January 2026: Markets, geopolitics, and a shift in leadership

January 2026: Markets, Geopolitics, and a Shift in Leadership

The first month of 2026 delivered an interesting shift in market dynamics. Whilst the FTSE 100 broke through 10,000 for the first time in its 40+ year history, the more significant story was the changing pattern of returns across global markets. Small-cap stocks surged ahead of their large-cap counterparts, other markets outpaced the US, and geopolitical tensions escalated, particularly between the US and Iran.

For UK investors, January provided a key reminder of why broad diversification remains essential in navigating complex market environments.

A Rotation in Market Leadership

January 2026 marked a clear departure from recent trends. For fourteen consecutive trading days, the entire first two weeks of the year small-cap stocks outperformed large caps. By 23 January, the Russell 2000 small-cap index had over 8%, significantly ahead of the S&P 500's 1.4% return, 

Markets outside the USA also demonstrated strength. Emerging markets powered on as they continued their trend from 2025, advancing over 5% in January. This continues to  represent a meaningful shift from the concentrated leadership of mega-cap US technology stocks that characterised 2023 - 2025.

One of the drivers behind this rotation include valuation disparities. January analysis showed that the Russell 2000 traded at a price-to-earnings (P/E) ratio of 18, well below the S&P 500's 28x multiple. Additionally, the artificial intelligence (AI) infrastructure buildout is benefiting a broader range of companies from copper miners to industrial equipment manufacturers to utilities beyond just semiconductor producers.

FTSE 100 Reaches Historic Milestone

On 2 January 2026, the FTSE 100 breached 10,000 points for the first time, reaching an intraday high of 10,039, this represented a tenfold increase from the index's 1984 launch value of 1000 points.

The milestone capped an exceptional 2025, during which the index gained more than 20% and recorded 41 all-time closing highs. Defence and aerospace stocks including Rolls-Royce, BAE Systems, and Babcock International led the advance, alongside mining companies benefiting from elevated precious metals prices.

It's worth noting that approximately 70% of FTSE 100 revenues derive from international operations, making the index sensitive to sterling movements, with 2025 being a year of sterling strengthening against the US dollar. However, the performance also reflects improving sentiment toward UK equities, which trade at significantly lower valuations than US counterparts.

FTSE 100 January 2024 to January 2026 chart

Escalating US-Iran Tensions

Late January saw a significant escalation in US-Iran tensions. Protests that began on 28 December across Iran were met with a severe government crackdown, with thousands of casualties reported.

By late January, the US deployed the USS Abraham Lincoln carrier strike group toward the Persian Gulf described by Military.com as "one of the most significant U.S. military buildups in the Middle East in recent years." On 1 February, Iran's Supreme Leader Ayatollah Khamenei warned that any US attack would trigger "regional war."

However, both sides indicated diplomatic channels remain open. President Trump stated Iran was "seriously talking" with Washington on 31 January. The situation remains fluid, with regional powers including Saudi Arabia, UAE, and Turkey actively working to prevent military escalation. Oil markets remained relatively stable through January, suggesting traders expect diplomatic resolution over military conflict. Any disruption to the Strait of Hormuz through which approximately 20% of global oil passes would have significant implications for energy prices.

US Trade Policy Developments

January saw continued evolution of US tariff policy. Key developments included a threat of 100% tariffs on Canadian goods if Canada proceeded with a China trade deal though Canadian Prime Minister Mark Carney subsequently stated Canada had "no intention" of pursuing such an agreement. 

The US administration also announced that countries purchasing Iranian oil would face an additional 25% tariff. A proposed tariff on eight European nations over Greenland was announced on 17 January but reversed on 21 January. The Canada-US-Mexico agreement is scheduled for review in July 2026, with implications for North American manufacturing supply chains.

UK Inflation and Interest Rate Outlook

The Office for National Statistics reported on January 21st that UK consumer price index (CPI) inflation rose to 3.4% in December 2025 from 3.2% in November, exceeding expectations of 3.3%. Services inflation edged up to 4.5%. The Bank of England (BoE) is expected to hold rates at 3.75% at its 5 February meeting, with markets pricing one to two additional cuts in 2026.

Unemployment has risen to 5.1% (three months up to November 2025), whilst wage growth remains elevated. Monetary policy committee member Megan Greene noted wage growth declines "may have run its course." The Bank forecasts inflation falling to 2.5% in fourth quarter (Q4) 2026, reaching the 2% target in second quarter (Q2) 2027. The Federal Reserve (Fed) held rates steady in January, citing solid 2.7% gross domestic product (GDP) growth.

UK CPI December 2019 to December 2025 chart

Golden precious metals

Gold and precious metals continued their blistering run throughout January. Gold ended them month advancing 9% from its price at the start of the year. Yet, impressively this was after a sudden drop in price at the end of the month. At one point during the month its returns since the start of the year were astonishingly more than 20%!

Gold still has strong backers. Traditionally, a weaker dollar and lower US interest rates increase the appeal of non-yielding gold. Economic and geopolitical uncertainty also tend to be positive drivers for gold, due to its safe-haven status and ability to remain a reliable store of value. Which as mentioned could tick up, particularly in the middle east as the year marches on.

Spot gold performance chart from 2 January to 30 January 2026

The Benefits of Diversified Portfolio Management

January's performance demonstrated the value of diversification. Whilst S&P 500 large caps gained 1.4%, diversified exposure to small caps, other global markets and asset classes captured stronger returns.

IG’s managed portfolio service the Smart Portfolios had a strong month on aggregate with the portfolios all producing positive returns broadly in line with our benchmarks. Some of the most notable performers for the month were Asian equities, emerging market equities and gold. Gold’s stellar run produced double digit returns when converted back into pound sterling!

The Smart Portfolios provide professionally managed, risk-profiled portfolios using BlackRock's iShares ETFs. They consists of five options from Conservative to Aggressive matching different time horizons and risk tolerances. Automatic rebalancing maintains target allocations, whilst costs significantly below traditional active funds compound meaningfully over time. They are also available in individual savings account (ISA) and self-invested personal pension (SIPP) structures for tax efficiency. Click to see how you can benefit from professional portfolio management at a fraction of the cost of traditional wealth managers.

Sources: Bloomberg, Morningstar UK, Office of National Statistics, Miliary.com (all data as at 31st January 2026)