2025 Year End Market Commentary & 2026 Outlook
Commentary
U.S. equities produced strong returns in 2025 despite faltering employment data and tariff-driven volatility. The S&P 500 Index rose 17.8% in 2025, its third straight year of double-digit gains and well above the 12% average annual return over the past 30 years. The market’s success was driven by an improving underlying investment environment as the Federal Reserve pivoted away from restrictive policies designed to prevent inflation. All else equal, equities historically perform well in a moderate growth, low interest-rate environment. Despite persistent inflation concerns, faltering employment, and volatile import/export trends, investors welcomed the Federal Reserve’s actions to lower interest rates and unwind the tight monetary environment. Prospects of continued strong artificial intelligence (AI) infrastructure investment and optimism surrounding lower regulation may also have helped propel U.S. stocks to record highs.
In retrospect, the success of U.S. equities in 2025 appears reasonable. Mega-cap technology companies—uniquely positioned to both fund the massive capital spending requirements of AI and capitalize on its proliferation—led the stock market higher. This group dominates market-capitalization-weighted index performance due to its outsized membership. Telecommunication companies, normally considered a more defensive sector, also thrived from the AI data-center buildout, while certain industrials benefited from increased demand for communications equipment, wire, and components. On the weaker side of the market, consumer stocks (both discretionary and staples) underperformed, as concerns over tariff-induced inflation and layoffs hampered the sectors. Energy stocks also lagged as global economic activity slowed amid tariff uncertainty and as governments worked to keep oil prices contained to mitigate inflationary pressures.
Admittedly, the market was far stronger in 2025 than we expected. We would argue that the delayed implementation of broad tariffs allowed the market to rally on the prospects of lower interest rates and a more accommodative Federal Reserve. Chairman Powell’s term ends in May 2026, and President Trump is likely to appoint a new Chair more aligned with his economic priorities. Wall Street speculates this transition could result in lower short-term lending rates, a potential return to quantitative easing, and job-market stimulus—contrasting with the Fed’s more recent emphasis on inflation containment.
The affordability crisis is real, particularly in food prices and certain regional housing markets. However, we anticipate headline inflation could remain relatively soft. The two most significant components of the Consumer Price Index, the most widely followed inflation gauge, remain shelter and energy. Housing-related inflation is a slow-moving component due to the annual resetting of rental rates, implying that downward pressure from shelter inflation may persist as mortgage rates decline and rents reset. Energy prices are also under pressure, as policy measures and diplomatic engagement appear to have convinced both domestic and international suppliers to maintain abundant supply. Therefore, despite rising food and services costs and tariff-impacted goods, the October headline CPI reading of 2.7% is not overly concerning. This has allowed the Fed to pivot away from its inflation-first posture, though a leadership change could accelerate more stimulative open-market operations (for better or worse).
While broad and aggressive tariffs were sidelined for much of 2025, they are likely to return and contribute to renewed volatility in 2026. Thus far, it appears unlikely that the Trump administration will yield to market pressure (or court rulings) to gracefully abandon sweeping tariffs. Instead, several legislative avenues remain options for the President to reimpose country-specific and industry-focused tariffs, though with congressional approval, to pursue broader policy goals. Whether Congress will ultimately support broad tariff reimplementation remains uncertain, but tariff-induced volatility could reemerge in 2026.
Massive capital investment in artificial intelligence was a key driver of U.S. equity strength and economic activity in 2025. Major technology companies are investing trillions in aggregate over the next decade into AI data centers, power generation, and semiconductor capacity. With an AI arms race clearly underway, specialized chip manufacturers were among the strongest performers of the year. Unlike the dot-com capital-spending cycle of the late 1990s, this investment phase occurs at a time when technology leaders are among the most profitable and financially robust companies in the market. They are best positioned to fund these investments and withstand the extended timeline required to generate returns. As we move into 2026, concerns about an AI bubble will persist and warrant monitoring, but for now the capital-spending cycle remains intact.
While the U.S. market performed well in 2025, it underperformed many international markets. Major Asian equity markets rose more than 30%, Europe’s Euro Stoxx 50 Index gained 22%, and the Bloomberg Latin America Index surged 55%. Weakness in the U.S. dollar—driven by tariff and trade uncertainty—partly explains this outperformance. However, there also appears to be a gradual reallocation away from U.S. assets amid geopolitical realignment under the Trump Administration. U.S. fiscal and monetary instability fueled interest in physical gold and other precious metals. Spot gold prices rose more than 65% in 2025, while silver surged 147%. Although country-specific data is slow, there are reports that some global central banks have increased gold reserves while reducing exposure to U.S. dollars and U.S.-denominated assets.
Looking ahead to 2026, we expect many current trends to continue. AI investment and technology leadership may persist, lower interest rates should support financial and real-estate stocks, and tariff policy issues are likely to resurface. However, unexpected developments are often what derail Wall Street. Geopolitical risk remains elevated, including the potential escalation of conflict involving Russia or tensions in Asia. U.S. intervention in Venezuela is likely to be economically inconsequential for U.S. equities, similar to the market impact following Russia’s invasion of Ukraine. Energy stocks have the most to gain from the recent intervention, but it is too early to truly assess. That said, if such actions embolden other nations to intervene in sovereign states, it could threaten the Bretton Woods–based global economic order that has existed since World War II. A breakdown in this framework could raise global risk premiums and increase market volatility.
The outlook for the U.S. job market remains the most important indicator to monitor in 2026. A more accommodative Federal Reserve and improved tariff clarity could support employment but also risk reigniting inflation. As 2025 ends, uncertainty has fostered a “no-fire, no-hire” environment. Layoffs throughout the year reached levels typically associated with recessionary conditions. To what extent these layoffs resulted from federal government restructuring under DOGE initiatives versus post-pandemic over-hiring remain unclear. Nevertheless, further deterioration in employment data would meaningfully increase recession risks and investor concern and therefore warrants close attention.
In conclusion, the underlying investment environment remains the primary concern for U.S. investors. For now, a low-interest-rate, slow-growth, and relatively low-inflation backdrop appears likely to persist, supporting equity markets. Inflation risks and geopolitical instability remain key areas to monitor. While valuation multiples expanded in 2025, margins also rose record levels and the profitability of large-cap U.S. companies appears resilient. With both valuations and risks elevated, we expect to tilt portfolios toward companies exhibiting earnings stability and strong capital-return characteristics. As bull markets mature, factors such as return on invested capital, dividend yield, and free cash-flow yield historically offer more attractive risk-adjusted returns.
Thanks for investing with Oak Associates.
Kind Regards,
Robert Stimpson, CFA
Chief Investment Officer
Oak Associates, ltd.
Grow stronger together.
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