Financial Markets and the Economy: A Look Back at 2025

The year 2025 offered an unusual mix of solid economic growth, easing inflation, and strong market returns, even as headlines pointed to ongoing uncertainty. It served as a reminder that progress rarely moves in a straight line. Below is a recap of what shaped markets and the economy over the past year, along with the themes carrying us into 2026.

Tech Leadership Continues to Drive Market Gains

U.S. stocks closed out 2025 with broad double‑digit gains, marking a third straight year of strength for large‑cap equities. Performance remained heavily concentrated, with technology and AI‑related companies pushing major indices toward record levels. The S&P 500 rose 16.39%, the Nasdaq 100 gained 20.17%, and the Dow Jones Industrial Average added 12.97%. These gains were driven primarily by rising corporate earnings, especially among mega‑cap tech and financial companies. International markets also advanced, reflected in the 32.4% gain for the MSCI All Country World ex‑USA index.

Fed Rate Cuts Offer Relief, But Housing Stays Tight

After a prolonged “higher for longer” stance, the Federal Reserve implemented three‑quarter‑point rate cuts in 2025. Treasury yields drifted lower throughout the year, and the 10‑year rate settled in the low‑4% range by December. For bond investors, this shift brought welcome stability as high‑quality fixed income returned to its traditional role as a diversifier and income source. Though credit spreads remained calm, the environment still warrants attention in lower‑quality segments where higher borrowing costs and labor market softening could have an impact.

Housing remained constrained despite a drop in mortgage rates from 6.91% to 6.15%. Home prices climbed about $7,400, or 1.7%, reinforcing that elevated rates do not automatically translate into improved affordability. Limited supply and higher long‑term borrowing costs continue to be challenges for households weighing a move.

Policy Shifts and Global Tensions Shape the Backdrop

Tariffs and rapid advances in technology shaped key areas of the U.S. economy in 2025, steering investment toward AI, automation, and domestic manufacturing while pressuring sectors more exposed to global trade. Globally, the year unfolded with steady but persistent geopolitical tensions rather than one defining crisis. Ongoing conflicts, supply‑chain vulnerabilities, and heightened discussions about cyber risks and AI governance contributed to elevated risk premiums and reinforced the value of preparing portfolios for a range of scenarios.

Economic Themes That Defined 2025

The U.S. economy expanded at a steady 2% pace, though growth was uneven. Research shows that roughly 60% of GDP growth came from the AI buildout, benefiting technology‑driven industries while manufacturing lagged and wage growth cooled. Inflation continued to ease, settling into the high‑2% range by December, though tariff effects and housing costs added complexity. The Federal Reserve responded with three rate cuts while signaling a deliberate approach going forward. Markets also navigated repeated bouts of volatility tied to tariff announcements, policy debates, and geopolitical developments. Once again, a small group of large technology companies accounted for a meaningful share of market gains.

Looking Ahead to 2026

Despite political turbulence and a cooling labor market, moderating inflation and positive earnings helped support another year of gains in 2025. As we move into 2026, we see both opportunity and areas that warrant discipline. Rising tariffs, sustained deficit spending, and a maturing AI investment cycle suggest the value of staying diversified, focusing on companies with strong balance sheets, and remaining attentive to valuations.

For personalized guidance tailored to your goals and financial situation, we encourage you to reach out to your financial team for support and strategic insight.