With markets increasing, Wall Street confidence unwavering, and little indication that the forces driving 2025 have run their course, the new year began much like the previous one ended.
The duration of the cross-asset synchronization is less certain. The first session of January saw gains in global stocks, continuing a run that lasted much of the previous year as trade conflicts, geopolitical strain, and stretched valuations were overshadowed by enthusiasm for artificial intelligence, lowering inflation, and supportive central banks. It reaffirmed a basic lesson for investors: taking a chance paid off.
But the rally's breadth across asset classes, rather than merely its intensity, was what set the year apart. Bonds and stocks both increased in value.
Spreads on credit tightened once again. Even when inflationary pressures subsided, commodities continued to rise. Gains were widespread, consistent, and remarkably well-aligned.
Financial conditions had loosened by year's end, approaching their loosest levels of 2025, highlighting growing valuations and a convergence of investor expectations around growth and artificial intelligence.
2025 produced the best cross-asset performance since 2009, a year characterized by crisis-level values and extensive governmental intervention, when measured across global stocks, bonds, credit, and commodities.
Diversification appeared straightforward due to this alignment, which also made it difficult to see how much relies on the same factors that drove profits over the previous 12 months.
Portfolios become less protected than they seem when assets intended to offset one another move in the same direction. As returns mount, the error margin gets less.
Jean Boivin, worldwide president of the BlackRock Investment Institute, stated, "We think that 2025 has shown the risk of a diversification mirage."
"This is not a tale of protection through diversification across these asset classes." The worry as markets continue into 2026 is not that the run from the previous year was illogical, but rather that it might be challenging to replicate.
The same factors continue to shape Wall Street's projections: significant investments in AI, robust GDP, and the ability of policymakers to relax without rekindling inflation.
There is widespread consensus that those pressures still exist, according to forecasts gathered by Bloomberg News from more than 60 institutions.
The market has already factored in a lot of positive news, which is the foundation of that optimism. In reference to AI and nuclear-related firms, Carl Kaufman, a portfolio manager at Osterweis, stated, "We are assuming that the torrid pace of valuation expansion we have seen in some sectors is not sustainable nor repeatable." "We are worried that future returns might be weak, but we are cautiously optimistic that we can avoid a major collapse."
The magnitude of the previous year's surge contributes to the explanation of why global equities returned nearly 23% while US stocks returned approximately 18%, marking a third year in a row of double-digit gains.
As the Federal Reserve lowered interest rates three times, government bonds also saw gains, with global Treasuries rising by almost 7%.
Credit followed a sharp decline in volatility. Investment-grade spreads tightened for the third consecutive year, bringing average risk premiums below 80 basis points, while measures of US bond-market volatility saw their greatest annual fall since the financial crisis.
The advance was joined by commodities. Precious metals led an 11% increase in a Bloomberg index that tracks the industry. A weaker dollar, softer US monetary policy, and central bank purchases helped gold hit a number of record highs.
The fault line is still inflation. Although pricing pressure decreased for the majority of 2025, several investors caution that any improvement might be swiftly undone by energy markets or policy errors.
"Whether inflation eventually returns is our biggest risk," stated Mina Krishnan of Schroders. "We see the most likely path starting with an increase in energy prices, and we envision a cascade of events that could lead to inflation."
Beyond markets, the strain is evident. According to the Bloomberg Billionaires Index, the 500 wealthiest individuals in the world increased their combined wealth by a record $2.2 trillion last year, despite the fact that US consumer confidence declined for the fifth consecutive month in December.
Additionally, traditional Wall Street diversifying techniques made a resurgence last year. Just as an index using the so-called risk parity quant approach surged 19% for its greatest year since 2020, the 60/40 portfolio, which divides bets between stocks and bonds, returned 14%. Investors pursuing performance in that type of fund that had protracted outflows have yet to adopt balanced strategies.
The majority of asset allocators maintain their optimism, claiming that policy support and economic momentum are still sufficient to counteract higher valuations.
Josh Kutin, head of asset allocation for North America at Columbia Threadneedle Investments, stated, "We are looking to spend as much cash as possible to take advantage of the current environment." "There is really no indication that we should be worried about that decline in the near future."
