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US markets end 2025 on a high after volatile year
Wall Street wrapped up 2025 with robust gains, defying earlier turbulence from trade disputes and economic jitters. The S&P 500 is set to finish the year up 17%, marking its third consecutive year of double-digit growth.
Trade tensions spark market turbulence
In early April, President Donald Trump's announcement of sweeping tariffs on trading partners sent shockwaves through financial markets. The S&P 500 briefly flirted with bear market territory-a 20% drop from recent highs-while the Nasdaq Composite and Russell 2000 indexes temporarily entered bear markets. However, markets rebounded swiftly after Trump softened the most severe tariffs, easing fears of an economic slowdown.
Tech and AI drive record highs
The technology-heavy Nasdaq Composite is poised to close the year with a 21% gain, while the Russell 2000 index of smaller companies rose roughly 12%. Strong corporate earnings, particularly in the tech sector, fueled the rally, with artificial intelligence investments playing a pivotal role. The top five companies-Nvidia, Apple, Microsoft, Amazon, and Alphabet-now account for nearly 30% of the S&P 500's total value.
Yet concerns are growing about an AI-driven bubble. Analysts warn that soaring valuations of AI-linked firms and heavy corporate spending on the sector could lead to a correction. Despite this, earnings growth is broadening beyond tech, offering investors some diversification.
"The market continues to climb the wall of worry into next year," said Robert Edwards, chief investment officer at Edwards Asset Management. "2026 should be another year of record-setting for stocks," he added, citing expectations of lower borrowing costs.
Robert Edwards, Edwards Asset Management
Economic resilience and lingering risks
The US economy outperformed expectations in 2025, with GDP expanding at an annualized rate of 4.3% in the third quarter-the strongest growth in two years. However, the labor market showed signs of strain, with unemployment rising to 4.6% in November, a four-year high.
Gold emerged as a standout performer among safe-haven assets, surging nearly 70% for the year. Bitcoin, meanwhile, lagged behind, ending 2025 slightly lower after a sharp decline from its October peak, despite early-year support from the Trump administration.
Uncertainty looms for 2026
Analysts anticipate another strong year for stocks, but risks remain. Vanguard projects annualized returns of 3.5% to 5.5% over the next decade, a more subdued outlook compared to recent gains. Key concerns include potential fallout from Trump's trade policies and leadership changes at the Federal Reserve.
Trump is expected to name a new Fed chair in the coming weeks, replacing Jerome Powell when his term ends in May. The decision could introduce volatility, particularly if the new chair signals a shift in monetary policy. Trump has publicly pressured Powell to cut interest rates and indicated he will select a chair aligned with his easing preferences.
"Fed chair transitions come with volatility," said Paul Stanley, chief investment officer at Granite Bay Wealth Management. "The bar for a pullback or mini correction in early 2026 is not terribly high."
Paul Stanley, Granite Bay Wealth Management
Investors are also monitoring the rotation away from Big Tech stocks, with some analysts cautioning that valuations outside the tech sector may also be stretched. Parag Thatte, an equity strategist at Deutsche Bank, noted that earnings growth is now broadening beyond tech, calling it a "key development" for market stability.
