In the final quarter of 2025, investors continued to adopt a glass half full approach, brushing aside negative news and focusing instead on the positives.

This was particularly evident in the US, where markets looked through rising job cuts, stretched valuations, near record low consumer sentiment, and the longest US Government shutdown in history. Investors instead prioritised strong corporate earnings, growing expectations of a US rate cut, and ongoing enthusiasm around the future of AI. 

Global equities rose by 2.58%, while the S&P 500 delivered a slightly lower return of 2.35%. Emerging markets continued their upward momentum, gaining a further 3.85%. In contrast, the Australian market lagged its global peers, with the ASX 200 declining by roughly -1.40%. 

Fixed income markets delivered mixed performance. International bond yields continued to decline as cooling inflation across major economies prompted markets to price in additional rate cuts, driving yields lower.

Conversely, Australian bond yields rose as the re emergence of inflation led investors to consider the likelihood of further rate hikes. 

Separately, gold continued its strong run in the fourth quarter, rising another 13.17% and closing out an exceptional year with a 65% gain in 2025. Elevated central bank buying, a weaker US dollar (which made gold more attractive to offshore buyers), lower interest rates reducing the opportunity cost of holding gold, and persistent geopolitical risks all contributed to this impressive performance.

The S&P 500 returned 2.35% in the fourth quarter of 2025, closing out the year with a 2025 return of 16.39%. This marks the third consecutive year of double digit returns for US equities.

The tech heavy NASDAQ also delivered a strong result, returning 3.16% for the quarter and 19.80% for the year. These outcomes are notable and highlight the importance of staying invested even when conditions may not appear ideal. The US market continues to demonstrate resilience, supported by strong corporate earnings, slowing inflation increasing the likelihood of further rate cuts, and ongoing enthusiasm around AI.

Toward the end of the year, investors showed renewed interest in previously overlooked sectors, resulting in value outperforming growth. Profit taking in large technology names – after another strong year – likely contributed to this rotation as capital flowed into undervalued companies.

In Australia, equity markets declined amid growing concerns over the re emergence of inflation. Housing inflation and rising energy prices in recent months have contributed to the recent spike in inflation. With rate cuts now off the table, speculation has shifted to whether the RBA may need to raise interest rates to address the issue. As a result, investor sentiment has weakened, and returns in the final quarter were negatively affected.

Elsewhere, emerging markets continued their upward trajectory, gaining 3.85% for the quarter and closing out the year with a 23.65% return. Chinese equities were among the strongest performers, rising 31.40%. The market benefited from advancements in Chinese AI, which provided a significant catalyst for performance in 2025.

Additionally, China’s ability to maintain strong trading relationships – even amid US tariffs – was viewed positively by investors and helped support upbeat market sentiment.

The United States Dollar appreciated marginally over the fourth quarter of 2025. After strengthening in October as global growth concerns prompted a flight to safety, the USD later pulled back in December as investors priced in more aggressive rate cuts.

As a result, the US Dollar Index, measuring the USD against a basket of major currencies, fell 9.40% over 2025, marking its largest annual decline since 2017 and the seventh‑worst on record. Key drivers included policy uncertainty under President Donald Trump, expectations of further interest rate cuts, concerns over the fiscal deficit, and narrowing interest rate differentials between the US and other economies.

The Australian Dollar appreciated against the US Dollar over the quarter, largely due to persistent inflation concerns reducing the likelihood of near‑term rate cuts and even raising the prospect of rate hikes. The Euro also ended the fourth quarter slightly stronger against the US Dollar, closing the year with a 13% gain.

The European Central Bank has signalled that rates are likely to remain on hold for now, with inflation close to target and economic growth showing encouraging signs.

Global fixed income markets finished broadly positive for the quarter ending December 2025. US Treasuries eased slightly as markets continued to price in further rate cuts.

The US Federal Reserve delivered a 25 basis point cut in December, its third consecutive reduction. Easing inflation, a modest rise in unemployment, and slowing (but not stalling) economic growth all contributed to improved investor sentiment and pushed US bond yields lower.

In contrast, Australia did not follow the global trend, with a spike in inflation weighing on bond markets. The Consumer Price Index (CPI) rose more than expected in both September and October, peaking at 3.80%, the highest reading since July 2024. Persistent upward pressure in housing related inflation and higher energy costs contributed to this outcome.

Elsewhere, European bond yields generally moved lower as ECB policymakers signalled the end of the restrictive policy cycle and hinted at potential cuts in 2026. UK gilt yields moved higher as sticky inflation left the Bank of England unwilling to ease policy.

In Japan, yields rose again, marking the sharpest annual increase since 1994, driven by inflation expectations, fiscal stimulus issuance, and the Bank of Japan’s decision to end its yield curve control policy.

Credit spreads remain tight, as both credit and equity market investors continue to downplay the potential for an economic slowdown.

Looking ahead to 2026, we expect continued bouts of volatility as geopolitical tensions persist across the globe. The most notable recent development is Trump’s capture of the Venezuelan president, an escalation that could open the door to further violations of international law. With China’s focus on Taiwan, the US on Greenland, persistent conflict in the Middle East, and the ongoing Russia–Ukraine war, geopolitical risk remains a key consideration for investors in 2026.

Domestically, the recent spike in inflation is concerning and has almost certainly derailed any near term hopes of further rate cuts. The RBA, which has taken a cautious approach throughout the easing cycle, will continue to be guided by incoming data, and any signs of cooling inflation will be welcomed by markets.

Fixed Income:

Fixed income delivered strong performance in 2025, with broad based gains. Aggressive tariff policies, threats to Federal Reserve independence, the “Big Beautiful Bill”, and uncertainty regarding the US’s ability to maintain global leadership all challenged markets during the year. Nevertheless, investors were rewarded through attractive yields and price appreciation as bond yields declined. Notably, around 50% of total returns in the US bond market in 2025 came from income, highlighting how attractive yields have been, and continue to be.

Looking to 2026, we expect income (coupon payments) to make up a larger proportion of total returns compared with 2025, as the scope for further price appreciation is likely to narrow. Although the pace of rate cuts should slow relative to last year, we still anticipate additional modest cuts from central banks, providing some potential for incremental price gains. We think that the RBA will be able to cut towards the end of 2026 although this will be dependent on the inflation and employment data that comes out over the year.

The Federal Reserve on the other hand is more difficult to predict as we are likely to see the knock-on effects from policies such as tariffs, feed into the economy, as well as potential political interference.

The first phase of rate cuts successfully moved interest rates from elevated to more moderate levels. The next phase, pushing rates even lower, is likely to result in a stronger economic response and therefore carries a higher risk of inflation resurfacing. Central banks are acutely aware of this risk and will be highly data dependent. In Australia, the re emergence of inflation remains a concern, and upcoming data will be crucial in shaping RBA decisions.

Overall, yields remain attractive and continue to offer strong income and diversification benefits within portfolios. Given the risks associated with geopolitics, fiscal policy, and inflation, we recommend a medium to short duration positioning, diversified across regions, credit quality, and issuers. We also expect the yield curve to steepen as interest rates trend lower, placing downward pressure on the front end of the curve.

Equities:

Aside from 2022, S&P 500 annual returns since 2019 have been exceptionally strong, with high double digit gains becoming increasingly common. It is important to remember, however, that over the past century the average annual return of the S&P 500 is 10.48%. Investors should not expect recent elevated returns to persist indefinitely.

That said, current market conditions appear broadly constructive for equities. Inflation continues to normalise, further rate cuts are anticipated across developed markets, economic data remains resilient, and corporate earnings have been positive, all of which provide reasons for optimism entering the new year.

We believe equity markets have the potential to perform well again in 2026, though it is essential to remain mindful of the risks. High valuations, particularly in the AI related sectors, have been a persistent topic of discussion. While many comparisons have been drawn to the Dot Com Bubble of 2000, it is worth noting that the “bubble” narrative was debated for years before markets eventually turned. In our view, many current valuations are justified by fundamentals, but investors should remain selective and vigilant.

Whilst some view the current market environment as a bubble, investors cannot afford to be out of the market, as timing it is extremely difficult, ‘time in the market, not timing the market’. The AI megatrend is here to stay, and the potential impact AI can have on global companies is significant, even if it is difficult to quantify. Until now, markets have largely been driven by companies critical to the AI supply chain, infrastructure providers, data centres, and semiconductor manufacturers. Looking into 2026, we expect the focus to broaden towards companies that can best utilise AI within their business models. If diversification is implemented appropriately then the AI theme will benefit the entire portfolio, therefore the debate of whether or not there is a bubble should not materially affect the asset allocation.

As always, a diversified equity portfolio remains essential. Spreading exposure across regions, sectors, and company sizes can provide downside protection while allowing participation in market rallies.

In Australia, certain segments of the market appear expensive relative to fundamentals. Commonwealth Bank, now one of the most valuable banks globally and a standout ASX performer in recent years, is a clear example. With the risk of re emerging inflation, investors should approach the Australian market with some caution to mitigate potential downside. It is also important to recognise the inherent concentration of the Australian market in Financials and Materials. An active approach can help manage this exposure appropriately, ensuring capital is not overly concentrated in any one sector or company.

As we enter a period marked by elevated valuations, heightened geopolitical tension, and ongoing economic uncertainty, ensuring portfolios are sufficiently diversified is more important than ever. Alternatives continue to play a valuable role in diversification. Depending on the portfolio’s objectives, this may include precious metals, uncorrelated macro strategies, or private market investments.

General Advice Warning
This update is issued by Ventura Investment Management Limited (AFSL 253045), which is a related body corporate of Centrepoint Alliance Limited.

The information provided is general advice only and does not take into account your financial circumstances, needs or objectives. Where you are considering the acquisition, or possible acquisition, of a particular financial product, you should obtain a Product Disclosure Statement for the relevant product before you make any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. It is imperative that you seek advice from a registered professional financial adviser before making any investment decisions.

For more information, refer to the Financial Services Guide (FSG) for Ventura Investment Management Limited (available at https://venturafm.com.au/media/1729/ventura-fsg-update-nov.pdf).

Disclaimer
While Centrepoint Alliance Limited and its related bodies corporate try to ensure that the content of this update is accurate, adequate and complete, it does not represent or warrant its accuracy, adequacy or completeness. Centrepoint Alliance Limited is not responsible for any loss suffered as a result of or in relation of the use of this update. To the extent permitted by law, Centrepoint Alliance Limited excludes any liability, including negligence, for any loss, including indirect or consequential damages arising from or in relation to the use of this update.