Markets ended the week lower as an awaited Santa Claus rally failed to materialize. Historically, the five trading days following Christmas and the first two trading days of January have produced a positive return of ~1.3%. Nonetheless, investors were treated to a strong year of returns in 2025. In the US, the S&P 500 returned 16.4%, marking its third consecutive year of double-digit returns. The Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) once again led the way, up a collective 22%. However, within the vaunted group, there was notable return dispersion as Alphabet surged 65%, while Amazon gained just 5%. The dispersion suggests investors are becoming more discerning regarding companies’ progress and promise with artificial intelligence (AI). In 2025, investors became more sensitive to Mag 7 valuations, leading to periodic bouts of volatility. Investors also became more attuned to the potential return on investment (ROI), or lack thereof, on the hundreds of billions of dollars spent by Mag 7 companies on AI infrastructure. In 2026, investors will likely become even more discerning, which could benefit those companies that can show a clear link between their AI investments and revenues.
International market returns were particularly strong in 2025 with developed markets (MSCI EAFE index) up 27.9%, their best year since 2003 and emerging markets (MSCI EM index) up 30.6%, their best year since 2017. International markets benefitted from multiple factors including attractive valuations, USD dollar weakness, fiscal stimulus and other policy initiatives in a number of countries including Germany, Japan, and China.
Bond markets also enjoyed a strong year, with the Bloomberg US Aggregate Bond index, the broadest measure of the US bond market, gaining 7.3%, its best year since 2020. Within bonds, corporate high yield bonds were the best performing sector up over 8% reflecting their greater correlation to equity markets. Municipal bonds gained 5%, a notable achievement given record issuance estimated at ~$575B.
