The Big Picture

Briefing.com Summary:

*Tariff fears drove extreme volatility in early 2025, but negotiations restored confidence and fueled a powerful, broad-based bull market rally.

*Mega-cap stocks and AI leadership paced the gains, but strong earnings, resilient consumer spending, and Fed rate cuts supported market momentum.

*Once the market got past its main tariff concerns, a fear of missing out on further gains and momentum trading took over.

2025 is a year investors won't soon forget. It was a year the stock market had to play politics, so to speak, but more to the point, it was a year chock-full of gains and record highs for the major indices. At its conclusion, the market cap-weighted S&P 500 was up 16.4% in price and had recorded its third straight year with a double-digit percentage gain.

The themes that drove the stock market in 2024 carried over into 2025, namely the AI trade, mega-cap leadership, an expectation of lower interest rates, strong earnings growth, and a U.S. economy that continued to operate on a growth trajectory.

What was new in 2025 was President Trump occupying the Oval Office for his second stint as president and a rapid-fire policy push to impose tariffs, negotiate new trade deals, cut government costs, crack down on illegal immigration, force deregulation, drive AI and cryptocurrency adoption, stifle Iran's nuclear ambitions, lower drug prices, pass a tax stimulus package, and end the wars between Israel and Hamas and Ukraine and Russia.

If there was a singular happening that commanded the stock market's performance in 2025, though, we'd have to say it was the tariffs. They were at the center of everything, both the bad and the good.

First the Bad, Then the Good

The tariff noise started in early February when the U.S. imposed a 25% tariff on imported goods from Canada and Mexico (only 10% for Canadian energy) and a 10% tariff on imported goods from China. President Trump subsequently added that tariffs for the EU would also likely be seen fairly soon.

From there, it was "game on," as the affected countries and blocs, many of which were U.S. allies, soon announced retaliatory tariffs or threats of retaliatory tariffs that triggered major growth concerns and worries about a pickup in inflation. Things hit a fevered pitch on April 2 in what was dubbed by the president to be "Liberation Day."

That is when a 10% baseline tariff on imports was established for all countries that didn't face other sanctions and was supplemented by additional, country-specific reciprocal tariffs that, in China's case, accrued to more than 100%. Between April 2 and the low on April 7, the S&P 500 plunged 14.7%, and then... well, the rest is bull market history.

Following the news on April 9 that the administration would pause the reciprocal tariffs for 90 days for most countries, excluding China most notably, and be open to tariff negotiations, the S&P 500 soared 9.5% on April 9, marking the third-largest single-day gain since World War II, and the Nasdaq Composite surged 12.2% for its second-best day ever.

The willingness to negotiate was the true turning point for the stock market, along with the U.S. and China coming to a tariff détente of sorts. The low on April 7 (4,835.04) was the low for the stock market this year, and it isn't an exaggeration to say it was nearly straight up from there and where this year's market found its true bull market identity.

From their April lows to their closing levels on December 31, the Nasdaq, Russell 2000, S&P 500, S&P 400, and Dow Jones Industrial Average skyrocketed 57%, 43%, 42%, 32%, and 31%, respectively.

Coming to an Understanding

To understand the push and pull of the tariff announcements, it is important to understand how the view of the tariff developments impacted the stock market's bull market psyche.

• With the tariffs, the U.S. expects to generate about $300 billion per year in customs duties that will, reportedly, offset the cost of extending the 2017 tax cuts and other fiscal concessions agreed to as part of the One Big Beautiful Bill Act.
• When the president quickly communicated a willingness to negotiate tariffs after the Liberation Day stock market rout, participants once again embraced the notion of there being a "Trump put" in the market.
• Incoming economic data in the ensuing months revealed that the economy was holding up much better than feared following the tariff announcements.
• Inflation proved to be sticky, yet that stickiness was concentrated mostly on the goods side of the economy, paving the way for a view that it should be short-lived.
• Although many companies raised prices, many also worked to absorb the cost of the tariffs to ensure end demand did not decline in a marked manner. Stronger-than-expected earnings results calmed investors' concerns about a consumer spending slowdown and tariffs causing a major hit to profit margins.
• The Federal Reserve refrained at first from cutting its policy rate but eventually cut the target range for the fed funds rate three times (75 basis points), starting in September, on a belief that a slowdown in the labor market, versus a pickup in inflation, was the bigger risk in terms of satisfying its dual mandate.
• Consumers have been confronted with affordability issues, particularly lower- to middle-income consumers, but robust spending activity by upper-income consumers fortified by bull market returns and rising home prices has been the great offset that has fueled the U.S. economy's continued growth. To that end, real GDP in the third quarter increased at an annual rate of 4.3%, which was the best in two years and well above the prior 10-quarter average of 2.6%.

Game On

When the stock market saw its worst tariff fears assuaged, it was again "game on," only this time it was more fun and games than fear and loathing.

Investors plowed back into the mega-cap stocks, which paced the recovery off the April lows along with the so-called AI trade that was led by the semiconductor stocks. Their outperformance was part of a feast on high-beta stocks that got jubilant when the market sensed the Fed would be cutting rates again.

That, in turn, resuscitated interest in the so-called meme stocks, which are high on growth prospects but lack profitability. That includes areas like quantum computing, space, and air taxi transportation.

Their runs were a byproduct of animal spirits kicking in that fueled waves of momentum investing and an indefatigable buy-the-dip mantra. The thing is, there was never any real dip of note to buy once the recovery got going in April. There were 2-5% pullbacks here and there at the broad market level, but nothing that would qualify as an actual correction (i.e., a decline of 10-20% from a high).

The lack of a correction became its own buying catalyst, triggering a fear of missing out on further gains and short-covering activity that pushed the indices higher. That also triggered calls of an AI bubble, along with some circular financing arrangements, that served to cool off some of the worshiping of AI leaders as the fourth quarter unfolded.

The remarkable aspect of that is that it did not sink the broader market. Instead there was some rebalancing activity, catalyzed by a positive growth outlook for 2026, that kept the bull market intact. The health care sector, in fact, was the market's best-performing sector in the fourth quarter.

Another Tough Act to Follow

While the mega-cap stocks and growth stocks spearheaded this year's winning campaign, there was ample participation in the bull market action. The Dow Jones Industrial Average rose 13.1%, the Russell 3000 Value Index jumped 13.4%, the Russell 2000 added 11.3%, and the equal-weighted S&P 500 increased 9.3%. The S&P MidCap 400 Index trailed with a more modest gain of 5.9%.

There wasn't any definitive K-shaped action in the stock market like there was in the economy. For the stock market, returns across the market-cap spectrum by year's end were up and to the right. There were no negative returns.

The stock market isn't the economy, but it is undeniable that it played a major part in supporting the economy through the wealth effect that powered spending by upper-income holders of stocks and homes. That wealth effect is integral to the economy's performance in 2026. Take that away, and earnings growth prospects will diminish along with stock prices.

That isn't the consensus view as 2025 closes out. The consensus view is that the economy will be supported in 2026 by the tailwinds of tax refunds, productivity gains driven by AI, and additional rate cuts by the Federal Reserve. Therefore, the consensus view is that it will be another good year for the stock market in 2026. S&P 500 price targets proffered by Wall Street strategists generally fall in the range of a 10-15% gain for the S&P 500, which effectively follows the earnings estimate trend.

It will be tough to follow a year like 2025, especially if the earnings growth doesn't materialize as envisioned. That is key given the full, if not rich, valuations for the market entering 2026. To be fair, the same criticism applied going into 2025, and it ended up being another great year underpinned by falling interest rates and rising earnings estimates.

The stock market will have its share of issues to contend with in 2026, starting perhaps with the Supreme Court's ruling on President Trump's tariff authority, but that will be a matter for a different day. On this day—the last day of 2025—the matter at hand is the year that was, and what a year it was for traders and investors who continued to ride the bull market.

Happy New Year!

--Patrick J. O'Hare, Briefing.com