Investment market updates

A good year for most investors

Investors enjoyed strong returns during 2025, despite rising tensions in world politics. All major asset classes grew for the first (calendar) year since 2020. Globally, share markets were up 14% (in GBP).

The first half of the year was dominated by global trade concerns. President Trump’s self-titled ‘Liberation Day’ enacted near-universal tariffs. Markets reacted negatively, but quickly recovered following a series of exemptions and deals.

The second half of the year saw most share markets hit new highs. Generally, inflation has fallen across most regions this year. This has allowed central banks to slash interest rates – the US Fed managed three quarter-point cuts between August and December. Lower interest rates boost investing and spending. This also affects asset values, by reducing the rate at which future income streams (dividends and coupons) are discounted to today’s money.

Purely in returns, 2025 was good to investors. However, the backdrop of global political tension has the markets on alert. You only have to look at gold, the go-to  ‘safe haven’ asset, to see this. The precious metal reached new highs above $4,500/oz.

AI investment driving economic growth

The world’s largest economy, the US, grew by around 2% during 2025 – slightly down on 2024 (2.8%). 2 or 3% per year has been the norm (pandemic aside) since the turn of the century. Growth in the global west has settled into a more moderate, mature phase. China and India, on the other hand, are growing at a faster rate (5-6% per year) as full industrialisation raises wealth and living standards.

Economic growth comes from investment and productivity. Fidelity estimates that approximately 60% of the US’ 2025 growth was driven by AI buildout. Investments in capacity and capabilities are expected to generate material productivity gains in the future. As we’re able to deploy AI in more ways we could face a landmark moment to rival the industrial revolution. The parallels are clear, with whole industries in uncharted territory.

As the majority of AI investment has been in the US and China, European economies have been flatter (c1.4%). Germany – historically an industrial powerhouse – hardly grew in 2025 (0.2%).

Three straight years of double-digit returns for US shares

The S&P 500 (the 500 largest US companies) returned 18% in 2025. That’s double-digit growth for the third consecutive year. Previous years were driven by ‘the magnificent seven’ tech firms, but 2025 has introduced a more diverse cast.

• Alphabet (Google) was one of the year’s standout performers, returning over 60%. Central to this was the launch of Gemini 3, their flagship generative AI tool. Q3 was Alphabet’s first ever $100bn revenue quarter and their total market valuation topped $3 trillion.
• Nvidia became the world’s first $5 trillion company, yet returned a relatively modest 39% vs. recent years. Even with heavy capital investment in new chip platforms, their $50 billion share buyback was the largest in history.
• Tesla lost their position as the leading EV car manufacturer to BYD. Their shares performed better in the second half of the year, ending up 10% for the year, but behind the broader market.

Long-established UK sectors deliver strong gains 

In 2025, UK shares performed well – but with different drivers to the US. The FTSE All Share Index was up 24%, with strong gains from long established sectors – like mining, banking and defence. The FTSE 100 (roughly 90% of the All Share Index) approached a landmark 10,000-points, achieved in early January 2026.

UK banks maintained strong profits despite falling interest rates. The sector as a whole returned 68%. With banking making up around 17% of the FTSE 100, the sector’s performance has a big influence on UK indexes. HSBC investors received $8bn in share buybacks and Barclays’ investment banking arm beat market expectations, growing income by 13% in H1. The sector also received a boost in the Autumn budget, avoiding a mooted windfall tax on profits.

Defence stocks rose, with US influence on NATO countries leading to increased spending. Babcock shares rose by 150%, while Rolls-Royce continued its comeback with an 84% gain. In one of the greatest turnarounds in British industrial history, Rolls-Royce shares have grown ten-fold in five years. Analysts point to a focus on costs, margins, and dominance in civil aerospace (Trent engines), as well as the defence sector’s rising tide.

The UK’s smaller, domestically focused companies saw more modest gains. The FTSE 250 (the next biggest 250 companies) returned 13%. High taxes and restrained consumer spending limited further growth.

Bond yields down from recent peaks

Globally, 2025 was a good year for bond investors with returns of 4.8%, including reinvestment of interest. Falling interest rates made income streams from bonds more valuable.

Overall, UK Gilts, returned just above 5%, whilst sterling corporate bonds were up just shy of 7%. Higher-risk, higher-yielding bonds are more sensitive to economic conditions and tend to reflect equity performance. In keeping with a positive year for shares, they were the best performers. GBP high yield bonds returned 8.7%.

The Autumn budget was a key event for UK bonds. Markets were uneasy in the run up, but the Chancellor’s approach to maintaining fiscal headroom reassured them. With annual inflation falling to 3.2% for the 12 months to November, we ended the year with another cut to interest rates. We’ll likely see fewer interest rate cuts from this point. Markets expect one or two more 0.25% reductions in 2026.

The benchmark 10-year Gilt yield ended the year at 4.5%, down from just above 4.9% in early 2025. This is still high, based on the last 10 years. It’s expected that yields will gradually fall (albeit not  smoothly), which should support bond valuations in 2026.

Octopus Money Direct investment funds 

All Octopus Money Direct investment funds had positive returns in 2025, from 4.9% for our specialist Climate Change Fund, to 23.8% for our UK Tracker fund.

Our three multi-asset growth funds (Cautious to Adventurous, also known as Octopus Growth Funds 1, 2 and 3) delivered good returns, ranging from 9.2% to 15.0%, respectively. This has been a period in which risk was rewarded, as shares outperformed bonds. The best-performing underlying fund within our funds was the iShares Emerging Market ESG ETF, which returned just over 25%. Japan and UK shares were also standout performers. Property (in global REITs) was less positive, growing a modest 3.5%.

The Defensive fund – our lower-risk, multi-asset fund – returned just over 7%. It invests mostly in lower-risk bonds, with a 25% cap on higher-risk assets. Over the year, share investments were close to 20% and this helped returns. The Bond Fund achieved a similar return (just over 7%), but, as per its objective, by investing exclusively in bonds. The fund held just shy of 10% in higher-yielding bonds, which helped lift the return above that from gilts and higher-rated corporate bonds.

The UK Index Tracker fund performed best, up 23.8%. The fund tracks the performance of the FTSE All Share Index, of which over 85% is represented by FTSE 100 companies. As discussed, this index performed strongly in 2025. Growth was spearheaded by aerospace and defence, mining and banking. The mining sector grew by a staggering 250% in the year, as gold hit record highs and the demand for rare earth metals grew in line with meeting AI’s resource demands.

The Global Share fund returned a more modest 14.1%. A good result, but behind the more narrowly invested UK fund. The fund’s largest exposure is to the US (around 58% of the fund) – which, while more than half of the fund, is underweight (10%) to its benchmark. US shares were up 18% for the year, but the dollar fell versus sterling. After currency conversion, these returns were a more modest 10%. The fund increased its exposure to Japan in the second half of the year, up from 1% to 6%. Japanese shares performed well in the final quarter (+9.6%) but, again, the strength of sterling (with far higher interest rates than Japan) brought returns down to 3.3% in the final quarter and 16% for the year as a whole.

The Climate Change fund grew nearly 5% during the year. It’s great to see growth, but disappointing considering how well global equities performed. The fund is concentrated in just over 40 companies developing climate change solutions and/or leading their industries in environmental practices. Concerns for green energy funding meant some holdings fell in value and (understandably) excluding sectors like defence and mining limited returns. Of the big US tech firms, the Climate fund held only Microsoft for the full year, adding a new position in Nvidia in H2. Aberdeen, investment adviser to the fund, believes there is further upside in the valuation of Nvidia. Now the world’s most valuable public company, they are leading the market with  energy-efficient microchips.

Visit each fund’s webpage if you want to see their returns over the last five years.