2025 marked a turning point where geopolitics, policy, trade, and capital markets became inseparable drivers of investment outcomes. Global growth slowed modestly, with the International Monetary Fund estimating world GDP expansion at roughly 3.2%, reflecting persistent inflation pressures, tighter financial conditions, and uneven regional recoveries. Central bankers are expected to have a crystal ball to tell where all these macro- and geo-economic factors will impact their economies, employment, wages, financial conditions, and inflation. At the same time, intensifying U.S.–China strategic competition, ongoing conflicts in Eastern Europe and the Middle East (and now South America), and renewed trade and industrial policy reshaped supply chains and capital flows. Markets responded in a bifurcated manner: U.S. equities advanced sharply, driven largely by AI-related earnings concentration, and at the same time, domestic and global correlations across equities, crypto assets, credit, and private markets increased, limiting traditional diversification benefits. Against this backdrop, investors are reminded that geopolitical risk is no longer a tail event but a core structural variable influencing valuations, volatility, and long-term portfolio construction. The old standby in times of turmoil and uncertainty, gold, did very well. We still do not project a recession in 2026 as the labor dynamics have changed due to a number of factors. A recession is defined, not only as two back-to-back quarters of negative GDP growth, but also includes a spike in unemployment. We just don’t see the latter happening in today’s environment.
The fourth quarter commentary offers a more in-depth discussion about the economy and investment in general. Our full report can be accessed here.