This week in the markets: the year end melt-up continues into 2026 as investors shrug off geo-political upheavals; and gold hits a new record on worries about Fed independence.

The first full week of 2026 has carried on where 2025 left off. Markets are resolutely glass-half-full as investors see headline grabbing events in Venezuela, Iran, Greenland and elsewhere as so much geo-political noise.

Major global stock markets have continued to rise strongly, with the rotation from America into the rest of the world ongoing. More than two thirds of global stocks are trading above their 200-day moving average. European shares have already grown twice as fast in 2026 as Wall Street.

But in the US, too, the rally is broadening out encouragingly. The proportion of American shares rising faster than their recent moving average has more than doubled to 71%.

The main reason for that should become clearer in the next week or so as fourth quarter earnings season kicks off. Last year, earnings picked up the baton from valuations as the main driver of market growth. Earnings growth expectations, which had started the year in double digits, but dipped sharply at the time of the tariff tantrum in April, bounced back to where they had started, and if anything look like moving further ahead as we move into 2026.

Earnings provide one key tailwind for markets. Another is monetary policy, which received another kicker this week as the White House tightened the screw on the Federal Reserve. US prosecutors have launched a criminal investigation into Fed chair Jerome Powell over a $2.5bn renovation of the Fed’s headquarters in Washington. Powell has responded by warning that the probe is nothing more than an attempt to rein in the Fed’s independence and to pressure it into lowering interest rates.

It is widely expected that Powell’s replacement at the Fed in May will be more aligned with the White House’s desire for lower interest rates to boost economic growth. Although that poses a threat to inflation and the credibility of the Fed, it is also seen as growth positive and so a driver of further stock market gains.

The market’s concern about that ongoing and intensifying threat to the independence of the Fed has been reflected in the gold price. Gold rose this week to yet another all time high of $4,600 an ounce. The dollar, another barometer of concerns about US government policy and the inflation that might flow from it, also fell against a basket of peers.

The rise in gold is just one element in a sharp rise in commodities prices in recent months. Industrial metals like copper have also been surging to new record levels. The rise in base metals and other hard assets partly reflects uncertainty about inflation and paper currencies. That is building on other fundamental attractions such as copper’s use in the industries of the future like clean energy, electric vehicles and the data centres required to fuel the AI revolution.

AI remains at the heart of the global market rally as it is one explanation for the relentless rise in corporate profitability in the face of an apparent slowdown in the jobs market. One explanation for that disconnect is the fact that we may already be seeing an AI dividend as companies are able to drive productivity benefits, doing more with fewer people. It’s also driving a move downstream in the stock market rally from the creators and providers or AI to its ultimate beneficiaries - companies and end users.

That broadening out of the AI-fuelled rally is being seen as a positive in the context of a market that had become worryingly concentrated. The so-called Nifty 50, the top 50 stocks in the S&P 500 index now account for nearly two thirds of overall market capitalisation. That is above the concentration reached in earlier narrow markets such as the 1970s and late 1990s.

Importantly, however, the gap between the valuations of the Nifty 50 and the rest of the market is much lower this time than in either of those periods. At the height of the dot.com bubble, tech stocks were twice as highly valued as the rest. The gap is much narrower this time, and it suggests that the bull market is much better supported by valuations than it was in the earlier bubble.

How long the current market surge can continue will depend, as ever, on the future trajectory of earnings and of interest rates. Both, for now, seem supportive. Although earnings growth has now reached the levels it reached before earlier reversals, the AI revolution has the potential to extend the period of high earnings growth, which would in due course reduce valuations further and give the bull market further legs.

One of the possible headwinds for the stock market rally is a rise in bond yields if investors worry that the government and/or the Fed have lost control of inflation. For now, the bond market seems unperturbed by the apparent willingness to let the economy run hot. The 10-year Treasury bond yield in the US stands closer to 4% than 5%, widely seen as a danger zone for shares.

Investors seem to be taking the view that AI can help keep inflation in check. One new measure of this, known as Truflation, which gathers massive amounts of real time prices data and is seen as being more up to date and accurate than backward looking government data, has seen a sharp fall in recent months to under 2%, less in other words than the Fed’s and Bank of England’s target rate of inflation.

The ongoing strong performance by the tech stocks that dominate global stock market indices has made it very hard for so-called active managers to keep up with the market. In recent days, two of the UK’s best-known stock-pickers have unveiled performance figures for 2025 very disappointing underperformance of the wider market.

Nick Train, manager of the Lindsell Train UK Equity fund, saw his investments fall 7.2% to the end of November, underperforming the FTSE All Share index which returned over 20% in the same period. Meanwhile, Terry Smith’s flagship Fundsmith Equity Fund returned just 0.8% in 2025, failing even to keep up with cash, which returned over 4%.