As 2025 came to a close, global financial markets finished the year in a mixed but telling position. Share markets delivered solid returns over the year overall, but December itself was quieter, with investors weighing high interest rates, political uncertainty and likelihood of rate cuts in 2026. In New Zealand, economic momentum improved late in the year, but local shares continued to lag global markets. 

2025 markets at a glance

• Global share markets ended 2025 with strong annual gains, despite a flat finish in December

• The S&P 500 was broadly unchanged for the month, but finished the year up 16.4%

• NZ shares underperformed again, with the NZX 50 up just 3.3% including dividends for the year

• Interest rates remained elevated, with US 10-year government bond yields rising to 4.17%

• Gold prices reached record highs as investors looked for safer places to park money amid uncertainty

US share markets: strong year, subdued finish

US share markets took a breather in December. The S&P 500 index finished the month essentially flat, down 0.05%, as the re-weighting of asset allocations (for example, from shares to gold or bonds) that began in November continued. The usual end-of-year “Santa rally” failed to appear this year, perhaps after such a strong 11 months prior.

Despite the soft finish, 2025 saw a particularly strong 12 months. The S&P 500 delivered a total return of 16.4% for the year, comfortably above its long-term average and a reminder of the resilience of US shares, even amid higher interest rates and political noise.

NZ shares underwhelmed in 2025

Closer to home, New Zealand shares continued to underperform compared to our peers. The NZX 50 gained just 0.25% for the year, or 3.3% once dividends are included. December itself was uneventful, and local shares again lagged global peers for the month.

While dividend yields remain attractive for income-focused investors, overall share price growth has been limited, reflecting the small size and narrow sector mix of the New Zealand market.

Australian and other global markets were a mixed bag

Australian shares had a steadier year. The ASX 200 index total return rose just over 1% in December, and finished 2025 up 6.8%. This result was well behind the US market but comfortably ahead of New Zealand. Trade tensions linked to President Trump’s tariff programme weighed on Australian investor sentiment at times throughout 2025, but Aussie superannuation funds still largely benefited from their strong exposure to US shares, supporting overall member balances and returns.

European share markets outperformed the US market in December, though gains were still modest. The UK FTSE 100 index rose about 1% for the month, helped along by their reserve bank's easing monetary policy. Continental Europe faced more challenges. Political instability in France and higher planned government spending in Germany weighed on investor confidence, keeping share market returns uneven across the wider region.

Local interest rates and economy: improving momentum, mixed signals

New Zealand’s economy showed renewed strength in Q3 '25 (the results of which were published in December), sharply reversing the negative GDP result from Q2. Broader economic indicators have been encouraging going into 2026. Card spending, tourism, and net migration all improved through the second half of the year. Tourism activity is now close to pre-Covid levels, supported by a weaker New Zealand dollar (NZD).

There were some softer spots on the horizon. Global dairy prices fell moving into December, putting pressure on local farm incomes and leading to a downward revision in the farmgate milk price toward $9 per kilogram of milk solids. While this is being debated as a potential good thing for retail dairy prices, it's a reverse of the positive trends seen earlier in the year for the rural sector.

Interest rate expectations shifted upwards late in the year. The outgoing Reserve Bank (RBNZ) Governor signalled that the "easing cycle", where interest rates decline, was likely over. In response, wholesale swap rates, which influence fixed mortgage pricing, rose by around 50 to 60 basis points (BPs) from their November lows. Banks moved quickly to lift residential mortgage rates off the back of the swap rate increases, particularly for borrowers fixing for longer terms. Local bond yields also ticked higher, following global bond market trends.

A challenging US economy

US interest rates remained elevated last month. The 10-year Treasury yield (which acts like an economic benchmark that affects all other rates) rose to 4.17% in December, up from 4.02% in November. Higher yields reflect the Federal Reserve (the Fed)'s cautious stance as it balances inflation risks against slowing economic momentum.

The ongoing US government shutdown meant some economic data was delayed or incomplete, adding to ongoing market uncertainty. With the govt operational again, markets are now looking to January data releases for clearer economic signals. However, due to the delayed release of statistics over the previous months of shutdowns, it will be harder for economists to pick out trends and comparisons.

Debate continues over whether the Fed will cut US interest rates by 0.25% at its next meeting. Public attention has also turned to President Trump’s expected nomination of a new Federal Reserve Chair in January, with a proposed start date in May (subject to approval).

Other global markets see varying rates movements and impact

UK government bonds were a standout performer globally in 2025. The Bank of England cut rates by a total of 100 BPs over the year, despite inflation remaining above their target band. The rate cut moves were made possible by a weakening labour market and easing of wage pressures.

Elsewhere in Europe, French government bonds underperformed due to ongoing political instability - with three governments collapsing over attempts to rein in spending. German government bonds also delivered negative returns as their capital Berlin committed to higher defence and infrastructure spending - fuelling the potential for inflation. The European Central Bank held its policy rate at 2.00% and offered little guidance on future interest rate moves, opting for a data-dependent approach similar to the US Federal Reserve's sentiments late last year. 

Japanese bonds also ended the year in negative territory. The Bank of Japan continued to normalise interest rates, and investor concerns around Japan’s high debt levels added to volatility.

Currency trends and gold as a safe haven

Currency markets reflected relative economic strength between nations. The Australian dollar rose 8% against the US dollar, and 5% against the NZD over the year - showing Australia's continued economic growth which is outpacing its peers.

Investor caution was also evident via gold markets. Gold prices surged late in the year, closing 2025 at $4,322.50. This move highlighted a continued preference for perceived "safe-haven assets" amid share and bond market volatility and ongoing uncertainty.

Looking ahead to 2026

As we move into 2026, markets remain on edge - with a need for a balanced perspective and some caution. Share markets enter the new year with two years of solid gains behind them, but higher interest rates, political uncertainty, and uneven economic data suggest volatility is likely to persist.

For long-term investors, the themes remain familiar. Diversification matters, market timing is inherently difficult, and staying focused on long-term goals continues to be the most sensible (and reliable) approach through changing market conditions.

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