2025 Year-End Market Review & 2026 Outlook

By MTWH Advisors on December 29, 2025

2025 Year-End Market Review & 2026 Outlook

While the journey was far from linear, markets demonstrated remarkable resilience in the face of a shifting policy environment, market volatility, and a growing divergence between robust economic growth and softening labor trends.  

Liberation Day and the Market Reset

On April 2nd, President Trump announced his “Liberation Day” tariffs, the most dramatic escalation in U.S. trade policy since the Smoot-Hawley Tariff Act of 1930. The announcement triggered a widespread sell-off across asset markets, marking the largest global market decline since the 2020 COVID drawdown.

The S&P 500 declined 21.34%¹ from its February peak. The baseline 10% tariff on nearly all imports, combined with country-specific tariffs ranging up to 54% on China, sent shockwaves through global supply chains and rattled investor confidence.

Just one week later, on April 9, the Trump administration announced it would pause its tariff increases and instead enter negotiations. The “TACO” trade was born (Trump Always Chickens Out), and by mid-May the S&P 500 turned positive for the year². By late June, the S&P 500 and the NASDAQ closed back at all-time highs³.

The AI Super-Cycle Continues

While tariff headlines dominated the news cycle, the AI revolution continued its march forward, becoming the year’s most significant structural driver of returns. Our portfolio has been well served not only by our technology exposure, but also by infrastructure, utility, and healthcare businesses that stand to gain from these same underlying forces.

The scale of AI-related capital spending continues to accelerate, and we are closely watching how this investment wave interacts with free cash flow generation and return on capital trends. Artificial Intelligence capex among S&P 500 tech companies rose from $256bn in 2024 to $443bn in 2025 and is expected to approach as much as $600bn in 2026⁴. This level of investment represents a structural build-out that is reshaping entire industries.

We believe this AI super-cycle is still in its early stages. The data center infrastructure cycle is being propelled by surging demand for AI and cloud services. At the same time, power availability remains a major bottleneck, prompting grid upgrades, on-site generation, and “bring your own power” strategies.

Federal Reserve: Threading the Needle

Against this backdrop, the Federal Reserve faced one of its most complex policy environments in recent memory. GDP growth remained resilient, yet labor market signals softened, creating a divergence that challenged traditional policy frameworks. Sticky inflation—compounded by tariff-induced price pressures—further complicated the picture as trade friction pushed input costs higher and risked reigniting inflation expectations.

In September, the FOMC voted 11-1 to lower its benchmark rate to a range of 4.25%-4.00%. Two additional twenty-five basis point cuts followed in October and December. These moves were widely interpreted as “insurance cuts”, responding to signs of labor market weakness even as inflation remained above target. This marked the Fed’s pivot toward easing after multiple years of restrictive policy.  

Markets are currently pricing two additional rate cuts in 2026⁵, bringing policy closer to neutral. We believe policymakers will remain focused on balancing labor market support with stubborn inflation, particularly in services and housing, while maintaining data dependence.

Chair Powell’s term concludes in May 2026, and attention is increasingly turning to who will lead the Federal Reserve next. This leadership transition will be scrutinized for any shifts in policy approach, communication style, and the Fed’s continued independence. We are actively watching to see how markets digest the shift.

Looking into 2026

The K-shaped economy: Divergences across the economic landscape continue to widen. AI-related sectors are expanding rapidly, while non-AI industries face more modest growth. The broader U.S. economy is balancing robust capex with softer labor demand and widening differences in household spending. While layoffs remain contained, hiring has flattened, creating an environment where corporate profits can grow even as employment conditions moderate.

Market concentration: The top five stocks account for more than one-quarter of major equity indexes by weight, giving them a disproportionally large impact on the index’s returns. This concentration creates both opportunity and risk. The “Magnificent Seven” (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, Tesla) now command a combined market capitalization of approximately $21 trillion⁶.

Valuation Concerns: As of December 15, the S&P 500 has risen 17.17% for the year⁷, with a forward 12-month price-to-earnings ratio of 22.1x⁸. This demands careful security selection and risk management.

What are we watching

Growth and Earnings: We expect resilient growth, supported by healthy corporate and household balance sheets, broadening AI-related capex spending, and continued productivity gains. Earnings growth in the 13-15% range appears achievable⁹, driven more by operational improvements than multiple expansion. This would represent a 1.5-2.5% acceleration from 2025.

Monetary Policy: Based on current market pricing, we anticipate two additional rate cuts before the Fed moves to an extended pause. The central bank’s ability to ease further will depend on improving inflation dynamics and signals from the executive branch.

AI Leadership Continues: The AI sector’s momentum is spreading geographically and across diverse industries—from technology and utilities to banking, healthcare, and logistics. Companies with exposure to data center infrastructure, hyperscalers, and electric power providers remain well-positioned.

Managing Concentration Risk: The extraordinary concentration of returns in 2025 demands thoughtful portfolio construction. While we remain constructive on AI leaders and believe the infrastructure build-out has years to run, we are cognizant that current revenues generated by AI companies are far smaller than the amount of capex directed at them.

This creates a “show me the money” moment for AI that will reveal itself over the next 12-24 months, during which we will look for clear evidence that substantial AI investments are translating into sustainable revenue growth and improved unit economics.

Key Risks to Monitor

• Policy Uncertainty: Potential for further tariff escalations or unexpected policy shifts.
• Valuation Reversion: Extended multiples in mega-cap tech are vulnerable to shifts in sentiment. 
• Labor Market Weakness: Additional softening could weigh on consumer spending.
• Geopolitical Tensions: Ongoing conflicts and power competition.
• AI Monetization: Whether AI capex translates to revenue growth fast enough.

In Closing

2025 reminded us that markets can digest significant shocks when underlying fundamentals remain sound. The rapid recovery from the April tariff panic demonstrated that corporate America’s ability to adapt, innovate, and invest remains robust.

As we enter 2026, we maintain conviction in several themes:

• The AI super-cycle remains in early stages
• Quality and earnings growth will matter more than multiple expansion
• Active security selection will become increasingly important in a polarized market environment

We are invested for a market that rewards patience, quality, and exposure to transformative technologies, while maintaining the discipline required to manage concentration risk and navigate what promises to be another year of dynamic change.

Investment returns are never linear; however, we believe the tailwinds supporting innovation, productivity growth, and corporate earnings remain firmly in place. As always, we remain focused on your long-term financial objectives and are committed to navigating these markets with rigor and discipline.

Sources:

1. FactSet estimates, as of December 1, 2025
2. FactSet, as of December 24, 2025
3. FactSet, as of December 24, 2025
4. FactSet, as of December 24, 2025
5. Credit Sights: https://know.creditsights.com/insights/technology-hyperscaler-capex-2026-estimates/
6. FactSet, CME Group https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
7. FactSet, as of December 1, 2025
8. FactSet, as of December 23, 2025
9. FactSet, as of December 23, 2025