 8.2% annualised, hardly an environment to justify further cuts.

US debt in the meantime topped $30tn for the first time, doubling since 2018. The servicing of this debt mountain is running at around $1.2tn a year and even though Trump’s tariffs have reduced their budget deficit to around $1.8tn a year these numbers are uncomfortable to say the least.

The ECB remains in a holding pattern as EU growth comes in better than expected. Core inflation remains sticky and with more robust growth it looks as though there might be no change to the 2% deposit rate throughout 2026. Activity in the German economy is finally beginning to tick up as the stimulus of government spending begins to feed through. However, meagre German growth of 0.3% GDP in 2025 and a forecast 0.7% in 2026 remains pretty anaemic.

In the UK, Gilts have rallied recently as CPI fell more than expected and some fiscal worries receded. GDP came in better than expected at 0.3% for November despite our Chancellor’s best efforts. Budget ‘Purdah’ was abandoned and flying kites of its content to test the water was a source of volatility. The trailing of manifesto breaking income tax rises was replaced by a retraction (lamely and latterly justified by a mooted upgrade to prospective growth by the OBR) and this has continued to make the longer end of the Gilt curve a volatile place. Fiscal realities, along with a record ex Covid Public Borrowing Requirement (a mere £10Bn more than expected), mean that we have seen a 2025 range for the thirty-year Gilt yield from 5.0% to 5.7%, then back to 5.2%, a move of 8% in capital terms. The OBR recently downgraded growth for 2026 and every year of this parliament.

Goldman Sachs issued the biggest ever bond sale by a US Bank, printing a $16bn six-part multi-tranche. Supply of new bonds over 2026 is expected to break all records and the primary market has had a busy start; we even saw six sterling issues on the first proper day of trading. Globally credit spreads have fallen to their tightest since 2007 as the economic outlook remains stable.

The full Quarterly Review is available here. 

January 2026

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