Following strong gains in 2023 and 2024, U.S. equity markets enjoyed another year of double-digit returns in 2025. The S&P 500 gained 17.9% and small-cap stocks as measured by the Russell 2000 Index also rose double digits, up 12.8%. These strong returns masked intra-year volatility precipitated by President Trump’s “Liberation Day“ tariff announcements in April. Following those unexpectedly high tariff rates, the S&P 500 dropped nearly 20% from its February 2025 high during the second quarter. After this initial shock, negotiations between the US and other countries ensued and many headline tariff rates became less onerous. Companies also found ways to adjust supply chains with the result that investors began to breathe a sigh of relief, recognizing that the impact of tariffs on consumer wallets and corporate profit margins may not be as bad as feared. Some softening in labor market measures allowed the Federal Reserve to resume lowering the Fed Funds rate in September, adding some fuel to the bull’s fire. Robust corporate profits reported for the second and third quarters provided fundamental support for higher equity prices even as valuation multiples contracted.
Sector performance within the S&P 500 throughout most of 2025 was led by themes tied to artificial intelligence (AI). This included strong returns from the communication services sector, particularly Alphabet (aka Google), information technology, with noted strength from semiconductor companies, and select industrials, with many viewed as beneficiaries of increased capital spending to build data centers.
In the bond market, Treasury yields declined in 2025, led by short-term maturities, as the Fed resumed lowering rates in September after a nine month pause. Corporate bonds performed better than Treasury bonds as investors embraced risk in the bond market just as they did in the stock market. Gold had a remarkable year, up over 60% as central banks increased their purchases and investors followed amid increased geopolitical uncertainty.
The bull market extended outside the U.S., with returns significantly impacted by the 9.7% decline in the U.S. Dollar, the largest drop since 2017 and third largest of any calendar year in the last century. In U.S. dollar terms, the MSCI EAFE Index rose 31.9%, but only 21.2% when measured in constituents’ local currencies. Emerging market indexes were led by Korea and Taiwan, with many of the indices’ largest companies also benefiting from AI enthusiasm. European markets performed well due to anticipated defense spending by Germany, attractive valuations relative to the U.S. entering 2025, and a weak dollar.
The backdrop for stocks and bonds remains favorable heading into 2026. Earnings forecasts have risen across market capitalizations in the U.S., and the Fed is expected to continuing lowering rates, albeit at a slow pace. While vigilance around potential speculative excess in parts of the equity market remains warranted, the earnings power and cash‑flow generation of leading technology and communication‑services companies continue to provide fundamental support as they invest heavily in AI‑related capital expenditures. Markets are reflecting optimism that over time applications of AI will enhance productivity and corporate profits across industries. This should be balanced with the understanding that AI’s impact will differ from one industry to another and even from one company to another. We continue to explore AI’s potential market impact while maintaining a balanced and thoughtful approach. Legislation passed last year will provide a boost to consumers in the first half of 2025 as many individuals are expected to receive tax refunds. As always, we will continue to monitor market developments and maintain balanced and diversified portfolios to align with our clients’ goals.
Sources:
https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview
https://www.lseg.com/en/ftse-russell/indices/russell-us
https://www.federalreserve.gov/newsevents/pressreleases/monetary20250917a1.htm
https://www.lbma.org.uk/prices-and-data/precious-metal-prices#/
https://fred.stlouisfed.org/series/DTWEXBGS
https://www.msci.com/indexes/group/developed-markets-indexes
https://www.msci.com/our-solutions/indexes/emerging-markets
Disclosure:
The information provided is for illustration purposes only. It is not, and should not, be regarded as “investment advice” or as a “recommendation” regarding a course of action to be taken. These analyses have been produced using data provided by third parties and/or public sources. While the information is believed to be reliable, its accuracy cannot be guaranteed. MONTAG employees do not provide legal or tax advice. For specific legal or tax matters, you should consult with your own legal and/or tax advisors. There are risks associated with investing in securities. Investing in stocks, bonds, exchange traded funds, mutual funds, and money market funds involve risk of loss. Loss of principal is possible.
