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The S&P 500 delivered a solid 17.9% return in 2025, along with strong bond performance, but leadership remained narrow, with AI continuing to dominate investor attention.
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Market leadership broadened meaningfully in 2025, with international and emerging markets outperforming, gains across all S&P sectors, and strength in Industrials and Utilities.
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Corporate resilience contrasted with inflation challenges in 2025, as tariffs pressured consumers and the Federal Reserve shifted toward monetary easing.
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As 2025 ended, markets favored established AI leaders and value stocks, reflecting caution toward high valuations and speculative growth assumptions.
Following two 25%-plus years, the 17.9% S&P 500 Index return for 2025 was welcome news to investors, especially when combined with a strong year for bonds. But as we’ve seen over the trailing years, returns were heavily concentrated, with Artificial Intelligence remaining the resounding theme. Over the past three years, the large tech companies dubbed the Magnificent 7 have been responsible for about 50% of the S&P 500’s gains. This was less true in 2025 as only two of these seven (which now constitute some 35% of the index) beat the index’s return. In fact, one of the most important stories of the year was the broadening of returns. For the first time in years, international and emerging markets outperformed domestic results while precious metals soared. As has been true throughout this bull market, the technology-heavy Communications Services and Information Technology sectors led the market, yet this past year, all S&P sectors ended positive. The third sector to beat the market in 2025 was the formerly becalmed Industrials sector, followed by the usually staid Utilities sector, driven by projected electrical demand for the massive build-out of AI data centers.
While the first half of the year was replete with concerns over tariff impacts, the second half demonstrated the remarkable nimbleness of U.S. corporate management as corporate profits showed unexpected strength. Nevertheless, tariffs were a factor in keeping inflation well above the Federal Reserve’s target of 2%. Higher costs were particularly hard on households earning less than the median income, whereas wealthier families benefited from the steady rise in home and portfolio valuations. Throughout the year, the Federal Reserve, concerned about deteriorating labor market conditions, cut rates three times, with projections indicating two more in 2026.
As we look into the coming year, we are particularly attuned to trends that emerged late in 2025. One of the most salient was the differentiation among AI players, with investors beginning to believe that massive spending alone might not spell future success and profits. We have seen this before with emerging technologies, where early leaders are later surpassed. In this regard, we remain patient, concentrating on investing in proven winners rather than speculating on future results. Another notable shift was the outperformance of value stocks over growth in the fourth quarter. While there is no assurance this trend will continue, it aligns with our concerns about valuations in a historically expensive market. With more Federal Reserve cuts on the horizon and the likelihood of appointing of a more dovish chairman in May, bonds could have another solid year, supported by a steepening yield curve. Meanwhile, the military incursion into Venezuela at the start of the year is a reminder that we invest in an ever-changing, fragile world where geopolitics can produce unpredictable volatility in the markets. While it is never possible to eliminate risk from a diversified portfolio, we believe in the benefits of active management that monitors this risk and builds portfolios accordingly.