- Three of the largest stocks, the S&P 500, Japan's Nikkei Index and UK's FTSE 100 all up
- The gains are likely to be propelled further following stronger-than-expected quarterly US economic growth
- Outlook for 2026 upbeat but uncertainty around AI valuation and global trade relations pose the greatest challenges
As December 2025 winds down, financial markets in the US, UK, and Japan are moving upward together. This rise reflects new money coming in, based on both recent economic news and strength in specific business sectors. As of this writing, the S&P 500 has edged up 0.2% on the daily chart, the Nikkei 225 closed with 0.02% in gains while the FTSE 100 Index was at +0.3%.
After a year that saw its fair share of volatility, investors appear to be breathing a collective sigh of relief. But why is this happening now, and can we expect this trend to continue into 2026?
Economic Data Catalyzes Rally
The current rally is not the result of a single event but rather a “triple threat” of positive developments. First and foremost is the US GDP growth data, which showed the world’s largest economy grew by 4.3% on an annualised basis in the three months ending September, up from 3.8% in the previous quarter. That was also the fastest quarterly growth rate in two years, and was attributes to strong consumer spending and export growth.
There’s also clarifying stance of central banks, strengthening investor confidence. In the US, data suggests inflation is nearing the Federal Reserve’s 2% goal. This has led traders to expect at least two more interest rate cuts early in 2026. This outlook often boosts stocks because it lowers borrowing costs, making stocks more inviting compared to bonds.
In Japan, the Nikkei 225 is doing well because the Bank of Japan is carefully balancing its policies. Though the bank recently raised rates to 0.75%, the highest in 30 years, investors like the stable currency. A slightly weaker yen usually helps Japan’s export economy. The rise in real estate and banking suggests confidence is growing at home.
The UK’s FTSE 100 is getting a push from rising commodity prices. Gold is at record highs above $4,400 per ounce, and copper prices are up because of industrial demand. As a result, London’s focus on mining and energy is proving to be a big plus.
The “Santa Rally”
There is also a psychological element at play: the “Santa Rally.” Historically, the S&P 500 tends to rise an average of bout 1.3% in the last five trading days of December and the first two of January. So, the chances of ending 2025 on a positive note look good. ABC News Australia calls 2025 a chaotic up-crash, with markets in places like Australia, the US, UK, and Japan hitting records as interest rates fall and AI business grows.
2026 Stock Market Outlook
While things look good right now, analysts at firms like UBS and J.P. Morgan advise watching out for challenges in early 2026. The US economy is expected to grow at a steady 1.8%, but trade issues and ongoing inflation in the service sector could cause problems.
Vanguard predicts the job market will stabilize by 2026, which should help stocks perform well, despite risks from too much excitement around AI. U.S. Bank believes stocks will rebound based on solid business fundamentals, showing they can handle policy uncertainties. BlackRock notes that central bank actions, including potential rate hikes by the Bank of Japan, could help keep the positive trend going.
It is worth noting BlackRock’s commentary on central bank actions, including potential Bank of Japan hikes, which could maintain positive momentum.