It’s the penultimate trading day of 2025, and the overriding theme is that global stock indices have lost momentum into year end. There are plenty of reasons for this, including decent returns for 2025, and investors waiting to make big trading decisions until after the Christmas break. But perhaps the most powerful reason is that the MSCI World Index excluding the US has outperformed the S&P 500 by the highest margin since 2009 this year.
US stocks underperform
The S&P 500 has risen more than 17% so far this year, compared to a 29% gain for the MSCI ex US index. The last time this happened the global economy was recovering from the financial crisis. Ironically, this has happened even though valuations for US companies, especially tech companies, have soared this year. Broadcom, Tesla and Eli Lily joined the trillion dollar club in 2025, while the majority of trillion dollar companies are US tech firms. The core group of tech stocks worth more than $1 trillion include the likes of Nvidia, Meta, Microsoft and Google, and combined they are worth a staggering $21 trillion.
The underperformance of US stocks this year compared to other global indices has not stopped US tech firms from getting bigger; however, it does bring up the question of valuations. With US tech firms so richly valued, is it any surprise that investors are turning towards other markets?
As we near year end, investors are facing a dilemma: if this is the year that AI is about to take off, will the US stock market outperform once more? If the answer is yes, then the end of year malaise could make way for US stock indices to play catch up early in 2026.
So far on Tuesday, European stocks have opened mildly higher across the board, US futures prices are lower, and the silver price has clawed back some of Monday’s losses and is up more than 2.5%, as supply concerns limit the downside for the precious metal.
FOMC minutes unlikely to signal faster pace of cuts
Markets are waiting to analyze the FOMC minutes that will be released later today. The focus will be on how likely Fed members are to switch from one to two rate cuts in 2026. The Fed’s Dot Plot predicted that there would be one cut next year, and we doubt that today’s minutes will shift the dial for markets, which could put upward pressure on bond yields. Sovereign yields have risen mildly in the past month, and the 10-year Treasury yield is above 4.1% as we move into year end.
Perhaps one of the biggest threats to stock indices for 2026 is an end to interest rate cuts, or even rate hikes in the major economies. This is a small risk, but it could cause havoc in risk markets next year, and the focus should be on bond yield movements as we move through to 2026.
Defense still a key theme for 2026
Ther other theme that is likely to persist into 2026 is defense stocks, particularly in Europe. Rheinmetall, the German arms manufacturer, is the top performing stock in the Eurostoxx 50 index in 2025, and we expect the defense sector to continue to dominate as peace talks between Ukraine and Russia break down. Even if there is peace, defense spending will still need to grow, as Europe needs to create a deterrent to ensure Russia respects sovereign boarders in the coming years.
Three questions for investors
Overall, it’s a quiet news day today, and we expect market movements to be relative stable. Although we are nearing year end there are three questions that are relevant for markets right now: 1, Can the silver price continue to stabilize? 2, Will the Chinese yuan continue to strengthen, and what this means for Chinese economic policy going forward? Finally, 3, with direction lacking for stocks this week, can the new year bring a clearer sense of where stocks go next? We may need to wait for next week to get clarity on that one.
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