What to make of 2025?

Intro
Well, what a year.  Whether 2025 for you was a net positive or net negative, where things got better or much worse, depends on who you are and what lens you look through.  In my work, I’ve rarely heard people voice such strong opinions about their country.  This past year mattered.  Many narratives are in play right now to describe what’s happening.  Investors looking at their portfolios, might see expressions of these different narratives, both optimistic/positive and cynical/negative.  The US stock market performed better than many had predicted.  Why?  And what might we expect for the year ahead?

Tariffs and Trade Policy. 
Tariff policies have not yet had the negative impacts that many feared.  In the end, it seems that the final magnitude of tariffs may ultimately be far less than when originally presented on Liberation Day.  The market appears to have come to the opinion that tariffs may be less disruptive than the initial worst-case scenarios.  Negotiations, pauses, exceptions, and concessions all likely play a role.  And while the US could be gaining more favorable trade treatment from adversaries and allies than before, evidence may emerge that the impact from tariffs was felt in slowed employment growth rather than higher prices for consumers, so far.

Corporate Earnings Have Been Strong. 

Consumer Spending.  Throughout 2025, the American consumer has continued to spend.  Consumer spending accounts for some seventy percent of the US economy.  Higher income households saw continued growth while lower income households continued to stagnate in real terms.  While all income levels spend significantly, the highest income households spend so much that they move the economy.  Lower income households likely feel the impact of inflation more acutely.  This could well have implications in upcoming midterm elections. 

Consumption ≠ Sentiment.  How consumers spend doesn’t seem to be directly linked to how they feel.  It has been widely reported that consumer sentiment is trending lower.  Several studies show that many Americans have a negative outlook on the economy.  Political affiliation appears to play a substantial role in one’s outlook.  But while sentiment has trended down in recent years, spending has not.  It is not yet clear why this is the case, but sentiment does not appear to be a reliable indicator of future spending.

AI Growth. 
A key driver of growth in stocks during 2025 was the potential impact from AI (artificial intelligence).  There are at least two broad narratives developing here: 

The Positive View.  We are in the early stages of massively transformative technological change.  A new industrial revolution is upon us that will cause substantial gains in productivity and enable great societal and economic advancements. Technology stocks, the story goes, reflect this and have surged accordingly.

The Negative View.  This transformation could cause widespread displacement of workers and lead to a cascading of crises; a destructive genie we’ll be unable to understand or control.  This negative view compares these times to the late 1990s, and we all know how that bubble ended.  The fear is that stock investors are engaged in foolish euphoria, potentially creating a speculative bubble concentrated around a small number of important companies. 

Which is True?  I of course do not know, but my guess is that the potential for AI is likely quite real and corporations may have only just begun to realize productivity gains.  If true, this could foretell strong growth ahead.  Widespread adoption of AI tools could indeed be disruptive.  But let’s remember that the net impact to jobs from the dotcom/internet revolution was ultimately positive. Perhaps we could expect (hope?) that the impact of AI will be similarly positive.  There are thriving sectors today that were unimaginable before the dotcom revolution.  A speculative bubble could develop, but in my view at present we are not there yet.

For Investors, Diversification Worked. 
Diversification can lead to suboptimal performance when compared to a portfolio concentrated into one winning sector.  But this past year shows how there are many times when broad diversification can show its true strength.  Investors with diversified portfolios in 2025 likely enjoyed stronger returns than those concentrated in domestic equities.  Dispersion in performance across different investment categories this past year reflects the range of viewpoints and narratives at play in the overall economy, both optimistic and cynical. 

US Large Cap Tech continued to grow during 2025.  This was driven by the AI boom, as discussed earlier.  The positive narrative won out.

Precious Metals (gold and silver) and associated mining stocks performed particularly well.  In my view, this was an expression of fear rather than optimism.  Many factors likely supported this, such as fears about inflation, foreign central bank purchases, and concern over US political dysfunction.  This was likely an expression of fear.

Developed International delivered strong results.  For example, western Europe countries responded to the US pullback from NATO by increasing their own domestic investments in energy and defense.  Also, Japan seems to have finally begun to emerge from its decades long economic malaise.  This was seen as long overdue.  Continued dollar devaluation could be a positive for investors.

Emerging Markets.  Many companies in countries such Brazil, India, and China did well likely due to strong exports to the US (in spite of tariffs) and the continued reorganization of the global supply chain.  Globalization is apparently not dead yet.

Conclusion – Outlook for 2026
Many of the challenges we face as a nation can seem intractable.  For example, persistent income disparity, climate change, the growing Federal Deficit, demographic pressure from an aging US population, and the potential decline of trust in US Institutions could all spell trouble if they continue along their current trajectories.  But will they?  Is it correct to extrapolate current trends or will corrections come about that seem obvious only in hindsight (witness the 1960s fears of overpopulation versus today’s concern of too few US workers).  These questions deserve closer consideration.

In short, though risks abound, I side with the optimists who think 2026 will be another good year for investors.  But I wouldn’t be surprised to have a lot of volatility along the way.  And the leaders in terms of performance or growth may surprise us.  Once again, diversification and patience will be the approach I choose to follow.

Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC. 

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.  The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The Consumer Price Indexes (CPI) program produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services (Source: U.S. Department of Labor).

The PCE price index, or Personal Consumption Expenditures price index, is a measure of the prices of goods and services purchased by people in the United States.