Markets Climb Walls of Worry

2025 Reflections and Outlook for 2026

2025 ended up as another double-digit return period for the IA Global sector, now making three years in a row back to 2023. Given the implementation of President Donald Trump’s trade wars last year, many investors may be surprised to have benefited from strong positive returns and could be tempted to take profits. The previous three year run of double-digit profit (2019, 2020 and 2021), was followed by a fall of 11.06% in 2022 so is there is a possibility of history repeating itself?

A question the Margetts Investment Committee keep coming back to is the moral hazard of quantitative easing, or to put it more simply, printing money. Following the collapse of the banking system in 2008/9, governments became increasingly comfortable printing money to ease economic tight spots, which turned into a frenzy during the Covid-19 crisis. The amount of money printed between 2008 and 2021 was at least $15 trillion and the long-feared inflation began to appear as the global economy started to operate normally as Covid-19 restrictions were removed.

Trump believes US inflation is now under control and the US Federal Reserve should already have reduced interest rates further, but is this correct? If it were possible to print money for more than a decade, with the resulting inflation remedied with normalised interest rates over a three-year period, you would be back to printing money again very soon. Perhaps this is something Trump is already planning as it would be popular, but very risky.

Trump has congratulated himself on the implementation of tariffs and the significant tax revenues they are now generating, which have drawn little retaliation from trading partners? It may seem like a great success but economically it is the equivalent of a lobster pot. While tariffs can work temporarily, in the longer term they doom inefficient industries to remain inefficient. This causes them to be increasingly dependent on the state, making them even more reliant on further protection. Given the tax revenue is essential to fund popular tax cuts, how does the US ever reverse this strategy? Like the lobster pot, it is easy to get into but hard to get out of.

Signs of US weakness can be seen in the performance data. Whilst the IA North America sector outperformed the IA Global sector every calendar year between 2018 and 2024, 2025 saw the IA North America struggle to keep up, mainly due to dollar weakness. During 2025, the Dollar lost nearly 7% to Sterling blunting the return of US assets to UK investors.

Readers who have been on a train will know the uncertain feeling of being in a station and watching the train alongside move backwards, giving you the feeling of moving forwards. This is how inflation can also feel, as the rise in asset prices is also partly attributable to the value of money going down. During the 1970s stockbrokers coined the phrase ‘markets climb walls of worry’ to explain why even when economic data was disappointing asset prices continued to move higher, this was the story of 2025.

We know that liquidity affects valuations with higher liquidity increasing value. Bitcoin appears to only be driven by willing buyers and sellers as any intrinsic value has not been identified. With the abject failure of active managers to add value over the years, the rise of index-based funds has continued with UK domiciled active funds now having seen years of net outflows whilst trackers enjoy record inflows.

Naturally, trackers push more liquidity into the largest stocks, and this trend seems to have created historically expensive large companies together with historically cheap smaller companies. This has influenced US valuations to be well above other markets because the largest companies in the world are US stocks. The opportunity for active managers has never been greater and a new era of lower cost, more disciplined boutiques are beginning to emerge.

Many of these smaller and middle size companies existing is Asia and Emerging markets where demographics, population, economic growth, productivity growth coupled with attractive valuations cannot be ignored. 

Looking forward to this year, taking profits from expensive large caps does feel appealing but not to be held in cash. Inflation will erode the value of cash with taxation potentially reducing returns further leading to negative real returns. The opportunities outside the US remain appealing with valuations still around, or below, long term averages. Given the valuation differential, we feel that non-US assets could be better protected in the event of a downturn in US valuations, similar to the experience post the dotcom boom.

The main risk is a collapse of artificial intelligence led stocks, as the expected earnings may not come through, especially as much of the recent jump in earnings has been capital investment within this group of businesses. A crash is not likely whilst tracker flows continue to support liquidity, irrelevant of the business performance and the US continues the current approach causing further dollar weakness, so we look forward to this year with some optimism.

 * Margetts Fund Management Limited is authorised and regulated by the Financial Conduct Authority (FRN: 208565). This information is designed for investment professionals only and must not be considered as investment advice. Investors should seek professional advice before making any investment. The value of investments and the income derived from them can fall as well as rise. Capital is at risk so investors may not get back everything initially invested. Past performance is no guarantee of future performance.