2025 Year End Review
The stock and bond markets both experienced strong returns in 2025 as the U.S. economy continued its steady growth, dating back to the post-COVID period. Since its peak in 2022, inflation has remained subdued, allowing interest rates to head lower and giving the bond market its best year since 2020. Stocks endured periods of volatility and rose on strong earnings and improved outlooks for the economy.
Investors experienced a lot during 2025. Extreme volatility and a large market drop in the Spring, followed by a furious stock rally; a long government shutdown in the Fall that added uncertainty to the markets; conflicting economic data that led to a divided Federal Reserve; and a dizzying climb in artificial intelligence (AI) stocks that looks a lot like the climb in dot-com stocks in the late 1990s.
Any discussion of the stock market in 2025 has to include AI, and AI is dominated by the so-called Magnificent Seven stocks, which are the seven tech stocks driving the market higher. These stocks are: Meta, Apple, Alphabet, Nvidia, Tesla, Microsoft, and Amazon. For 2025, these stocks made up almost 40% of the return, 45% of the earnings growth, and 75% of the capital expenditures of the S&P 500 Index. There are increased risks for markets when such a small number of stocks dominate the remaining companies. Similar things have happened many times over the years, and the dominance never lasts.
The U.S. economy is, by most measurements, in good shape. It looks like GDP will expand by roughly 2.5% for the year. However, third quarter GDP grew at a much higher than expected rate of 4.3%. Earnings and revenue had strong gains (again, dominated by AI), and consumers continue to spend a lot of money.
Challenges for investors also exist. New job creation dropped considerably as the year went on. This could be due in part to increased usage of AI by businesses, which allows many entry-level jobs to be replaced by AI applications. Whatever the reason, the lack of job creation is a concern. Also, while much lower than it was three years ago, inflation remains above the Fed’s target. This, along with the hot GDP number for the third quarter, likely diminishes the chances of further rate cuts by the Fed. Probably the biggest concern for us is the current valuations of the equity markets, which are approaching the levels of the dot-com bubble. Consumers, despite their spending, are becoming more negative on their outlook for the economy.
Switching gears, Jim Exline retired recently from Wabash Capital. One of the original founders of our company, Jim was instrumental in helping us grow to where we are today. Please join us in wishing him well.
We appreciate the opportunity to assist you with your investments. Please let us know if you would like a copy of our Form ADV when it is updated during the upcoming quarter.
Wabash Capital
