The U.S. stock market ended 2025 on a positive but increasingly cautious note. During the fourth quarter, the S&P 500 index posted overall gains, though the path was uneven: consistent with the full year. The last week of the year especially reflected growing investor selectivity after a strong multi-year rally. Early in the quarter, the market extended its momentum from the summer and early fall, reaching fresh all-time highs in November and again in early December, a long way from April’s handwringing. However, as December progressed, markets softened. The S&P 500 gave back some gains late in the quarter as profit-taking emerged, and some investors looked to harvest losses in names which had not rebounded from the April lows. Overall, investors reassessed valuations, especially in names reliant on continued artificial intelligence spending and adjusted positions accordingly.

Technology and communication services continued to be the dominant contributors to index-level gains, driven largely by artificial intelligence investment, cloud computing demand, and strong earnings from mega-cap companies. But it was not only the famed “Magnificent 7” driving the market, as only two of those names outperformed the benchmark’s 2025 performance. Value-oriented and cyclical sectors such as energy, financials, and industrials experienced periods of outperformance responding to shifting macroeconomic signals. Inflation remained a background concern, particularly as some investors began to focus on the long-term cost pressures associated with large-scale AI investment and infrastructure spending. These dynamics created a more cautious tone toward the end of Q4, even as the broader trend for the year remained positive. For investors concerned about market valuation entering the year, corporate earnings strength relieved some of that worry. Earlier periods of this bull market were heavily influenced by valuation expansion, but much of the market’s strength in 2025 was underpinned by actual profit growth, reinforcing confidence that elevated stock prices were at least partially justified by fundamentals.

Viewed in its entirety, there is no escaping that 2025 was another strong year for investors. The S&P 500 finished the year up close to 18%, marking the third consecutive year of double-digit gains, and the sixth time in seven years the index has appreciated more than 15%. Meanwhile, equal-weighted S&P 500
increased just over 11%, significantly trailing its market cap-weighted counterpart. Bonds also joined in the exuberance as they increased approximately 7%, as measured by the Bloomberg US Aggregate Bond Index. However, the journey was not without a hiccup or two along the way. The year began with elevated volatility as markets grappled with trade policy concerns, geopolitical uncertainty, and lingering inflation fears. These conditions led to declines and a market low in April but that ultimately proved temporary, as economic data and corporate earnings both remained resilient. Earnings growth broadened modestly beyond technology, and investor sentiment improved as recession fears abated.

Looking ahead to 2026, the outlook for the U.S. equities is cautiously optimistic. Most forecasts call for positive but more moderate returns compared with the aforementioned mid-teens gains of recent years. Earnings growth is hoped to remain a key support, with analysts projecting continued profit expansion for large U.S. companies. Both Federal Reserve policy and a new chair will be central to the market narrative, as will geopolitical concerns. Expectations for rate cuts in 2026 have been a major source of optimism, and if those cuts materialize, as well as achieving resolutions pertaining to global conflicts, we could see another favorable year. However, the margin for error is thin and risks remain. Persistent inflation or unexpected economic strength could delay or limit Fed easing, which would likely pressure multiples. Elevated valuations, market concentration, geopolitical uncertainty, and the possibility of renewed inflation all represent potential headwinds. As a result, volatility is likely to be higher than in the earlier stages of the bull market. As the market moves into 2026, the outlook is positive but more balanced – returns will likely depend on earnings delivery, Federal Reserve policy, and the ability of the rally to broaden beyond its narrow leadership base of previous years.