Market Trends as the New Year Begins
The new year kicked off much like the last one finished: with a rise in markets and a sense of confidence on Wall Street. There’s really no indication that the momentum seen in 2025 is slowing down. Yet, how long can this alignment across different asset classes remain? That’s the tricky part.
In the first trading session of January, global stocks climbed higher, continuing a positive trend that stretched throughout the previous year. This boost can be attributed to excitement around artificial intelligence, easing inflation, and support from central banks, which seems to outweigh concerns about trade disputes and geopolitical issues. Investors, it seems, are getting the message: it’s time to embrace some risk.
What set this year apart wasn’t just the intensity of the rally but also its breadth. Stocks and bonds both experienced gains, and credit spreads have tightened once again. Even commodities saw positive movement, despite inflation pressures starting to ease. The strong, consistent gains across various categories were quite notable. By the end of the year, financial conditions had improved significantly, emphasizing surging valuations and a focus on growth expectations and AI developments.
When looking at the performance of global stocks, bonds, credits, and commodities, it’s clear that 2025 was characterized by extremely high valuations and extensive policy interventions—resulting in the strongest cross-asset performance since 2009.
However, this progress can create a false sense of security in diversification. When assets that usually offset each other move in sync, it can leave your portfolio more vulnerable than it appears. Yes, returns can accumulate, but the buffer against losses narrows. As Jean Boivin from the BlackRock Investment Institute put it, “we think 2025 shows the risk of a diversification mirage.” Diversifying across these asset classes might not provide the protection one expects.
As we move deeper into 2026, concerns linger—not that last year’s growth was unfounded, but that replicating it may prove challenging. Wall Street’s optimistic outlook still hinges on similar factors: significant investments in AI, steady growth, and policymakers skilled at managing inflation without reigniting it. Analysts from over 60 institutions share a consensus that these factors are likely to remain in play, although there’s a caveat—much good news may already be built into current market prices.
“We assume that the rapid valuation growth we’ve witnessed in certain sectors isn’t sustainable or repeatable,” cautioned Carl Kaufmann, a portfolio manager. While there is cautious optimism about avoiding a major downturn, there is a legitimate worry that future returns may not meet expectations.
The sheer scale of last year’s stock market rally explains why U.S. stocks saw returns near 18%, achieving three consecutive years of double-digit growth, while global stocks hit around 23%. Even Treasuries gained, as U.S. Treasuries increased nearly 7% following three interest rate cuts by the Federal Reserve.
Volatility significantly decreased, reflected in the bond market as well. The bond market experienced its sharpest annual decline in volatility since the financial crash, with investment-grade spreads narrowing for the third successive year.
Commodities joined the positive trend too, with the Bloomberg index rising about 11%, driven mainly by precious metals. Gold reached new highs repeatedly, buoyed by central bank purchases, lenient monetary policies in the U.S., and a weak dollar.
Yet, inflation remains a concern. While price pressures have subsided for much of last year, some investors caution that this progress could reverse due to failures in the energy market or policy missteps. “The key risk for us is whether inflation eventually returns,” noted Mina Krishnan of Schroders. She anticipates that rising energy prices might herald such a return.
Outside the market, the wealth of the world’s 500 richest people hit a record high of $2.2 trillion last year, even as U.S. consumer confidence dipped for the fifth month in a row by December, according to the Bloomberg Billionaires Index.
The old Wall Street diversification strategy made a comeback last year. A 60/40 portfolio, balancing stocks and bonds, yielded a 14% return, while an index tracking risk-parity strategies rose by 19%, marking its best year since 2020. However, the performance of these balanced strategies has yet to catch up with funds that have seen extended outflows.
Despite this, asset allocation experts remain optimistic. They argue that the robust economic momentum and supportive policies are strong enough to offset rising valuations. “We want to deploy as much cash as possible to take advantage of the current environment,” stated Josh Kutin, the head of North American asset allocation at Columbia Threadneedle Investments. “We don’t really see evidence that should make us worried about an economic downturn in the near term.”
