- U.S. stocks finished 2025 strongly after tariff-driven spring turmoil, with the S&P 500 up ~17%, Nasdaq ~21%, and Russell 2000 ~12%.
- Returns were powered by Big Tech and AI, but heavy concentration in a handful of mega-caps is fueling overvaluation worries and some rotation into other sectors.
- Markets face policy and Fed uncertainty ahead of a May 2026 chair transition and scrutiny of Jerome Powell, even as growth stayed solid and unemployment rose to 4.6%.
- Vanguard expects slower U.S. equity gains (~3.5%–5.5% annually for a decade), favoring value stocks, non-U.S. markets, and high-quality bonds versus pricey growth/tech.
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The U.S. equity market ended 2025 on an upbeat note after a turbulent year. Following steep losses in the spring when sweeping tariffs by President Trump pushed markets toward bear territory, indices rebounded as tariffs were curtailed, earnings remained resilient, and AI continued to draw investor enthusiasm. The S&P 500, Nasdaq Composite, and Russell 2000 all posted solid gains—~17%, ~21%, and ~12% respectively—marking a consecutive three-year streak of double-digit returns for the broader S&P 500.
Big Tech and AI have been driving returns, with the top five companies—Nvidia, Apple, Microsoft, Amazon, Alphabet—making up nearly 30% of the S&P 500. This concentration has raised red flags over potential overvaluation and risks should the tech rally falter, prompting a broader earnings broadening across sectors as a possible counterbalance.
Policy risk looms large. The U.S. economy grew at 4.3% annualized in the third quarter of 2025—its strongest stretch in two years—yet unemployment rose to 4.6% by November, and trade policy remains a flashpoint. A major uncertainty is the Fed. Jerome Powell’s term as Chair runs through May 2026, and Trump is expected to select a successor who is committed to easing borrowing costs. Meanwhile, a DOJ investigation into Powell’s testimony about a $2.5 billion Fed headquarters renovation has ignited bipartisan concern about threats to the Fed’s independence.
On the outlook, long-term return forecasts are muted. Vanguard’s VCMM model predicts U.S. equities will average ~3.5%–5.5% annually over the next decade, a sharp moderation from recent returns. The model suggests better risk-reward among value equities, non-U.S. developed markets, and high-quality bonds, particularly given the higher interest-rate environment and stretched valuations in growth/leverage/AI—tech stocks in particular are seen as most vulnerable unless earnings surprises can support current valuations.
Strategic implications: Portfolios may need to rebalance away from concentration in large-cap tech and toward value, international exposure, and high-quality fixed income. Monitoring the evolving Fed leadership and policy signals will be critical, as will managing exposure to geopolitical risks and trade policy shifts that continue to unsettle global supply chains and inflation expectations.
Open questions include how aggressive the next administration will be in selecting Fed leadership aligned with rate cuts, whether AI hype will yield sustainable earnings across sectors, how inflation responds to supply constraints and labor market weakness, and how global macro risks—from trade tensions to geopolitical uncertainty—might spill back into U.S. markets.
Supporting Notes
- S&P 500 is on track to end 2025 up about 17%; Nasdaq Composite poised for ~21%; Russell 2000 ~12% gains.
- In spring 2025, S&P nearly entered bear market territory after sweeping tariffs were announced, with Nasdaq and Russell both briefly entering bear markets.
- The top five firms—Nvidia, Apple, Microsoft, Amazon, Alphabet—comprise nearly 30% of the S&P 500; growing concern they may be over-valued.
- U.S. economy expanded at 4.3% annualized rate in the three months to September 2025 (Q3), up from 3.8% in the prior quarter; unemployment rose to 4.6% in November from 4.4% in September.
- Jerome Powell’s term ends in May 2026; Trump expected to pick a new Fed Chair perceived as committed to loosening monetary policy.; DOJ investigating Powell over the Fed headquarters renovation, concerning statements to Congress and cost overruns.
- Vanguard’s Capital Markets Model forecasts U.S. annualized equity returns of ~3.5%–5.5% over the next 10 years; bonds, international equity, and value stocks among preferred opportunities versus growth/tech.