By Douglas Porter

December 19, 2025

In a year of high drama on the policy front, there’s little doubt that the key takeaway from 2025 was the resiliency of the global economy and, thus, financial markets.

And while the tech sector broadly struggled in the last two months of the year, with AI-focused names in particular hit by concerns over the wall of capital spending and the related debt build-up, the Nasdaq emerged yet again as the top-performing major index in the U.S.—for the third year in a row and for the seventh time in the past nine years.

After plunging by 24% in the short space of seven weeks amid the onslaught of U.S. trade actions early in the year, the Nasdaq roared back by more than 50% from its April lows and will finish up nearly 20% this year overall.

But the really big story in the equity world was how the rally truly went global, with U.S. advances paling in comparison to many international markets. Those gains were amplified by the fact that the U.S. dollar fell heavily against most currencies; in fact, turned the other way, an unhedged European investor would have barely broken even on their U.S. equity holdings this year. Despite all of this year’s trade noise, the global economy appears on track to have grown 3.2%, almost matching last year’s 3.3%.

Stunningly, world trade is now estimated to have grown roughly 5% in volume terms, not only a solid outcome in a year of trade stress and uncertainty, but the best increase in four years. The major story there was that while sales to the U.S. faced intense pressure for most exporters, the rest of the world carried on and, in some cases, even strengthened ties.

To pick but one specific example of the strength outside of the U.S., Canada’s TSX is currently sitting on a 28% year-to-date advance, its second-best annual showing since the start of the century. The only better year was 2009, and that was when the index was recovering from a devastating hit in 2008.

This year’s strong gain instead built on solid advances in the two prior years. Amazingly, this was in spite of a middling performance by its smallish tech sector, and late-year weakness in its large energy component. Materials shone bright, mostly thanks to gold, but financials and even consumer shares did well.

The solid gains by a variety of domestically oriented sectors reflected the surprising stability of domestic demand—albeit retail sales volumes were essentially flat from a year ago in October—and is a hint of potentially better times ahead in 2026. Echoing that theme, a survey of business sentiment (from the CFIB) snapped all the way back from 25-year lows in March to above normal by December.

The rally in global equities from the April lows was initially spurred by some backing off of U.S. tariffs (although they eventually came right back), but then later by the AI-driven investment boom and also by central bank easing. The Fed spent most of 2025 playing it coy, concerned about the potential for tariffs to fuel inflation, but also with the reality that core CPI was sticky for much of 2025.

The dam broke by the fall as it became obvious that the trade war had weighed heavily on U.S. jobs—payrolls did manage a decent 64,000 gain in November, but the big story is the 0.5 ppt rise in the unemployment rate in the past five months alone to 4.6%.

Adding some late-year spice this week, the long-delayed U.S. CPI came in far below expectations in November, slicing core inflation to its slowest pace since 2021 at 2.6%, and clipping the headline to 2.7%.

Stunningly, world trade is now estimated to have grown roughly 5% in volume terms, not only a solid outcome in a year of trade stress and uncertainty, but the best increase in four years.

It would be an understatement to say that the figures were greeted with skepticism, with even some Fed officials slapping a warning label on the data, and suggesting the December figure will likely be more meaningful. Even so, the big story is that most prices did not accelerate, groceries eased, and shelter costs are likely indeed fading.

Even with plenty of caveats, this week’s data brought the market closer to our view of three 25 bp Fed rate cuts in 2026, matching this year’s tally.

Even as central bank rates were coming down heavily almost everywhere this year, with most of the action arriving late, global long-term bond yields mostly rose. The one major outlier among central banks was the BoJ, which waited until today to deliver just its second 25 bp hike of the year (to around 0.75%). Naturally, its bond yields led the parade higher, with 10s vaulting above 2% to their highest level in 30 years.

But some other central banks may not be far behind on the tightening front—Australia is the next most obvious candidate—turning the tide on yields. As well, sporadic fiscal concerns, especially in Europe, also contributed to the yield back-up.

Canada was not immune to questions over its much larger budget deficit, and not just at the federal level. With some quarterly updates this week, the combined deficit among the 10 provinces is headed for $47 billion this fiscal year, up roughly $40 billion in a year, the largest annual increase on record.

As a share of GDP, the combined federal and provincial deficit will be around 3.8% of GDP, up from less than 1.5% last year and a big reason why Canadian growth managed to keep its head above water. But that borrowing spree and the market view that the BoC could begin hiking in 2026 amid sticky core inflation pressured yields higher on net for the year.

Amazingly, this is the second year in a row that the Bank of Canada has cut overnight rates heavily (100 bps this year, 175 bps in 2024) and yet, 10-year GoC yields have risen. Now at nearly 3.5%, they are up since the Bank first began cutting in June 2024.

Treasuries did manage to buck this year’s broader trend of rising yields, even with some pressure around Liberation Day as well as plenty of fiscal concerns. But the reality is that—love them or hate them—tariffs are supporting revenues and chipping away at the hefty U.S. budget deficit. It has narrowed to $1.6 trillion on a 12-month rolling basis from $2.1 trillion at the start of the year.

But it’s the relatively more dovish view on the Fed looking forward that’s containing yields, helping the 10-year finish 2025 at around 4.15%, closer to the low end of its 4.0%-to-4.8% range for the year.

In turn, the U.S. dollar was also under downward pressure for much of 2025. While the greenback made a bit of a counter move in the fall, it resumed its descent in December to finish down nearly 7% on the year against the majors. Most currencies managed to rise against the greenback, with the curious exception of the yen. Japan’s currency finished on a down-note despite the BoJ rate hike and was little-changed on net for 2025.

Even with the spectacular rise in yields this year and BoJ tightening, it still has some of the lowest rates in the world. As noted, Japan may have some company on the tightening trail in 2026, assuming that the world economy can continue to hurdle U.S. tariffs and trade uncertainty, and that the AI spending boom does not come to an abrupt halt.

That is our working assumption, as we look for another year of global GDP growth close to 3% in 2026, some ebbing in core inflation and a mild further weakening in the U.S. dollar.

Policy Contributing Writer Douglas Porter is Chief Economist for BMO.