Did the US stock market live up to expectations in 2025?

‍

IS A DOUBLE-DIGIT RETURN FOR THE MARKET STILL GOOD ENOUGH, OR HAVE EXPECTATIONS BECOME UNREALISTIC?

‍Looking back on 2025, the narrative around the US stock market finished somewhat mixed. On the one hand, some analysts noted that it was the worst first year of a Presidential term since 2005, returning 13.3%. However, absent any context, it’s easy for some of the noise to disguise the reality of what was otherwise a robust year.

If we consider calendar year 2025, rather than the goalposts a few weeks to the side of that date, while the market’s returns were down on the preceding two years, the year represented the third consecutive year of double-digit, above-average gains. By most meaningful measures, US equities delivered another year of solid returns, extending an extraordinary bull run that has now outpaced historical averages for multi-year gains. In fact, the S&P 500 finished 2025 sharply in positive territory.

The S&P 500 advanced 16.4%, the Dow Jones increased 13.0%, while the Nasdaq Composite leapt 20.4% on the back of AI enthusiasm. Even after these gains, there are encouraging signs for optimists looking ahead to 2026.

‍

Resilience returns to the fore

‍

Many investors will dwell on the headlines driven by political events and tariff uncertainty from earlier in 2025, but ultimately, the market’s response to those headlines reflects resilience, not weakness. When policy concerns intensified mid-year, stocks oscillated, only to rebound as corporate fundamentals prevailed and sentiment adjusted.

Each of the major US benchmark indices recorded consistent earnings growth throughout the year, underpinned by secular trends such as the integration of artificial intelligence (AI) across industries, and ongoing strength in core economic activity.

Unlike years gone by, the rally was also supported by a broad suite of segments. Yes, tech and growth stocks did lead the charge once again, however, the market’s gains were not exclusively narrow or speculative. Consumer strength, industrial earnings, and sector rotation all contributed meaningfully to the overall performance of the market, which indicates that the rally featured both depth and durability.

‍

Why 2025 was a positive year for investors

‍

All said and done, last year’s market result is a compelling and upbeat outcome. Given the fact that markets are forward-looking, and with indices already deep into a multi-year bull run, the robust returns of 2025 demonstrate underlying confidence in the US economy and growth engines associated with the market’s biggest companies.

Make no mistake, even in the face of headline risks related to politics, policy, inflation, and conflict - among others - investors put their money on the line and yielded handsome returns. Meanwhile, the volatility that characterised certain periods during the year - and arguably capped overall returns for the year - should not necessarily be viewed as a negative in itself.

After all, it is only normal for markets to retrace or correct, before subsequently re-pricing. And that’s effectively what happened, because even in light of said headwinds, the year ended on a high. All up, the S&P 500 reset its record high on 39 occasions across the year.

Add to that, astute investors treated the dips - especially April’s tariff-related pullback - as a buying opportunity that would prove fruitful. From last year’s low, the market advanced more than 50%, which if anything, is just as insightful for a barometer measuring the performance of the benchmark indices in 2025.

Another factor that investors should not overlook is the fact that market fears proved overblown and economic conditions were largely much better than expected. Despite significant protestations, the impact of tariffs on US inflation figures turned out to be relatively negligible.

The Federal Reserve also began to pivot to a more accommodative stance, not only cutting interest rates three times during the year, but signalling an openness to continue doing so, in turn providing further support for risk assets over the coming months. Viewed through these lenses, the market didn’t just hold its own in 2025, it actually fared very well, especially by long-term historical standards.

‍

Will the US economy boom ahead of the midterm elections?

‍

With each of the themes that buoyed returns in 2025 also ‘live’ and likely to be in play through 2026, the case for continued market upside this year is strong. Another tailwind that should not be overlooked is the current administration’s signature ‘One Big Beautiful Bill Act’ that became law in the summer, with its stimulative impact expected to pick up over the coming months.

If anything, it gives some weight to the theory that the government may wish to frontload the economy and let it run ‘hot’ until the midterm elections, scheduled for later this year. That also ties in with the government’s controversial attempts to influence and shape monetary policy, repeatedly calling on the Fed to lower interest rates and even seeking changes to the makeup of the Board that sets rates.

Analysts at the likes of Deutsche Bank are forecasting a near 18% increase for the S&P 500 in 2026, while Morgan Stanley and Wells Fargo see the index rounding out the year at 7,800 - still, nearly 1,000 points higher than at the end of 2025. And that leads us to the performance of the market during midterm years. In the vast majority of cases, an incumbent party has lost seats during a midterm, making it a somewhat ‘foreseen’ event priced into markets early in the piece. Markets have often shown some softness during the middle stages of the ‘average’ midterm election year, but historically, US market returns tend to boom after midterms conclude, likely owing to there being less of a policy ‘vacuum’.

The average return in the S&P 500 one year after midterm elections is nearly double that of all other years, supported regardless of the political composition of Congress. Nevertheless, if recent times lend weight to any teachings, the market appears to have become increasingly conditioned to uncertainty associated with Congress. That could redirect the focus back to the key tailwinds around AI, interest rates, and economic resilience. It also imparts another key lesson for investors about discipline.

While uncertainty or volatility may distract from staying the course and remaining disciplined with a long-term focus, 2025 was another year among a growing list of years where discipline and patience rewarded investors and the market knocked it out of the park.