2025 marked another strong year for economic growth and global stocks. In the US, the large cap S&P 500 Index gained 16.39%, with the communications sector (including Meta, Alphabet, and Netflix) leading the charge higher, rising 32.41% (yCharts). International stocks also delivered stellar performances, with the MSCI Europe and Emerging Markets Indexes climbing 31.95% and 30.58% respectively. A 9.40% decline in the US Dollar Index helped bolster international returns, as early 2025 tariff turmoil caused some capital flight from dollar-denominated assets.
Several asset classes outside of equities also performed well. Bonds, as measured by the Bloomberg US Aggregate Index, gained 7.38%, making 2025 a slightly above-average year by historical standards. Gold and especially silver, however, shined (pun intended) the most, with their respective prices rising by 63.53% and 141.40% (yCharts) as physical shortages and rising global sovereign debt increased the appeal of the popular “safe-haven” of hard assets.
We see several economic tailwinds (lower interest rates, improving business sentiment, widespread fiscal stimulus from the One Big Beautiful Bill Act) and headwinds (elevated stock valuations, labor market weakness) coming into 2026, but the weight of evidence currently leans bullish. We dive deeper into some key economic themes of the new year below.
Rate Cuts Resume as the Labor Market Slows
The Federal Reserve reduced their benchmark “Federal Funds Rate” by 0.75% during the fourth quarter, following their 0.25% cut in September. They cited emerging labor market weakness and a falling risk of runaway inflation as their rationale for the economically stimulative cuts. When asked about the impact of tariffs on prices, Federal Reserve Chair Jerome Powell indicated that tariffs are inflationary, but the Fed views them as creating a “one-time inflation” increase, rather than a new and persistent inflationary force. In other words, tariffs are most likely not going to cause rate hikes.
Ironically, they may have had the opposite effect and spurred recent rate cuts. The trade wars of 2025 and temporary enactment of the highest tariffs in over 100 years last April scared businesses, and many responded by halting plans of expansion and hiring. This led to an average of only 14,500 jobs being created each month during the second half of the year, far below the estimated 52,000-77,000 new jobs needed per month to keep the unemployment rate stable. Thankfully, the lack of private-sector layoff activity during 2025 has kept unemployment low, but policy makers still want to cut rates and help the labor market recover.
We view the year-end rate cuts as a tailwind to economic growth in 2026, as lower rates increase business profitability and reduce the cost of borrowing. Converging with this tailwind has been a multi-month trend of decreasing tariff rhetoric, which may inspire businesses to reconsider plans for expansion and hiring. Yes, talk of tariffs has very recently resurfaced while Trump is pressing Denmark to sell Greenland, but if last year is any guide, the staying power of new tariffs associated with this debacle should be low.
Potentially offsetting some of the bullish factors above is the potential for AI to replace some jobs, especially entry-level/lower skill type roles, which may create labor market strain. We are likely already seeing this on some level, as unemployment has been crawling higher for younger Americans while staying level for mid and later career professionals.
Sector Deep Dive — The Magnificent 7’s Race Against Great Expectations
The AI-centric Magnificent 7 stocks (NVIDIA, Apple, Microsoft, Meta, Alphabet, Amazon, and Tesla) once again led domestic stocks higher this year, prompting many to wonder if the stock market, and especially mega-cap technology stocks, are in a bubble. In fact, the November market pullback was accompanied by the greatest Google search volume for the phrase “AI Bubble” in Google’s archive history, suggesting high anxiety that AI stocks could soon “pop,” delivering economic disappointment and portfolio losses.
Many “bubblers” suggest that we are witnessing a sequel to the late 1990s/early 2000s dot-com boom and bust, pointing to valuation measures such as the “Shiller Price/Earnings Ratio” approaching levels not seen since then. And yes, it’s true, domestic stocks on that basis are valued more richly than they have been in over two decades. However, there are some major differences between the late 1990s bubble and today. Most significantly, the most prominent technology companies are making money — a lot of it. In fact, the latest estimates put the Mag 7’s share of the S&P 500’s earnings growth at over 40% for 2025. Big tech’s earnings/share has also followed the familiar “J-curve” shape associated with exponential growth over the last three years.
Higher earnings growth supports and may even justify richer valuations. The challenge arises when expectations outpace a company’s ability to grow, and investors are very optimistic about the future of AI companies. In fact, expected forward profit margins are literally off the charts, as indicated in the chart below of margins of mega cap technology stocks versus the rest of the S&P 500 (Yardeni Research). Yardeni includes Netflix along with the Mag 7 in his calculations to come up with what he calls the “MegaCap 8.”
The biggest risk to the AI boom, in our opinion, is that big tech companies fail to grow profits as fast as investors want. Currently, investors worry that the costs of developing AI infrastructure (data centers, power generation, etc.) will be so steep that it could hamper future profits. Whether this comes to pass remains to be seen. Even so, the potential for “less big profits” sounds a lot better than the 2000 stock selloff, when overhyped “dot-com” companies with weak/no earnings and no viable products lost investor confidence and “popped” into the early 2000s bear market.
To date, the Mag 7 has largely met or exceeded investors’ expectations. An ideal scenario sees this continue in 2026, with further stock gains, but investors want results and continued rapid growth. We take this information and suggest a balanced approach, prudently diversifying among established and profitable technology companies while avoiding many smaller and more speculative AI companies that have yet to prove their products and businesses.
Final Thoughts — The Appeal of Overseas Diversification
Despite positive economic tailwinds, many investors remain nervous about current domestic stock valuations and the unpredictable nature of US policymaking. Diversifying with international stocks is a great way to hedge these risks while remaining invested in equities. Moreover, our analysis of cash flows, profit growth, and currency dynamics forecasts attractive risk-adjusted returns over the intermediate term. As such, we believe a globally diversified portfolio will keep pace with or potentially outperform a US-only portfolio over the next several years.
As always, we are grateful to be your trusted partner in all matters financial and look forward to serving you in the new year.
Christopher Diodato founded WELLth Financial Planning in 2020 to help individuals live their best financial lives through expert, conflict-free guidance. He carries a rare combination of credentials — the CFA, CMT, and CFP charters — allowing him to create and implement best-in-class investment and financial planning strategies. A passionate advocate of the FIRE movement, Chris helps clients design life plans that reflect their unique vision of financial success, whether that means early retirement or more time for what matters most.