The final quarter of 2025 capped off an eventful year for investors. Markets navigated a host of crosscurrents in Q4, from freshly imposed tariffs and evolving inflation pressures to the Federal Reserve’s continuation of interest rate cuts. Meanwhile, artificial intelligence (AI) remained a dominant narrative on Wall Street, driving big gains (and big debates) as a few tech giants continued to account for an outsized share of market returns. In this year-end newsletter, I’ll recap the key themes that shaped both the fourth quarter and 2025 as a whole: tariffs and trade policy, the path of inflation, the Fed’s monetary policy pivot, the influence of AI, the concentration of S&P 500 returns, and a review of the market’s performance with a look ahead to 2026.
Tariffs Take Center Stage in 2025
One of the year’s most striking developments was the return of trade tariffs as a major economic force. Early in 2025, the U.S. implemented broad import tariffs, the largest hike in U.S. tariffs since the 1930s, under President Trump’s renewed trade agenda. These included new 25% duties on steel and aluminum imports and expanded levies on goods from China, among others. The policy shift marked a sharp turn toward protectionism and prompted retaliation from key trading partners (with China and others responding in kind).
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From an economic standpoint, the tariffs’ impact was twofold. On the one hand, they were intended to bolster domestic industries. On the other, they added friction to supply chains and costs to imported materials. Many economists warned that the tariffs would push prices higher. In fact, 8 out of 10 corporate economists surveyed in early 2025 expected tariffs to stoke inflation in the coming quarters.
Politically, the trade tension became a defining theme of 2025. Businesses and investors had to digest a constant stream of trade policy news, new tariff announcements, negotiation updates, and implementation delays. Notably, a scheduled tariff hike on certain consumer goods was postponed late in the year, a sign that policymakers grew mindful of not overburdening holiday shoppers.
There were mixed signs with the holiday shopping rhetoric and the result that ultimately unfolded. Holiday shoppers expressed pessimism and 41% of respondents to a CNBC All-America Economic Survey (46% of which specified inflation as the reason) indicated that they were going to spend less over the holiday period. However, Americans seem to be on pace to break $1 Trillion of holiday spending, for the first time, in 2025, according to the National Retail Federation indicating that 2025 was a record year for holiday spending.
Inflation: Cooling Off, But Not Enough
Inflation was on everyone’s mind in 2025, as the post-pandemic price surge finally turned a corner, albeit not in a straight line. The year started with genuine optimism that the Federal Reserve’s inflation battle was being won. By the spring, price increases had slowed significantly; in fact, the U.S. inflation rate briefly approached the Fed’s 2% goal.
However, that victory proved premature. Through mid-year and into Q4, inflation climbed back up modestly, settling just shy of 3% and above the Fed’s target, but still much lower than the peaks of 2022. Several factors caused this stubborn inflation. First and foremost, the new tariffs nudged many prices higher, as discussed above.
Energy prices were another swing factor. Oil prices fluctuated during the year, rising on OPEC supply cuts, which put upward pressure on gasoline and transportation. Though those effects eased later, the episode reminded us that the Fed can’t control oil with interest rates costs (oil rollercoaster - $80 to $57 to $75 to $57).
2025 WTI Crude Price - Source: CNBC
Inflation trended in the right direction overall this year, it moderated significantly from the multi-decade highs of the recent past, but it wasn’t quite the clear-cut victory consumers and the Fed had hoped for. High interest rates and improving supply chains helped bring inflation down, yet trade frictions and other hiccups kept it a bit stickier than desired. This challenging inflation picture set the stage for how the Federal Reserve responded in 2025.
The Fed’s 2025 Journey: From Patience to Rate Cuts
At the start of 2025, the Federal Reserve was in a tricky spot. Inflation was above target but falling, and the economy was slowing, yet a new round of fiscal and trade-policy uncertainty loomed. The Fed opted to hold interest rates steady in the early part of the year, effectively pausing after the aggressive rate hikes of 2022–2024 and the cycle’s first three cuts at the end of 2024. Fed Chair Jerome Powell and his colleagues struck a cautious tone, citing persistent inflation and tariff uncertainty as reasons to wait and see. This patience did not last indefinitely and as the data evolved, so did the Fed’s stance.
By mid-2025, cracks in the economy began to show: the labor market softened a bit (job growth cooled and the unemployment rate edged up), and inflation, while still above target, was no longer accelerating. In response, the Fed made a pivot and cut rates. In total, the Fed delivered three consecutive interest rate cuts in the second half of 2025. These moves were cautious 0.25% (25 basis point) reductions, each aimed at nudging monetary policy from restrictive toward neutral territory. By the Fed’s December meeting, the benchmark federal funds rate range was down to 3.50–3.75%, a drop from the 4.375% level at the start of the year, and notable cut from the cycle peak at 5.375% (2024). This marked the first easing cycle since the pandemic and a significant shift in the monetary policy narrative.
It’s worth noting that the Fed was not unanimous in its decisions. At the December meeting, for instance, 3 out of 12 Fed officials dissented, one wanted a bigger cut and two preferred no cut at all. This rare split vote underscores the crosscurrents the Fed faced: some feared doing too little to boost the economy, others feared doing too much and reigniting inflation. Nonetheless, Chair Powell forged a consensus around a gradual easing path. The message was that the Fed is data-dependent and feeling its way carefully. As he put it, policy is now “near the high end of a neutral range,” meaning it’s neither stimulating nor severely restricting the economy, and there is room to cut further if needed.
Looking into 2026 and beyond, investors expect the Fed to continue cutting rates at a measured pace, especially if inflation continues to moderate. The main takeaway is that 2025 marked a turning point: after years of fighting inflation with rate hikes, the Fed has transitioned to nurturing the expansion with rate cuts, a delicate balancing act.
The AI Boom: Hype, Hope, and Market Implications
If one theme could compete with inflation and the Fed for headlines this year, it was the Artificial Intelligence (AI) boom. In 2025, AI graduated from tech-industry buzzword to a persistent topic woven into nearly every market-related conversation. Advances in generative AI and machine learning drove a surge in business investment, market speculation, and yes, a bit of hype. The chart below highlights how quickly emerging technologies were embraced by households throughout history. The first chart below highlights the staggering speed at which AI is being adopted, while the second illustrates just how much capital spending is directed towards AI.
One illustration of the AI mania comes from Q3 2025 earnings calls where an unprecedented number of S&P 500 companies mentioned AI. In fact, AI was cited on a record 306 S&P 500 Q3 earnings calls, far above historical norms. From industrial firms to banks, it seemed every CEO was eager to tell investors how AI would improve their business, automate processes, or drive innovation. This highlights how pervasive the theme has become.
Naturally, with great enthusiasm comes a dose of skepticism. As the year went on, some experts began warning that the market was getting ahead of itself. There was talk of an “AI bubble,” with valuations in certain tech names reaching extremes reminiscent of the late-1990s dot-com era. By mid-year, even as the AI boom swelled, the chief economist at Apollo Global noted the “AI bubble [had grown] larger than the IT bubble” of the late 1990s, in terms of market fervor. Bloomberg compared the current run in AI versus historical bubbles. Conclusions are easy to draw with the advantage of hindsight, but one theme stands out, “…the last stretch of the rally is typically the steepest, and missing out would be costly”, said Bank of America strategist, Michael Hartnett. At present, the AI rally has run longer in length (3 vs 2.55 years avg), but its gains are smaller (131% vs 244% avg), when compared to the bubble averages.
S&P 500: A Market Powered (and Concentrated) by a Few
If you glanced at the S&P 500 in 2025, you might think it had a smooth, strong year. But under the surface, one enduring theme has been market concentration, the outsized influence of a handful of superstar companies on the index’s returns. This isn’t new, but 2025 took it to even greater heights before a slight late year leveling. Nvidia overtook Apple’s years of dominance as the largest company in the S&P 500. One thing is certain; leadership will evolve and rotate over time.
All year, analysts pointed out that the S&P 500 had become “extremely concentrated,” to quote Apollo’s chief economist. Just 10 mega-cap stocks now make up about 40% of the index’s total market capitalization, an eye-opening statistic. To put it another way, of the 500 companies that make up the S&P 500, the 10 largest stock represent 40% of the entire size of the S&P 500 (490 companies make up the other 60%). This means the market’s fortunes have become heavily reliant on the success (or failure) of a few tech-oriented names, and by extension, on investor optimism about AI and technology in general. For index fund investors, this concentration delivered great results while those giants were rising. However, it also represents a narrowing of market leadership that can be a double-edged sword. When so much of the market’s return is driven by so few companies, it raises questions about the durability of the rally if those leaders stumble, as was evidenced in the April correction. If one were to apply the same over-concentration of these names to their own portfolio, they would have been dismayed with their results at the April lows (-25.26% Mag 7 vs -9.72% S&P 500). This variance is why a diversified portfolio is important and to be mindful of concentrated positions.
April was also a reminder that not all pullbacks manifest themselves into bear markets, in fact the majority do not.
2025 Market Performance and 2026 Outlook
Despite all the twists and turns, 2025 turned out to be another positive year for equity investors. In fact, it became the third straight year of gains for the S&P 500. After back-to-back ~20%+ rallies in 2023 and 2024, the market delivered a solid advance in 2025 as well – not quite as dramatic, but still healthy. By the end of December, the S&P 500 was sitting on roughly a low-to-mid teens percentage gain for the year (including dividends). The second table below illustrates just how bifurcated the market is when looking at the divergence in sector returns for 2025.
Turning to the 14 Wall Street strategists that CNBC tracks each year, I find it interesting to track their yearly outlook for the S&P 500. For 2025, the most bullish forecast was from Oppenheimer with a year-end 2025 price target for the S&P 500 of 7,100. While the most bearish forecast was from UBS at 5,500. The S&P 500 closed at 6,845 on December 31, 2025, which means Oppenheimer overshot be a mere 3.7%, while UBS notably was off by nearly 20%. For 2026, Oppenheimer once again has the most bullish S&P 500 year-end target of 8,100, or an 18% return for 2026. While Bank of America has the most conservative forecast of 7,100, indicating an uneventful gain in 2026 of 3.7%. Notably, all strategists in 2026 feel the market will be higher by December 31st.
Key themes to keep an eye on in 2026:
- Continuation of Fed rate cuts which should be stimulative to growth and the market
- Tax cuts from One Big Beautiful Bill (OBBB) should result in higher refunds and lower tax liability for consumers
- Potential for stimulus checks related to US tariff income
- Productivity gains / capital expenditures from AI
- Mid-term elections and end of stimulus if Republicans lose their Congressional majority
- New Federal Reserve Chair in the spring
- Geo-political tensions (Venezuela, Iran, China/Taiwan, and Russia/Ukraine)
- End of stimulus if Fed stops cutting and we move past the April OBBB tax stimulus
In closing, it’s been a pivotal year, and we’ve covered a lot of ground: tariffs, inflation, interest rates, AI hype, market concentration, and more. The common thread is that change is constant, as is evidenced in my 2026 list above. If there’s one thing the last few years have shown, it’s that staying adaptable and focused on the long horizon works. Back-to-back market surprises underscored the importance of not overreacting to short-term noise but rather sticking to a thoughtful strategy.
If you have any questions or would like to discuss your personal circumstances, please do not hesitate to reach out to me. Thank you for your continued confidence.
https://calendly.com/planwithrob/15min
Rob Leiphart, CFP®
203-220-6474
rleiphart@rbcapitalmanagement.com