- 2025 marked a third-straight year of stellar returns across virtually every major investment category.
- International stocks were the clear winners of 2025, followed by U.S. technology and AI companies.
- AI stocks dominated the news due to their incredible performance and valuation risks.
Another Great Year
Investors had much to celebrate on New Year’s Eve after a phenomenal year for portfolios. U.S. and international stocks rallied in 2025 from their early-in-the-year woes to post double-digit returns. This marked a third-straight year for the S&P 500 index to do so. Bonds also rendered returns higher than historical averages and well in excess of Treasury, money market or CD yields. All in all, investors were again rewarded by staying in the markets, despite the bumps along the way.
Two notable areas of outperformance were international and AI stocks. International stocks took center stage with stronger growth relative to their U.S. counterparts. Currency swings amplified their returns as the value of the U.S. dollar tumbled early in the year. Healthier revenue and earnings helped AI stocks to achieve incredible returns.
2025 full-year investment returns were as follows:
Bloomberg U.S. Aggregate (U.S. bonds) 7.30%
S&P 500 Index (large U.S. stocks) 17.88%
Russell 2000 (small U.S. stocks) 12.81%
MSCI All Country World Index ex-US 32.34%
(International Stocks)
Defying Risks
As we reflect on 2025, it was a testament of investment resilience and the importance of not falling prey to the headlines. The year was fraught with risks including new U.S. administration policy uncertainty, tariffs, inflation worries, a possible AI bubble, large-scale Federal employee and funding reductions, a government shutdown, and geopolitical events. Fortunately, only a few of these (namely policy uncertainty, tariffs and AI bubble jitters) had any material impact, all of which were followed by full market recoveries.
Investors might not have imagined the year’s investment potential in April when the S&P 500 tumbled 12.12% over 7 days after President Trump announced global tariffs on “Liberation Day.” Yet, from the depths of that decline through year-end, the S&P 500 ascended by 37.38%, posting a full calendar year return of 17.88%.
Questions about the future of AI also rattled the markets in February and November as investors questioned stock valuations and the sustainability of infrastructure spending. Ultimately, strong corporate earnings and continued capital expenditure enabled recovery in both periods. We discuss AI concerns further below.
Looking beyond investment resilience, the economy continued to expand with strong consumer spending despite tariffs. The U.S. GDP grew at a 4.3% annual rate as of the third quarter, showing healthy economic expansion. Inflation remained slightly above the Fed’s target level but held steady and the Consumer Price Index (CPI) fell to an annualized rate of 2.7% in December. Despite the fact that the U.S. unemployment rate has been increasing, it remains reasonably low from a historical perspective.
Talk About a Market Bubble
The year was filled with concerns about the dominance of the seven largest U.S. stocks (the Magnificent Seven) and stock valuation levels, particularly among AI stocks. Some are comparing current stock valuations to those seen during the dot.com bubble, with warnings that AI stock prices are akin to the dot.com stock mania. While stock valuations are high by many measures, there are some important points to consider.
Talk about the risks of overweight to a few companies in the S&P 500 started back in 2013 when Facebook, Amazon, Netflix and Google were coined as the “FANG” stocks. We now have the Magnificent Seven. If investors had fled the S&P 500 in 2013 due to these concerns, they would have missed out on astounding returns of close to 380%.
While the Magnificent Seven dominate about 30% of the S&P 500, this is due to incredible fundamental growth that the companies have achieved. And, while they dominate the index, they were not the sole drivers of the S&P 500’s 2025 performance. In fact, the breadth of market performance among stocks that comprise the S&P 500 allowed the aggregate performance of the index to exceed that of four out of the Magnificent Seven companies.
Moving specifically to comparisons of AI stocks to the dot.com bubble, there is one substantial difference: AI is producing revenue and earnings. By comparison, most dot.com stocks did not. Furthermore, four out of five of the top AI companies (Microsoft, Amazon, Alphabet and Meta Platforms) sell diversified goods and services. Hence, they are more defensive against potential AI risks. We saw this in their performance when AI risks rattled the markets in November.
All of the above said, AI growth is dependent upon continued infrastructure spending, valuations are high, and there’s always a day of reckoning for market leaders (in every sector of the market). However, while AI and technology stocks could be poised for a correction, there’s no certainty that one is imminent.
The Consumer
Yet again, strong consumer spending helped to grow the economy and stock markets in 2025. This is despite progressive declines in consumer sentiment. One prevalent explanation of this discrepancy is our K-shaped economy with an uneven divide among the wealthiest of individuals who have maintained strong spending capability while many middle- and lower-income households feel pinched. These households are still feeling the wake of 2022’s inflationary effects now coupled with a slow job market. Jobs expanded in the health and leisure markets last year, but declined in the Federal government, retail and manufacturing industries (despite the goal for tariffs to bring manufacturing back to the U.S.).
Federal Reserve Rate Cuts
An increase in U.S. unemployment heavily factored in the Fed’s December rate cut, representing the third quarter-point rate cut in 2025. Fed Chairman Powell suggested an upcoming pause in rate cuts, but additional cuts could easily lie ahead if we see a further uptick in unemployment and/or a further decline in inflation. Additionally, there is much speculation of rate cuts ahead when President Trump appoints a new Fed Chair (likely mid-year). While it is very likely that President Trump’s new Fed Chair appointee will favor rate cuts, we remind readers that the Fed Chair does not dictate rate changes. A majority approval is required among the 12 voting members.
If rate cuts continue in 2026, they could materially benefit investments. Historically, rate cuts have been strongly correlated with positive financial results including stock and bond performance, lower mortgage rates, higher spending and economic growth. This is a large “stay tuned” factor in 2026.
Looking Forward
As we reflect upon the incredible performance and market resilience in 2025, there is no better time to remind investors of the importance of diversification and discipline to stay invested. Risks can and always will lie ahead, and market downturns are inevitable. However, investors have repeatedly been handsomely rewarded by maintaining a long-term investment approach.
Wishing you a healthy and prosperous year filled with joy.
SageVest Wealth Management
