A weaker dollar combined with a desire from investors to diversify their exposure away from the Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) provided a backdrop for other markets outside the US to re-rate (when share prices rise relative to profits). Strong earnings momentum from many of the FTSE’s largest companies and a low starting valuation allowed the UK to fully participate in the trend.
Looking ahead, we expect the environment to be supportive for the economy and stock markets at a global level this year. Government spending is high, and we think central banks in countries such as the US are expected to cut interest rates. In terms of the UK, for the first time since Covid we are no longer more optimistic on the outlook for consumer spending than consensus. To be clear, we are not bearish. Instead, we find ourselves in agreement with the consensus growth forecasts for the UK economy. Little real wage growth means any increase in spending will be dependent on a decline in the (elevated) savings rate. Encouragingly, we think inflation could drop towards the Bank of England’s 2% target by May, as increases to measures such as National Insurance and water bills are not repeated. As a result, we expect to see two or three interest rate cuts in 2026.
The rise in the labour force participation rate has principally been responsible for driving up unemployment.
Where we have exposure to discretionary spending in the portfolio, it is to more affluent households, although these are now also seeing incomes squeezed as the Chancellor focuses tax rises onto those she says have the ‘broadest shoulders’.
Risks for the UK
The main threats to the UK’s ‘muddle through’ outlook, which we expect to produce GDP growth of 1.0 to 1.5% in 2026, are focused on unemployment and politics. On the former, the labour market has been softening for some time, although overall employment has been stable, and it is the rise in the labour force participation rate, as measured by the Office of National Statistics, that has principally been responsible for driving up unemployment.
We continue to monitor the labour market closely for
any signs of an acceleration in the current trends, but for now we view the data as consistent with consensus growth expectations.
Job vacancies have normalised at just below pre-Covid levels and the impact of government policy on the labour market is already clear: rising public sector employment and wages. At the same time, cost pressures on the private sector from increases to National Insurance contributions and the minimum wage (with higher business rates to come) are leading to job losses – particularly in the hospitality sector and among younger members of the population.
In a world where dividends are likely to become a more important component of investors’ returns, the UK market continues to stand out.
Away from the labour market, the obvious risk is political. The Labour Party continues its remarkable ability to announce policies that alienate, we believe, almost all sections of the electorate. We can see the potential for another period of elevated uncertainty should there be a challenge to the Prime Minister post the local elections
in May.
UK valuations
Despite the strong performance in 2025, the UK remains at the cheaper end of the spectrum compared with other major stock markets. And, in a world where dividends are likely to become a more important component of investors’ total returns, we think the UK market continues to stand out. As a result, we think 2026 will be a year where the bulk of returns from UK equities will come from earnings growth and income. Against this backdrop, we believe that our portfolio of 40-60 companies where we have high conviction is well placed to perform. Combining earnings growth, dividends and moderate starting valuations, we see scope for another year of attractive real returns in 2026.
Ed Legget
Co-Manager of the Artemis UK Select Fund
Artemis Fund Managers LimitedArtemis Fund Managers Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Artemis Investment Management LLP’s registered address is Cassini House 57, St. James's Street, London, SW1A 1LD. United Kingdom. Company number OC354068.
The value of securities and the income from them can fall as well as rise. Past performance should not be seen as an indicator of future returns. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.
