The Year in Numbers

The S&P 500 (GSPC) concluded 2025 with a total return of 17.9%, marking its third consecutive year of double-digit gains. This performance was particularly notable given the significant volatility experienced during the spring, when the introduction of reciprocal tariffs triggered a meaningful global selloff. Despite these headwinds, the index recovered to post a 16.4% price return, anchored by the continued dominance of large-cap technology and a late-year shift in monetary policy.

Equity Benchmarks

  • Nasdaq Composite (IXIC): +21.1%
  • S&P 500 (GSPC): +17.9%
  • Dow Jones (DJI): +14.9%
  • Russell 2000 (RUT): +12.8%

Alternative Assets

  • Gold (GC=F): +67.0%
  • Bitcoin (BTC=F): -6.4%
  • WTI Crude (CL=F): -20.0%
  • 10Y Treasury (TNX): 4.18% Yield

While the headline numbers suggest a smooth ascent, the internal dynamics of the market revealed a stark divide. The Magnificent 7 stocks maintained a combined 33% weight in the S&P 500 (GSPC) and accounted for 42.5% of the index's total return. Meanwhile, the bond market navigated a complex path as the Federal Reserve eventually delivered three 25-basis-point rate cuts, bringing the target range to 3.50% - 3.75% by year-end.

What Worked

The primary driver of alpha in 2025 was the continued expansion of Artificial Intelligence infrastructure. Global AI capital spending reached an estimated $320 billion, providing a fundamental floor for the semiconductor and cloud services sectors. Alphabet ($GOOGL) emerged as the standout performer among the mega-caps, returning 65.8% for the year, largely driven by a massive 47% surge in the fourth quarter as its AI integration began to show tangible margin improvements.

The AI Infrastructure Thesis

Our January outlook identified AI capex as the 'indestructible theme.' This was validated as NVIDIA ($NVDA) returned 40.9%. While this was a deceleration from its triple-digit gains in 2024, the company's ability to maintain high margins in a more competitive environment was a key pillar of market stability.

The biggest surprise of the year was the resurgence of Gold (GC=F) as the ultimate hedge. The precious metal surged 67% to close at $4,368/oz, outperforming all major equity indices. This move was driven by a combination of central bank diversification and a search for safety during the spring tariff escalations. Investors who allocated to gold as a volatility dampener found it to be the year's most effective diversifier.

What Did Not Work

The most significant disappointment of 2025 was the failure of the small-cap 'catch-up' trade to keep pace with large-cap peers. While the Russell 2000 (RUT) finished the year with a positive 12.8% return, it significantly trailed the S&P 500 (GSPC) and Nasdaq Composite (IXIC). The combination of higher-for-longer interest rates in the first half of the year and the spring tariff shock disproportionately affected smaller, domestically focused companies with higher debt-service costs.

Miss Analysis: We overweighted the probability of a small-cap rotation in our January base case. We underestimated the degree to which large-cap balance sheets would insulate the S&P 500 (GSPC) from rising input costs compared to their smaller peers.

Similarly, Bitcoin (BTC=F) failed to live up to its 'digital gold' moniker. While physical gold surged to record highs, Bitcoin fell 6.4% to close at $87,501.95. The correlation between crypto and high-beta tech remained high, meaning Bitcoin acted more like a leveraged play on liquidity than a sovereign risk hedge during periods of geopolitical tension.

Key Lessons

The defining lesson of 2025 is the 'Resilience of the Large-Cap Balance Sheet.' In an era of reciprocal tariffs and fluctuating rates, companies with massive cash piles and pricing power—specifically the Magnificent 7—acted as the new defensive sector. Their ability to self-fund $320 billion in AI spending without relying on stressed credit markets was the structural advantage that consensus missed in the spring.

  • Tariffs as a Volatility Event, Not a Regime Change: The April tariff shock caused a 10% drawdown, but earnings growth in the tech sector eventually overwhelmed the macro noise.
  • Inflation Normalization: Headline CPI ended the year at 2.7%, suggesting that while the 'last mile' of inflation is sticky, it is not currently an obstacle to Fed easing.
  • Concentration is a Feature, Not a Bug: The 33% weight of the top 7 stocks creates index-level stability so long as their fundamental earnings growth remains superior to the broader market.

The Year Ahead

As we enter 2026, the market starts from a position of high valuation, with the S&P 500 (GSPC) trading at approximately 22x forward earnings. The Federal Reserve enters the year in a cutting cycle, but the 'easy' gains from multiple expansion may be behind us. The key question for Q1 will be whether the $320 billion in AI spending begins to translate into broader productivity gains across the non-tech sectors. We will provide a comprehensive framework for navigating these dynamics in tomorrow's Yearly Kickoff.