This article was issued and approved by Square Mile Investment Services Limited which is registered in England and Wales (08743370) and is authorised and regulated by the Financial Conduct Authority.

In 2025, global markets delivered strong returns. However, there was growing investor concern surrounding the increasing concentration of large technology and AI-driven names. So, even though the economic backdrop remains broadly supportive, elevated valuations coupled with narrow market leadership and sticky inflation means that following a fully diversified approach is more important than ever. 

Key takeaways:

1. Strong market performance in 2025 was driven by a small group of mega-cap tech stocks, increasing concentration risk.
2. High valuations can signal higher risk, but they are not always a sign of an imminent market downturn.
3. Staying invested following a diversified approach across regions, styles and asset classes remains key to navigate 2026 with confidence.

2025: Strong returns, narrow leadership

Global equity markets finished 2025 strongly, with leadership largely concentrated in mega-cap technology and AI-exposed sectors. The strongest performing markets by late November were China, Asia and Emerging Markets, with many regions led by large-cap names. Outside the US, value focused shares outperformed growth stocks, particularly in Europe, where defence stocks and financials dominated investor attention.

There was a growing gap between valuations over the year, with a small group of large technology firms trading on very high valuations, reflecting optimisim around strong revenue growth and expanding profit margins. Meanwhile, many small companies and cyclical businesses traded at much lower prices, reflecting slower earnings growth and ongoing recession risk pricing.

Corporate earnings were supported by cost discipline, productivity gains, particularly where AI tools were deployed, and still-resilient consumer demand across many service sectors.

The continued bond adjustment

Bond markets in 2025 continued to adjust to a world of structurally higher interest rates compared with the ultra-low levels of the previous decade. Long-term government bond yields settled into a higher range, with the US 10-year Treasury yield around the low-to-mid 4% level by late November, reflecting sticky real yields and persistent inflation expectations.

Yield curve shapes varied throughout the year, including periods of inversion signaling recession concerns before more recent steepening as markets began to price potential rate cuts. Corporate bonds performed well during periods of market confidence, supported by strong investor demand and generally healthy corporate balance sheets.

Importantly, with inflation expected to remain above the 1-2% norms of the past, bond investors demanded greater compensation for inflation variability, pushing real yields higher, despite inflation now below recent peaks. 

Looking ahead into 2026

Markets have clearly performed well in recent years and the macroeconomic backdrop continues to look supportive on many fronts. However, we must not be complacent.

In equities, we have been concerned about narrow leadership and concentration risks in certain equity markets for some time. As such, we have assessed what could pop an AI bubble. Several plausible triggers exist:

1. Firstly, disappointment in revenues and margins; firms may take longer to build reliable, high-margin AI products than investors expect.
2. Second, supply constraints and cost pressures such as for advanced chips or energy for data centres could compress margins.
3. Third, regulatory or policies on data use, competition or export controls could blunt the addressable market that many investors assume.
4. Finally, tighter financial conditions, including rising rates or a risk-off move could hit these stocks hardest.

Measuring risk through valuations, not timing

Does “dangerously overvalued” mean an imminent crash? Not necessarily. Valuation is a measure of risk, not timing. Although expensive valuations can imply lower expected long-term returns, or even losses if expectations are unmet, markets can remain expensive for long periods. 

That said, the current combination (historically high valuations, concentration in AI-linked winners and stretched sentiment) increases the probability of a meaningful drawdown or poor relative performance compared to those markets with lower valuations or less exposure to AI stocks such as the UK stock market.

Building resilience through diversification

Against this backdrop, our proposed equity exposure is designed to broaden diversification by both region and style, with a greater emphasis on markets and sectors where valuations are more reasonable and earnings expectations less dependent on a narrow set of AI-driven outcomes. This helps ensure the portfolio remains positioned for long term growth, while reducing reliance on any single theme or market leadership cohort.

As such, we continue to have an underweight stance to US equities and the ‘Mag 7’. Indeed, throughout 2025, we trimmed US and global equity exposure, particularly where biases towards growth investments were held, in favour of certain bonds and alternative funds which exhibit low correlation to bond and equity markets. This was so that the models continue to take a sufficient level of risk to meet your client’s long-term financial goals, while also being better positioned to navigate any bouts of volatility or market rotations that we may see in 2026.

Staying disciplined in a changing environment

Within bonds, the resilience of credit over 2025 was particularly impressive. One supportive factor has clearly been widescale global monetary policy easing over the past twelve months. This will continue, but the path forward for the US Federal Reserve will be a key focus for markets. 

While bonds, particularly developed market sovereigns, have historically proved a safe haven in recessionary environments, we think the probability of an imminent recession is on the lower side. Instead, a stickier inflation outlook is perhaps more likely at the time of writing – however this is dependent to some degree upon which market one is looking at. Inflation is both the nemesis of the bond and equity markets and it’s why we have positioned the portfolios with an overweight to alternatives, to help dampen such shocks should they arise.

Overall, we acknowledge some nearer term risks and have taken action in the portfolios to help mitigate these.  However, our collective experience tells us that long-term investment works best when capital remains invested as there are always shorter-term noises to worry about. The below chart depicts this very well.

Source: Titan Square Mile and LSEG Lipper (all rights reserved). As at: 31st December 2025, in GBP. Global market performance is represented by the IA Global Sector average. Capital at risk. Past Performance is not a guide to future returns. Views expressed do not constitute investment recommendations and must not be viewed as such. This document does not constitute an offer to sell or invitation to buy or invest in any funds mentioned herein it does not provide or offer financial investment, tax, legal, regulatory or other advice and recipients of this document must not rely on it as providing any form of advice. Recipients who may be considering making an investment should seek their own independent professional advice. None of the information contained in the document constitutes a recommendation that any particular investment strategy is suitable for any specific person.

This document is marketing material issued and approved by Square Mile Investment Services Limited ("SMIS") which is registered in England and Wales (08743370) and is authorised and regulated by the Financial Conduct Authority. The independent research is provided by Square Mile Investment Consulting and Research Limited ("SMICR") which is not authorised or regulated by the Financial Conduct Authority and does not undertake regulated activities. Titan Square Mile is a trading style of SMIS and SMICR. SMIS and SMICR are wholly owned subsidiaries of Titan Wealth Holdings Limited (Registered Address: 101 Wigmore Street, London, W1U 1QU).

This document is aimed at professional advisers and regulated firms only and should not be passed on to or relied upon by any other persons. It is not intended for retail investors, who should obtain professional or specialist advice before taking, or refraining from, any action on the basis of this document. It is published by, and remains the copyright of, SMIS. SMIS makes no warranties or representations regarding the accuracy or completeness of the information contained herein. This information represents the views and forecasts of SMIS at the date of issue but may be subject to change without reference or notification to you. This document does not constitute investment advice, a recommendation regarding investments or financial advice in any way and shall not constitute a regulated activity for the purposes of the Financial Services and Markets Act 2000. Should you undertake any investment activity based on information contained herein, you do so entirely at your own risk and SMIS shall have no liability whatsoever for any loss, damage, costs or expenses incurred or suffered by you as a result. SMIS does not accept any responsibility for errors, inaccuracies, omissions, or any inconsistencies herein. Past performance is not an indication of future performance.

Date: January 2026