With a flurry of potentially market-moving developments already in 2026 (Greenland, Venezuela and US Fed independence to name just three), 2026 is already shaping up to be an eventful year. As we enter February, we look at some of the key lessons from 2025, and themes that may shape markets in the year ahead.
Volatility is not the enemy, and may resurface in 2026
If there was one defining feature of the first half of 2025, it was volatility. The April “tariff tantrum” saw global markets sell off sharply as fears of renewed protectionism took hold. The S&P 500 fell around 12% in a matter of days and almost 20% from its February highs. The VIX Index, known as “Wall Street’s fear gauge”, spiked above 50, levels usually associated with crisis.
Yet, as history has shown repeatedly, the worst days often sow the seeds of the best ones. Markets recovered strongly in the months that followed, as trade deals were made and the Federal Reserve eventually restarted interest rate cuts. Panic, once again, proved to be a signal, not to sell, but to lean into quality assets at better prices. The economy and corporate sector proved far more resilient to the trade-war than first anticipated and markets rebounded quickly. Those who stayed the course received a good reward for stomaching the volatility, with the MSCI World Index gaining 21% in 2025.
As the chart below shows, there is usually some significant market sell-off every year. Over the last two decades, investors have experienced the Global Financial Crisis, the European Debt Crisis, Brexit, two trade wars, Covid and a bout of high inflation in 2021 and 2022. At the time these events always feel alarming, but despite this, markets typically rise in seven out of ten years and reward those who remain patient and stay the course.
Volatility may be uncomfortable, but for long-term investors it is simply the price paid for higher returns.
Note: The chart shows the annual return for the S&P 500 Index each year from 1975 (blue bar). along with the maximum decline of the index at the worst point each year (the red dot).
While the global economic backdrop and monetary policy settings should be supportive of markets this year – it tends to be unexpected events that shake markets. Left-field events are certainly possible in 2026. We have already seen geopolitical flare-ups in Venezuela and Iran, elevated trade-war risk (sparked by President Trump’s aggression towards Greenland), and a rapid spike in Japanese interest rates on concerns around their fiscal prudence.
If volatility does return to markets, it will be important to react with equanimity and remember the lessons of 2025.
Diversification had its moment—again
Another important lesson from 2025 was the value of diversification. At the start of last year the majority of professional investors believed the US would be the strongest performing share market again in 2025. However, the experts got it wrong, and after more than a decade of US dominance, leadership broadened materially. European equities and emerging markets outperformed the US market by a significant margin, despite having less exposure to the technology sector.
Investors with diversified global portfolios were rewarded, not only through better returns, but also through reduced volatility. Diversification, unfashionable in recent years, quietly did its job.
This is a timely reminder to stay diversified as we enter 2026. With roughly 40% of the S&P 500 now concentrated in just ten stocks (and 8% in Nvidia alone), too much passive exposure to the US would be a big bet on just a handful of companies.
Trends to watch in 2026
Looking ahead to 2026, we believe there are some key themes for investors to watch.
1. Broadening, not necessarily booming: With valuations elevated, 2026 may be a year of modest index returns, but with richer opportunities beneath the surface. The winner-takes-all market, led by a handful of AI-linked companies, may fade as the focus moves from hype to fundamentals. High-flying stocks will need to deliver on their promises (eg. datacentre build-out, revenue targets, tangible returns on capex) or risk their share prices declining materially. Selective stock-picking will matter. If trends from the last few weeks continue, this broadening out may also benefit previously out-of-favour sectors such as healthcare, small cap and value stocks, as fundamentals come back into focus.
2. Fixed income more attractive than cash: Cash has lost its shine. With recent interest rate cuts and inflation around 3%, the real return on term deposits is eroding, particularly after tax. Bonds are becoming relevant again, offering improved income and diversification as yield curves normalise. For conservative investors, fixed income now looks more compelling than sitting in cash.
3. A potential turning point for New Zealand: For Kiwi investors, 2026 could mark a recovery year. With recessionary pressures easing, support from the rural sector, and lower mortgage costs, economic conditions are stabilising. After years of underperformance, New Zealand equities may offer better prospects in the years ahead.
