The past year, 2025, marks the third consecutive year of double digit growth for the S&P 500. The index re‐ turned 17.9% for the year and the three‐year return an is astounding 86% gain. Although international stocks have lagged their U.S. counterparts in previous years, globally diversified investors were rewarded handsomely with MSCI EAFE Index returning 31.2% for the year. The bond market had a great year as well with the Bloomberg Barclay’s Aggregate Bond Index returning 7.3% for the year. Overall it was a terrific year for investors, no matter where they put their money.
*This graph is not intended to recommend any investment or investment activity.
Even with healthy market returns, the year had more than its fair share of disruptions. In April, President Trump announced a plan to levy tariffs against most of the U.S.’s major trading partners. This raised the average tariff rate to levels not seen in nearly a century. In addition, U.S. military strikes against Iran, and more recently Venezuela, have added to geopolitical tensions that were already simmering in Ukraine and Israel. There was also a budget standoff in Washington that shut down the government for a record 43 days. The market reacted violently to the April tariff announcement, but has remained astonishingly calm to the other major headlines, despite the history that these sorts of disruptions have created significant market volatility in years past.
When the new tariff policy was announced in April, it threatened to increase the average duty on imported goods from about 4% to 30%, the highest rate since the early 1900’s. After rounds of negotiations and reconsideration by President Trump, the average tariff rate now stands at 15.6%. A surprise to most economist and strategists has been the benign impact of these tariffs, so far. Although inflation has ticked up a bit, the overall economy has held up reasonably well. Many predict this may change in the coming year if businesses begin to more aggressively pass these costs along to consumers.
*This graph is not intended to recommend any investment or investment activity. Source: JPMorgan
The strong three‐year run in stocks has been driven largely by the strength of a small group of technology stocks dubbed the “Magnificent Seven” or “Mag 7,” which are seven massive technology companies at the leading edge of the development of artificial intelligence (or A.I.). This novel technology is considered to be as significant as the development of the internet in the late‐1990’s. And like the late‐90’s tech bubble, this market bears many similarities. The first and most significant is the narrowness of the leadership in the market by these companies. In the past the three years, the Mag 7 have accounted for more than half of the overall market returns, similar to the tech giants of the late‐90’s. Also, the valuations of the companies leading the market have risen to extremely high levels, leaving the rest of the market much more reasonably priced. When the late‐90’s tech bubble eventually burst, investors who did not get carried away with over‐allocating to those technology companies fared much better during the early‐2000’s bear market than those who loaded up on tech stocks. This is why we believe it is very important to stay well diversified.
Much of the optimism about the fast‐developing A.I. technology is the increase in worker productivity. A.I. seems capable of helping with many tasks across multiple industries. Even in our personal lives, using A.I. tools, such as ChatGPT, is quickly replacing internet searches when looking for recommendations about travel plans, restaurants, purchase decisions, and many other types of information and advice. We are seeing evidence of these productivity gains in the earnings of many companies, which has helped support the stock market rally. On the flip side, A.I. is being blamed for softness in hiring, especially among entry‐level white‐collar professionals, as some of those tasks can now be performed by A.I.
*This graph is not intended to recommend any investment or
investment activity. Source: JPMorgan
This shift in productivity and hiring is showing up in weakening data in the labor market. In the most recent report, the unemployment rate was measured at 4.4%, up from 3.4% two years ago. As the nearby chart shows, monthly payroll gains have been trending lower in recent years and are threatening to turn negative in the coming months.
The Federal Reserve was active late in the year, lowering their benchmark rate three times in the second half of 2025. After raising rates to fight inflation in 2022, the Fed has held rates at an elevated level to restrict activity with the goal of dampening inflationary pressures. Under increasing pressure from President Trump to lower rates, the Fed responded by lowering their bench‐ mark lending rate by a total of 0.75% in recent months. The expectation is that current Fed president Jerome Powell will be replaced in May when his term ends and that the Federal Reserve board will lower rates an additional 0.5% to 1.0% in the coming year.
Given the remarkable rise in the market over the past three years, it is unlikely we will see a fourth consecutive year of double‐digit gains in the market. However, overall sentiment is mostly positive as we enter the year, and as of this writing, the market has continued to rally into the new year. The hope is that the breadth of the market will broaden beyond the Mag 7 and A.I. focused companies, and that the economy will continue to advance, despite the headwinds of increased tariffs and a softening labor market.
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