Executive Summary
Dear Readers,
Global stock markets have delivered pleasingly positive returns for the third consecutive year. As is often the case, there were many uncertainties in 2025 and understandable reasons to sell equity holdings, such as Liberation Day in the United States or concerns about a potential AI bubble. However, these corrections were short-lived. Investors who had bet on sustained stock market corrections are now struggling to re-enter and repurchase shares at all-time highs. Therefore, the quote from investment icon Peter Lynch remains valid in 2025: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves.”
In addition to consistently strong corporate profits, particularly in the United States, the US Federal Reserve also provided support toward the end of the year with a loosening of monetary policy. It is worth noting, besides the interest rate cuts, that the Fed’s balance sheet is no longer being reduced but is instead being expanded through new bond-buying programmes. Put simply, the US Federal Reserve is once again pumping new liquidity into the system. Our Chief Economist, Dr Jörn Quitzau, justifies the new interest rate policy, among other factors, with an increased tolerance for inflation on the part of central banks.
A crucial decision is also approaching in May 2026: Who will become the new Chair of the US Federal Reserve? In this regard, I refer to the guest article by Mickey Levy, a long-time expert on US Federal Reserve policy. Mickey discusses his assessment of who the next Chair will be and, consequently, who will have the greatest influence on Donald Trump’s preference for higher stock valuations.
The hopes of the US Federal Reserve for further interest rate cuts, the ongoing high geopolitical uncertainties, and the still unresolved budget deficit in the US remain significant burdens for the US dollar. Even after the significant depreciation of the US dollar in 2025, the outlook for the currency does not change substantially in the new year. Therefore, we remain cautious and continue to use hedging mechanisms for the US dollar.
Falling interest rates and a weaker US dollar were also key factors in the spectacular performance of gold. According to the World Gold Council, the price movement and the increased demand from central banks have led to the value of foreign central banks’ gold reserves now surpassing their holding of US Treasury bond reserves. This trend is likely to continue into the new year, given the current US political landscape. Therefore, gold remains an important component of our traditional multi-asset portfolios.
Despite the legitimate concerns across numerous global issues, we remain optimistic about the capital markets in 2026. This optimism is primarily based on the assumption that companies will continue to generate profits for their investors in a growing economic environment, with scope for further profit growth. By acting with a steady hand and maintaining a long-term focus, we believe there are good opportunities for investors to achieve positive real returns in the capital markets by the end of 2026.
I hope you enjoy reading our latest publication and wish you a prosperous and healthy New Year!
Best regards,
Maximilian Hefele
Deputy Chief Investment Officer
Compass
Donald Trump’s economic policy remains erratic. Following the trade deals with more moderate tariffs and the tariff pause with China (extended by 90 days in mid-August), Trump made substantial adjustments in various areas. This confirms that even after trade deals have been concluded, it remains unclear how reliable the agreements are on the American side. Donald Trump is also causing irritation with his massive pressure on the central bank. The focus currently is on who will succeed Jerome Powell as Fed chairman. Even though the Trump administration’s economic policy is a burden, the US economy is performing surprisingly well. We expect growth of 1.7% for 2026, partly due to the very expansionary fiscal policy. This would put the economy roughly on par with its trend growth rate. In Europe, fiscal policy is becoming more expansionary, especially due to rising defence spending. This is giving the weak eurozone economy a positive boost. However, structural problems remain that are limiting European growth. France’s budget problems are a latent risk that could become a burden on the monetary union. The high budget deficits and government debt in the US could also become a major issue for the financial markets.
The inflation picture is mixed. In Switzerland, the inflation rate has been almost continuously within the Swiss National Bank’s (SNB) target range (0-2%) for two and a half years. In the eurozone, the inflation rate is back at the ECB’s target of 2%. In contrast, inflation rates in the US and the UK remain well above 2%, albeit with a downward trend. Despite high inflation, both the US and UK central banks have already eased monetary policy and will continue to do so in 2026. The US Fed is likely to cut its federal funds rate two to three times by 25 basis points each time. The Bank of England has recently made very close decisions, with many dissenting votes. Nevertheless, it has already indicated that it will gradually continue to ease monetary policy. The ECB and the SNB are likely to leave key interest rates unchanged for some time to come.
Geopolitics is currently a particular focus of attention. The war between Russia and Ukraine continues, as does the struggle to bring it to an end. The mood between the US and Russia has deteriorated. Donald Trump’s intervention in Venezuela and his repeated statements regarding Greenland are causing additional uncertainty.
Macro: The economy in the shadow of politics
Given the tense global political situation, the world economy is proving surprisingly resilient. The global economy is unlikely to slow down significantly. Among other things, this is due to very expansionary fiscal policy. The budget deficit of the G20 countries is likely to be around five and a half percent of GDP in 2026. Monetary policy was also eased last year and is supporting economic development. Monetary policy is likely to be further loosened in the United Kingdom and the United States, especially as the US Federal Reserve will have a new chairman in May who will be in line with the US president. The geopolitics and economic policy of the US government are the main risks to the global economy. Given the continuing expansionary fiscal policy, the latent risk of a sovereign debt crisis also remains.
Equities: Equity markets continue their upward trend
Global equity markets are currently showing a positive tone, supported by robust corporate earnings in the US and sustained demand for AI-related investments. In September, the Federal Reserve cut interest rates by 25 basis points, continuing its easing cycle; further steps are likely, which particularly supports rate-sensitive segments. Analysts expect earnings growth of around 11% for the S&P 500 this year, while Europe remains stagnant due to political uncertainty and weaker data.
The S&P 500 continues to post new highs, driven by the “Magnificent 7” and solid smaller stocks, without major setbacks. At the same time, investor sentiment has brightened: optimism is increasing, pullbacks are consistently viewed as buying opportunities, and liquidity remains supportive. Despite ambitious valuations, the fundamental backdrop and monetary policy support suggest that the downside potential in global equity markets currently appears limited.
Bonds: Chaos in the US boosts emerging market bonds: steepening of the US yield curve becomes almost a sideshow
In the fourth quarter of 2025, declining but still high inflation, a prolonged government shutdown, and growing US public debt led to a steepening of the US yield curve. Short-term yields declined as the Fed cut interest rates, while long-term yields rose slightly amid ongoing inflation and debt concerns. In contrast, European yield curves remained largely stable. The ECB kept its deposit facility at 2%, with inflation close to its 2% target. Credit markets remained resilient, with spreads on investment-grade bonds in USD and EUR remaining tight – those on emerging market bonds in USD even reached new historic lows.
Alternative Investments: Gold: structural tailwinds sustain the shine
The year 2025 marked a historic milestone for precious metals, delivering their strongest performance since 1979. Gold stood out with a gain of more than 64% in US dollar terms and over 50 new all-time highs, firmly establishing itself among the top-performing assets of the year. In our assessment, several structural forces should continue to support gold prices ahead. Record central bank purchases, elevated geopolitical risk reshaping global markets, and monetary policy at an inflection point are increasingly aligned in favor of gold. Looking ahead to 2026, we remain constructive on gold and maintain an overweight allocation, while expecting returns to moderate following an exceptional period.
Beyond convertibles: unlocking diversified alpha in a changing market
Global convertible bonds delivered strong returns, supported by elevated equity volatility, easing interest rates, and robust issuance, while effectively balancing downside protection with upside participation. However, following three consecutive years of strong performance, increased equity sensitivity and elevated valuations point to a more mature phase of the cycle. By contrast, liquid alternative strategies merit a more constructive outlook. Equity long/short approaches, particularly market-neutral strategies, offer attractive diversified alpha, enhanced downside mitigation, and portfolio flexibility in an environment shaped by shifting macroeconomic conditions and widening stock dispersion, supported by structural themes such as AI, reshoring, and global defense spending.
Currencies: Depreciation of the US dollar likely to continue at a moderate pace
Last year, the US dollar experienced one of its sharpest declines in decades. The main driver of this development was a growing loss of confidence in the United States. There is little to suggest a true trend reversal in 2026: US policy remains a source of uncertainty, and monetary policy is expected to loosen further. We therefore believe that the dollar’s depreciation is likely to continue, albeit at a more moderate pace. By contrast, the Swiss franc is expected to remain a pillar of stability in uncertain times. A lasting easing of global risks is not yet in sight. At the same time, however, the strong franc continues to weigh on the Swiss export sector. Accordingly, the Swiss National Bank is likely to intervene further should appreciation pressures intensify. The United Kingdom continues to face a challenging environment characterized by high inflation, stagnant economic growth, and a cooling labor market. While markets expect the Bank of England to cut rates this year, future policy remains highly data-dependent, and short-term shifts in direction are possible. Added to this are domestic political uncertainties, which could lead to periods of increased volatility for the British pound.
Topic: Notes on the US Federal Reserve
As a purebred Trump loyalist, Hassett is most likely to be nominated to be Fed Chair. If Hassett becomes Fed Chair, at least initially and well into 2026, his monetary policy directives will be dominated by Trump’s desires for lower interest rates. Hassett shares another desire with Trump: high stock valuations and robust capital markets. What are the limits on Fed rate cuts? Put simply, market signals will be the key limitation. A significant steepening of the yield curve and/or a fall in the US dollar in response to monetary easing would be a clear signal to the Fed. Trump views financial market behavior as his “report card” and would reverse course if pushed by financial market realities.