Q4 Multi-Asset Perspectives:

Julian Howard, GAM’s Chief Multi-Asset Investment Strategist, outlines his latest multi-asset views, exploring how market invincibility is flying in the face of uncertainty and slowing growth thanks to strong secular trends. Continued participation in any market progress going into 2026 will demand a structurally disciplined approach to accompanying diversification, whatever the New Year brings.

07 January 2026

Review

The fourth quarter of 2025 saw a solid gain of 3.7%* in global stocks as measured by the MSCI AC World Index in local currency terms, with the full calendar year delivering no less than 20.2%*, far in excess of the circa 6.7% annualised real rate of return for equities observed by Professor Jeremy Siegel in buy-and-hold bible ‘Stocks For The Long Run’¹ or the 7% identified by the San Francisco Federal Reserve’s (Fed) seminal study ‘The Rate of Return On Everything, 1870-2015’².

The simplest explanation for these outsize gains lies with the Artificial Intelligence (AI) revolution, specifically the ‘superscalers’ that dominate the US large cap indices. Remarkably strong third-quarter profits from Nvidia³ confirmed in investors’ minds that this was indeed an unfaltering trend, backed up by evidence from the real economy as large language models started to permeate every sector of the economy, and, according to Vanguard’s research⁴, promise to bring significant gains in productivity to a US and world economy that has been sorely lacking in it over recent years. However, the downside to this excitement is exactly that, and the price/earnings valuation for the S&P 500 Index soared to over 27x* by the end of the year (it got to nearly 29x at the height of the dot.com bubble in 1999 ). Despite increasing talk of an ‘AI Bubble’, the US stockmarket was able to brush off both the upset of ‘Liberation Day’ US tariff announcements in April and November’s AI-centred wobble.

Thoughtful investors are right to demand an explanation for this supreme resilience that goes beyond merely AI. Much can be explained by the rise of a new equity culture in America, fuelled by younger investors sharing ideas on online forums such as Reddit and then buying stocks (invariably Tech-based) using the myriad of apps with a video gaming-like feel that are now available. The prospect of lower US interest rates also encouraged the market, particularly in the last few months of the year. As the US economy slowed amid tariff uncertainty and less hiring, the Fed became increasingly concerned, despite persistently high inflation of around 3%*. The other major theme that characterised both the final quarter and 2025 as a whole was the issue of unsustainable fiscal deficits which haunted not just the US, but the UK, Europe and Japan too. Elevated long-term market interest rates (ie bond yields) around the world increasingly reflected concerns about lending to indebted governments although the effect on equity markets was, as described, largely muted. Resilience remained the order of the day.

Chart 1: Bulletproof, whatever your currency

Performance from 31 Dec 2024 to 31 Dec 2025

Positioning

History shows that for most investors, success depends more on capturing the strong real returns global markets deliver over the long run than on attempting to move in and out of the markets from one day to the next. Our multi-asset portfolios are designed with the aim to capture these superior real returns by remaining structurally engaged in equities over time. This is not to say that a pure equity allocation is appropriate in more than a few cases. Many investors will have nearer-term horizons or may simply not appreciate the volatility that characterises investing in stocks. For this reason, diversification is critically important, and it allows our client base access to a range of suitable ‘risk versus return’ profiles whether in a pooled fund or separate ‘segregated’ strategy form. But the starting point is inevitably the equity allocation, and across our portfolios we are taking steps to neutralise the regional and sector exposures to closely mirror the MSCI AC World Index. We believe this makes sense given the elevated uncertainty we see across stockmarkets, and the frequent apparent disparities between economic trends and stock market returns we have sometimes observed in the last year. Watching and waiting remains a perfectly legitimate strategy and incurs little opportunity cost in such an environment.

This does not come at the expense of long-term, meaningful engagement in stocks which, as stated, remains in our view the single largest determinant of investment performance over time. As far as diversification is concerned, the focus remains on transparency and reliability. This is defined as much by what we avoid as what we include. Hence, we are deliberately rejecting long-dated government bonds whose yields have been rising in response to both inflation concerns and the aforementioned fiscal deficits. Higher-yielding corporate ‘junk’ bond indices are also an area of concern and carefully side-stepped. Yields of around 6.5% in the US and 5.5%* in Europe will be scant consolation in the event of any economic slowdown which compromises underlying issuers’ ability to repay and incurs capital losses. Instead, our fixed income and credit preferences include a diverse array of well-established approaches including, depending on exact portfolio: insurance-linked bonds, climate bonds, European sub-investment grade financial debt, US mortgage-backed securities, medium-maturity government paper and short-dated investment grade credit, government bills and money markets. In the aggregate, these differentiated strategies have the potential to offer the desired characteristic of both steady yield and diversification through the vagaries of the market cycle. In our view, alternative investments offer further niche diversification and here we favour macro traders, global real estate, long/short opportunistic arbitrage and gold. While gold is now off its USD 4,356/oz.* high of mid-October, it has historically acted as a reliable diversifier in times of uncertainty and market volatility. The net effect of this blending of the equity and diversification sleeves goes to the heart of multi-asset investing – aiming to facilitate progress in rising markets over time while limiting the extreme effects of volatility along the way.

Chart 2: Tremors? Elevated bond yields signal unease on inflation, fiscal policy

From 31 Dec 2004 to 31 Dec 2025

Outlook

The global economy seems likely to continue to suffer elevated uncertainty from tariffs, fiscal crisis and unstable geopolitics. Specifically, trade policy has been in disarray since April's ‘Liberation Day’⁵ and even when the US administration announces an ‘official’ deal with any particular country, the terms can - and do - swiftly change. This creates uncertainty for businesses and consumers, as well as rising costs which central banks around the world somehow have to balance with sluggish economic performance. Fiscally, much of the developed world faces the twin challenges of a shrinking tax base and almost limitless demand for social and health provision, as well as the increasing costs of climate change mitigation. Simultaneously, there seems to be a corresponding unwillingness among electorates to have a meaningful discussion about how to fund all of this. We therefore expect continued fiscal and political crisis as already seen in the UK and France, along with associated political extremism and further destabilisation. Rising bond yields could well be a feature of 2026 as lenders may start to conclude that ‘enough is enough’. At the same time, US stocks - which dominate global indices - are not offering good value across a range of measures, even if their business models overall remain attractive.

The real question therefore is whether any of this will be sufficient to test market momentum in 2026. In what could be seen as a dress rehearsal, talk of an ‘AI bubble’ appears to have already come to a head in November (when bond yields also happened to be elevated), but this period of volatility was swiftly set aside by December amid strong corporate earnings and the prospect of lower interest rates. It may instead be a helpful thought exercise to step back to think about extreme events generally and whether portfolios are inherently prepared. Such events may include, inter alia, a US Fed that chooses to focus on inflation rather than the economy, rising prices pressures in Germany as infrastructure and defence spending starts to kick in, a change in leadership in the UK and France, a contagious private credit event to surpass the First Brands scandal of September-to-December 2025⁶, or a short-term US funding squeeze as liquidity is withdrawn from the banking system.

Whether any of these occur or not is hardly the point – the real purpose of thinking about the future is surely less about making specific predictions which are invariably forgotten by February but instead to try to ensure portfolio resilience whatever happens next. On this point, a well-executed multi-asset investment approach remains compelling.