Developed market (DM) equities ended 2025 on a positive note (MSCI World Index +0.8% in December) to leave them 21.6% higher for 2025. This marked a third consecutive year of strong returns for global equity investors (MSCI World Index +80% since the start of 2023). US equities (S&P 500 Index +0.1% MoM) and US tech stocks in particular (Nasdaq 100 Index -0.7% MoM) lagged their European counterparts (Euro Stoxx 50 Index +3.4% MoM in US dollar terms). The strong finish to 2025 helped European stocks to outperform their US peers by 21% YoY in US dollar terms in 2025, comfortably the largest annual outperformance since the Euro Stoxx 50 Index was launched almost 30 years ago in 1998.
Part of the US benchmarks’ underperformance into year-end can be chalked up to increasing investor anxiety about the massive amounts of spending on artificial intelligence (AI) infrastructure. Two of the mega-cap US stocks competing in the AI space experienced large negative share price reactions after reporting results in December. Oracle fell 11% the day after reporting a jump in spending on equipment and AI data centres, which is struggling to translate into commensurate cloud revenue growth. Broadcom also declined by 11% the day after issuing its sales outlook for the AI market, which failed to meet investors’ expectations. Despite these December wobbles for some mega-cap US tech stocks, the Nasdaq 100 Index still ended the year 21% stronger.
Emerging market (EM) stocks (MSCI EM Index +3% MoM) outperformed their DM peers in December, leaving them 13% ahead of their DM peers for 2025, the first annual outperformance since 2020. Somewhat ironically, AI hype was a large contributor to this EM outperformance. EM chipmakers (including TSMC, SK Hynix and Samsung) now account for around one-sixth of the MSCI EM Index, and those stocks rose by 65% in aggregate for 2025, contributing roughly one-third of the MSCI EM Index’s annual return in 2025. Chinese stocks also provided meaningful support to last year’s strong EM performance, particularly the large-cap tech conglomerates (Tencent +45% YoY, Alibaba +76% YoY).
On the policy front, the US Federal Reserve (Fed) cut rates by 0.25% for a third consecutive time at its December meeting (as anticipated). The decision, however, was notable for the three dissenting votes (the highest number since 2019), two for no cut and one for a 0.5% cut. Fed members are battling the tension between the urge to cut rates to support a weakening US labour market and the need to keep rates on hold to subdue elevated inflationary pressures. The US government’s 10-year borrowing rate ended the year at 4.2% p.a., having spent most of 2025 trading in a range of 4.0% to 4.5%.
The US dollar softened in December (US Dollar Index -1.1% MoM), contributing to its worst annual performance in nearly a decade (-9.4% YoY).
