At a glance, stocks are set to end 2025 pretty much where analysts expected they would. But it’s been a bumpy ride getting there.
A year ago, analysts predicted that the market would rise steadily, economists forecast cuts to interest rates and, in the wake of President Donald Trump’s re-election, market watchers broadly expected a business-friendly policy environment that would benefit the economy.
Twelve months on, the S&P 500 has climbed 16.4 per cent, the Federal Reserve has cut interest rates by three-quarters of a percentage point and, while there are emerging signs of weakness and intensifying concerns about the cost of living for the poorest in the country, the economy seems in OK shape.
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But for investors and traders who lived and breathed the market over the past year, this was anything but a smooth and predictable journey.
The S&P 500 limped to a 0.7 per cent drop on the final day of the year, its fourth consecutive day of losses.
In the end, the rally largely came down to one big idea: that artificial intelligence will be a generational force underpinning the stock market, because of the scale of investment needed to build the infrastructure that powers it and the technology’s expected productivity gains.
“If technology felt good, equities were on a tear,” said Cindy Beaulieu, chief investment officer for North America at the investment manager Conning. “If technology didn’t feel so good, well. …”
A rough start
The year started with inflation worries and the revelation that a Chinese company had developed competitive AI technology at far lower cost than American businesses were doing.
Then came Trump’s tariffs. Announced on April 2, an expansive suite of tariffs on dozens of countries sent stock markets plunging, with the S&P 500 sliding more than 12 per cent within a week.
The haphazard imposition of the tariffs and concerns that they would fuel inflation, damage corporate profits and hurt consumers left investors deeply unsettled.
The panicked reaction in the bond market pushed the administration to quickly backpedal.
The tariff delays, interest rate cuts by the Fed and the rally in technology stocks pushed the S&P 500 past previous record highs in every month from May through October.
The rally overlooked the slashing of the federal workforce, threats by Trump to curtail the Fed’s independence, concerns about rising government debt, widespread deportations, and challenges to the judiciary and the balance of governmental power.
Those worries were masked by the unrelenting rise of companies at the forefront of AI, obscuring a more modest year for other corners of the stock market. But the rally also raised concerns that investors had taken their bets too far.
“It feels quite frothy,” said Kristina Hooper, chief market strategist at Man Group. “And I do believe we are heading into a downturn. My base case is a modest recession in 2026.”
AI-powered rally
By one measure, more than 90 per cent of economic growth in the first half of 2025 came from investments in computer equipment and software, which economists chalk up to projects linked to the rush to build data centres and remain in the AI race.
Seven of the top 10 stocks in the S&P 500 in 2025 were lifted by the bet on AI.
SanDisk, the digital storage company spun off from Western Digital in February, led the gains rising more than 500 per cent. Its former parent company was second, up almost 300 per cent.
The top 10 also included large government contractor Palantir Technologies; Lam Research, which produces equipment used by semiconductor makers; and Comfort Systems, which provides the mechanical, electrical, plumbing and ventilation installation for data centers.
Three other highfliers in 2025 followed other trends: Newmont, a gold miner, reflecting the sharp rally in the precious metal; trading platform Robinhood, tracking the rise of stock trading; and Warner Bros. Discovery, the subject of a takeover battle between Netflix and Paramount.
The ‘magnificent seven’ lift the market
But those companies, despite their meteoric rise, didn’t have the biggest impact on the index. That honour went to Nvidia, Microsoft and Alphabet, part of a group of technology companies, known as the Magnificent Seven, that has driven the market higher in recent years.
The seven — Microsoft, Nvidia, Alphabet, Amazon, Meta, Tesla and Apple — each with its own AI ambitions, together rose 25 per cent for the year. Nvidia, whose semiconductors have underpinned the AI boom, rose nearly 40 per cent.
Because of their sheer size, the Mag 7’s performance can dictate the direction of the S&P 500: Consider that SanDisk’s 500 per cent gain increased its market valuation to roughly $35 billion from around $6 billion.
Nvidia, with a much smaller percentage gain, increased its market valuation by more than $1 trillion to around $4.5 trillion.
Nvidia alone was responsible for 15 per cent of the S&P 500’s total return in 2025, according to data from Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices.
What is the rally hiding?
Over the past three years, the Mag 7 has been responsible for more than half of the rise in the S&P 500. Without them, the stunning 88 per cent gain over that period would fall to 40 per cent, according to Silverblatt.
That has helped mask weaker showings in other areas of the market, and raised concerns that investment portfolios are again dependent on the performance of just a few companies — and highly tied to sentiment on the promise of AI.
In recent months, a tumble in some of the more speculative AI companies has also knocked down some of the market’s leaders. Nvidia, for example, has fallen almost 10 per cent since the end of October, and as it has, the market’s rally has stalled.
Bullish investors see an opportunity as underperforming parts of the market pick up while the AI rally slows down.
In the past month, for example, the best performing sectors in the S&P 500 have been the economically sensitive financial and industrial companies, which have underperformed the broader index over the full year.
But analysts see risks, too. These kinds of cyclical companies are much more dependent on the ebb and flow of the broader economy, which sits at a precarious junction.
Add to that the Supreme Court’s coming ruling on the legality of the administration’s tariffs, the potential for another government shutdown, the appointment of a new Fed chair, a weakening labour market and the potential for the AI trade to fade, and there are “some real vulnerabilities” heading into 2026, said Hooper at Man Group.
The expectation among analysts broadly remains positive. But not for Hooper. “There is a lot that can go wrong,” she said.
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