A 2025 Political Lesson to Take to 2026

Editors’ Note: MarketMinder Europe is politically agnostic. We prefer no party nor any politician and assess developments for their economic and market implications only.

Whenever there is a political change or big policy shift, we have observed that a flood of commentary will follow. Often, we find these analyses hype buying the perceived winners of said change on the presumption the policy’s intended effects will supercharge the supposedly obvious firms set to benefit. Whilst that can happen, our research shows oftentimes it doesn’t—and the very reverse may occur. Either the policy doesn’t play out as hyped or the excitement amongst investors proves excessive. We call this twist the perverse inverse—and 2025 has quite a few examples.

Based on our studies, no political party or ideology is inherently superior for markets. However, we have found sentiment can influence returns, especially in election and inaugural years. In America, we have observed a majority of investors view the Republican party as pro-business, so when a Republican candidate wins the presidency, excitement for potential business friendly policies often buoys stocks.^[i] Yet returns usually moderate in the inaugural year once the Republican president enters office as reality doesn’t turn out as rosy as hoped.^[ii] We have found this can apply at a broad market level or in specific categories or asset classes. To see a high-level look at the perverse inversion in action, some market analysts we follow projected US President Donald Trump’s “America First” policy would drive US leadership—yet 2025’s non-US market leadership argues against that.^[iii]

Consider: Trump entered office in January, touting many economic proposals. For instance, we saw financial headlines argue the Trump administration’s crypto-friendly agenda would be bullish for the cryptocurrency industry—and coins like bitcoin.^[iv] Coins initially surged on optimism, with many analysts we follow in financial media sure more gains would follow.^[v] The government has passed some legislation, but reality hasn’t met outsized expectations, in our view—and the flagship crypto, bitcoin, has given up its gains and is in the red year to date.^[vi]

We found that it was a similar story with fossil fuel-related Energy companies. Many presume what with the shift from former President Joe Biden’s renewable energy subsidies to Trump championing the oil industry, global Energy stocks (which are mostly fossil-fuel related) would boom.^[vii] Yet global Energy, up 5.7% year-to-date, has lagged broader markets.^[viii] Meanwhile, renewables (as tracked by the S&P Global Clean Energy Transition Index) are up 37.3% and outperforming broader markets—despite the Trump administration’s supposed opposition to them.^[ix]

In hindsight, we think some of the hyped investment theses didn’t make much sense to begin with. For instance, based on our review of proponents’ arguments, crypto’s decentralised nature is supposed to be a feature, not a bug. Why would additional regulations be a positive for an asset whose appeal is being outside the government’s jurisdiction? Yes, it may trigger more demand for coins. But we think it can equally trigger more supply and derivatives. On permitting more oil drilling: Why would that be bullish for Energy stocks considering the global supply glut?^[x] Yet we have found the initial excitement for the supposed political support often overlooks this logic.

We also find the perverse inverse isn’t exclusively an American phenomenon. We have seen it creep up in other parts of the world, too, namely, in Germany. Early in 2025, we read headlines cheering the spending plans of new Chancellor Friedrich Merz, arguing plans for much higher public investment would turbocharge Germany’s stagnant GDP. We had doubts about that projection, as our research has found public spending’s positive effects on economic growth aren’t a given. It generally takes time for that promised spending to become reality (if it does at all)—which has played out in Germany. Though Merz took office in early May, lawmakers didn’t approve the government’s budget until mid-September. Already, the Bundestag is bickering over 2026’s budget and future spending plans, with opposition lawmakers questioning whether enough money will reach citizens directly.^[xi]

We have seen many experts already downwardly revise expectations for government spending’s GDP boost. Per the Bundesbank’s (Germany’s monetary policy institution) latest forecast, whilst there are some “initial signs of an increase in government orders,” any meaningful benefits won’t show up until late 2026.^[xii] Moreover, the Bundesbank predicts government spending “will have only a limited impact on the potential output of the German economy,” and absent structural reforms, potential output will grow by just 0.4% per year over the foreseeable future.^[xiii] Long-term forecasts aren’t prescient and potential GDP is an academic, not real-world, construct, in our view.[xiv] But we think it is telling how quickly consensus views seem to have cooled from early in the year.

Now, we don’t think German stocks have ever needed this government help. Despite wearing the moniker of the sick man of Europe, Germany has mostly been an economic meh, yet that hasn’t stopped gross domestic product (GDP, a government-produced measure of economic output) from growing overall or stocks from climbing. After 2022’s recession and bear market—in which German stocks fell -30.0% in euros and -26.8% in pounds from mid-November 2021 to late-September 2022—stocks began recovering, recognising, in our view, a years-long, deep economic downturn wasn’t likely.^[xv] German stocks have continued their climb this year, up 26.8% in pounds and 20.2% in euros—in line with the eurozone’s 30.6% (23.8% in euros) and well ahead of global stocks’ 13.3% (7.3% in euros)—even though most of that promised spending has yet to materialise.^[xvi] If a bull market and expansion could run on for over three years without material government assistance, we don’t see why Merz’s spending package would be necessary now for the economy or markets.

In general, we recommend questioning rote assumptions about how a given policy or politician will influence a category of stocks. Very often, we have found they do something perversely inverse to what you expected.