What a year 2025 has been. If you had known what would be thrown at the world economy, especially Donald Trump’s tariff war, you would not have expected US equities to be ending the year around their all-time highs.
Come to think of it, given the performance of Sir Keir Starmer’s government, you would not have envisaged the FTSE 100 index being right up there either.
But it hasn’t been a bad year for the US economy, and in any case markets are about emotions as much as numbers.
Nothing like a dazzling transformative technology and the prospect of a more compliant Federal Reserve to keep the bulls running, and we in Britain were pulled along too.
But can there really be another year of rising share prices, as nearly all the professional market-watchers predict?
Well, things look very different here in sunny Florida than they do from grey London. Let’s call it the Mar-a-Lago financial outlook, after the pumped-up, glossy, wrinkle-free, flawless faces so favoured by Trump loyalists.
We know all bull markets eventually come to an end, so the question is whether that vibrant, optimistic perspective can be sustained for another year.
What a year: Donald Trump launched a slew of trade tariffs in 2025
One key element, cheaper money, will certainly run on a while yet. The next head of the Federal Reserve Board will be a solid supporter of the President.
We knew that, but to avoid any doubt Trump declared last week: ‘Anybody that disagrees with me will never be Fed chairman.’
It’s true the chair is not all-powerful, and could be out-voted by the rest of the board. But the reality is that the most effective curb on an overly-compliant Fed will be the bond markets.
For now they seem content to cover the huge fiscal deficit of 6.5 per cent of GDP at a reasonable rate – ten-year Treasury notes are yielding 4.2 per cent against 4.5 per cent a year ago.
If inflation were to start nosing up maybe they might take fright, but right now there is little hint of concern. The bond market vigilantes are holding their fire.
There are all the arguments about Artificial Intelligence (AI) being a bubble – that the shares of the principal players are vastly over-valued.
There’s not much point in adding to this debate, except to note that US corporations as a whole are forecasting rising earnings through 2026, and that gives support to the market overall.
So it’s at least plausible that money could be shifted out of the more outlandishly-valued AI stocks into solid enterprises generating higher profits without a total market meltdown.
Outcome: Given the performance of Sir Keir Starmer’s government, you would not have envisaged the FTSE 100 index performing well this year
Besides, there will be many winners from the AI revolution, in particular the corporations that use technology to hold down costs and bump up earnings.
Yet it is impossible not to feel uneasy. Mar-a-Lago’s cosmetic surgeons can make people appear more youthful, but they don’t make them healthier. That comes from something else.
Don’t dismiss the importance of an optimistic outlook in generating and sustaining growth.
You can see the damage our own government has inflicted on our economy by the Chancellor’s relentless gloom. But dig down and there are all sorts of reasons for concern about the US.
These include the possibility of a recession, a surge in inflation, a run on the dollar and/or on the bond markets – the usual suspects. Beyond these is the unknown impact of AI on employment.
It is clearly killing a lot of entry-level jobs here and probably in the UK too, and that is alarming for social as well as economic reasons.
As yet AI doesn’t seem to be undermining employment more generally, but that may become more evident soon.
Finally, there are the ‘unknown unknowns’, the phrase made famous by former US defence secretary Donald Rumsfeld to describe things you didn’t even realise you didn’t know about.
Faced with all this, I fall back on the law coined by the economist Rudiger Dornbusch, who noted: ‘In economics, things take longer to happen than you think they will, then happen faster than you thought they could.’
So the Mar-a-Lago glow could persist a while yet. It would be nice to believe this wave of optimism will subside gently, rather than chaotically.
Let’s hope that’s right, but be aware that a nasty correction may come before 2026 is out.
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