2025 Market Performance: A Brief Review
The U.S. markets overcame April’s “Liberation Day” pullback and Information Technology’s November woes as the S&P 500 returned 17.9%, 35% of which was attributable to the Mag Seven. Large cap value outperformed growth in the fourth quarter, but growth was the leader for the year.
I have read that a positive January has led to an average S&P 500 return of 12% for the year, but a negative January leads to an average 2% return. Interesting folklore perhaps? This comes to mind as January was off to a good start in the first 10 days then all major indexes were down for the week ended January 16th in response to tariff issues. Up or down, we’ll have to wait 11 months to see if history repeats itself!
International stocks outpaced U.S. stocks, 31.22% vs. 17.9%. A large portion of that differential was attributable to a weaker U.S. dollar, which fell 9.4% relative to a basket of major foreign currencies. Emerging markets did especially well. More on the dollar below. The economic outlook for Europe is weak despite fiscal and monetary stimulus efforts in Germany and England. Reportedly, energy supply and costs resulting from clean energy policies are an impediment to growth.
The normalization of the bond market certainly helped portfolios last year. The Bloomberg U.S. Aggregate Bond Index returned 7.30%.
The Bull Market
Several forces have powered the bull market through its third year:
- Strong corporate earnings
- Fiscal stimulus (continued government spending)
- Monetary expansion (The government has printed more money in the last 6 years than in the last 106 years combined.1)
- Consumer credit growth
- Investor optimism (amplified by enthusiasm surrounding artificial intelligence)
- Record levels of margin borrowing
What about valuations? While not all stocks are overvalued, the large cap indexes are trading at historical earnings multiples, largely due to the Mag Seven. Some observers believe those earnings and multiples are unsustainable. (It’s worth noting that small cap and mid cap stocks are trading at more normal valuations.) Corporate earnings drive stock prices, but other forces are also in play as detailed above.
Brian Wesbury, Chief Economist at First Trust, provides helpful perspective:
“Since the bottom of the economy during COVID in 2020, corporate profits are up 96.2%, S&P 500 reported earnings are up 140% (they won at the expense of small business closed during COVID), while GDP is up just 55.8%. But the total return for the S&P 500 is up 189.5%! The stock market has outperformed earnings and economic growth and is trading at valuation metrics at the high end of the historical level. Profits are also at a record level of GDP.”2
Positive Investor sentiment has certainly sustained stock prices. As markets moved up, investors with money on the sidelines moved into equities for fear of losing out. That drove markets even higher creating a positive feedback loop bringing even more money into equities that pushed prices even higher. Margin borrowing further amplified gains, and this leverage remains one of the more concerning risks. Sharp drawdowns can force leveraged investors to exit, accelerating market declines.
Earnings Still Matter
Investors betting on strong future earnings, have won. Some Tech earnings are off the charts. Margin growth has fueled earnings growth, which has pushed multiples higher, but multiple expansion is not the whole story. Here’s what drove some of the Mag Seven’s returns for 2025. The returns of Apple, Meta, Microsoft, and Nvidia were all attributable to earnings growth. All four saw a shrinkage in their earnings multiples. (Source: Fact Set). That shrinking reflects a moderation of investor return expectations. By contrast, 36% of Google’s return was attributable to multiple expansion and only 29% was due to earnings growth. The reason was its Gemini release, arguably making it the leader in the chatbot arena. One hundred percent of Tesla’s return was from multiple expansion as investors bet on its robotic business. Earnings growth was negative.
So, earnings still matter. It’s not all about multiple expansion and recent cutbacks in tech prices are arguably a healthy adjustment. Both suggesting that we are not in a bubble. Yes, margin improvements may be difficult to maintain due to rising costs, but, if anticipated AI-driven productivity gains materialize, they may offset margin slippage. Big Tech earnings may falter. There are risks. Not all hyperscalers will win. There will be fallouts. Big Tech belongs in portfolios but should not be the portfolio for most investors.
What about valuations and the S&P as a whole? A chart plotting S&P Forward PE Ratios (multiples) against Forward Net Margins (profitability) across four-year intervals since 2005, shows that multiples grow as net margins grow. The 2026 22.03 forward PE multiple for the S&P 500 measured against the forward Net Margin Increase is just above the 12-year trend line, an indication that the S&P 500’s PE multiple valuation is reasonably supported by profitability. (Source: FactSet) Encouragingly, leadership has broadened. Value stocks have rebounded, and multiple expansion has helped other profitable companies gain traction.
The Dollar: A Shifting Landscape
Although the U.S. dollar has strengthened recently, its 9.4% decline in 2025 raised legitimate concerns. That decline, the threat of ever shifting U.S. tariff adjustments, increasing concern about the U.S.’s ability to support the interest on its national debt, fear that it might choose to inflate its way out of the debt burden as it did in the 1940’s and 1970’s, all drove central banks to move some reserves out of the dollar and into gold. Retail investors jumped on the bandwagon and the price of gold went up by a ridiculously high 64%! This caused 3EDGE Asset Management to opine that, “It (meaning gold) became another speculative asset class”. Silver was another “safe haven” asset with price growth even greater than gold.3
Gold now represents a larger share of global central bank reserves than U.S. Treasuries. China, a major buyer of U.S. bonds, has almost doubled its gold reserves in 2025 relative to its average from 2000 to 2025. Emerging market country central banks have moved most heavily into gold and away from debt heavy currencies, like the dollar.
Long the dominant currency for international trade due its stability, the dollar is under threat. De-dollarization has been going on for some time. China has coerced some of its Latin American and African trading partners to use the Yuan vs. the dollar. Bitcoin is enjoying greater use due to the ease and speed of its transfers.
For the U.S. Treasury, waning demand for dollar assets could increase borrowing costs. As existing bonds mature, the questions becomes: who will buy the replacements? If the Federal Reserve becomes the buyer of last resort, inflation risks would rise accordingly.
Economic Outlook: Near Term
Economic data has been shaky due to December’s government shut down but recent numbers are generally encouraging, though mixed. The Fed’s GDPNow estimate for Q4 is 5.1%. But that number includes net exports, inventory, and government spending, which are not measures of economic productivity. Eliminate those items and Core GDP comes in at 2.7%, a reasonably strong number given the government shutdown.
Other signals about the health of the economy are mixed. Job growth is weak, as evidenced by the non-farm payroll number, but unemployment ticked down to 4.4%. Core inflation is steady at 2.6% year over year, but above the Fed’s 2% target. The Producer Price Index rose .03% to 3%, presumably a reflection of tariff-driven supply cost increases. Corporate CapEx spending is up, and tax refunds are due soon which could spur consumer spending—a core factor for economic growth. Other fiscal stimulation from the OBBBA may provide further support.
While some expect two quarter-point rate cuts this year, inflation data and relatively low unemployment make that outcome uncertain. Unemployment is far from triggering inflation concerns. Credit spreads are tight, a good indicator that a recession is not likely. Widening spreads are a warning signal. The stock market is also a good leading indicator. So far so good there.
In short, we think the near-term economic outlook is generally positive, which could bode well for stock prices. Earnings season has begun. Early reports have been mostly favorable. If that continues, investor confidence should improve and we may see stable, if not growing, markets. FactSet put out a piece a few weeks ago showing that analysts’ earnings forecasts tend to be fairly accurate. For 2026 analysts are predicting S&P 500 EPS growth at 14.9%, the information tech sector leading with an EPS growth estimate of 28.5%4.
Long Term Outlook
Markets, like the economy, are cyclical. Bull markets do end and reversions to the mean do happen. Expectations are for muted returns. Most major investment firms and Callan Associates, whose capital market assumptions have driven our asset allocation modeling since 1985, foresee 10-year S&P 500 returns in the 6.7% range (JP Morgan5) to 7.5% range. Callan’s estimate is 7.25%.6 Returns expectations for the Bloomberg Aggregate bond index range between 4 and 4.5%. The bears will have their day, too. When? No one knows.
Author:
Charles Baldwin, MBA
, Co-founder and President
Markets, Valuations, and the Dollar
2025 Market Performance: A Brief Review
The U.S. markets overcame April’s “Liberation Day” pullback and Information Technology’s November woes as the S&P 500 returned 17.9%, 35% of which was attributable to the Mag Seven. Large cap value outperformed growth in the fourth quarter, but growth was the leader for the year.
I have read that a positive January has led to an average S&P 500 return of 12% for the year, but a negative January leads to an average 2% return. Interesting folklore perhaps? This comes to mind as January was off to a good start in the first 10 days then all major indexes were down for the week ended January 16th in response to tariff issues. Up or down, we’ll have to wait 11 months to see if history repeats itself!
International stocks outpaced U.S. stocks, 31.22% vs. 17.9%. A large portion of that differential was attributable to a weaker U.S. dollar, which fell 9.4% relative to a basket of major foreign currencies. Emerging markets did especially well. More on the dollar below. The economic outlook for Europe is weak despite fiscal and monetary stimulus efforts in Germany and England. Reportedly, energy supply and costs resulting from clean energy policies are an impediment to growth.
The normalization of the bond market certainly helped portfolios last year. The Bloomberg U.S. Aggregate Bond Index returned 7.30%.
The Bull Market
Several forces have powered the bull market through its third year:
What about valuations? While not all stocks are overvalued, the large cap indexes are trading at historical earnings multiples, largely due to the Mag Seven. Some observers believe those earnings and multiples are unsustainable. (It’s worth noting that small cap and mid cap stocks are trading at more normal valuations.) Corporate earnings drive stock prices, but other forces are also in play as detailed above.
Brian Wesbury, Chief Economist at First Trust, provides helpful perspective:
“Since the bottom of the economy during COVID in 2020, corporate profits are up 96.2%, S&P 500 reported earnings are up 140% (they won at the expense of small business closed during COVID), while GDP is up just 55.8%. But the total return for the S&P 500 is up 189.5%! The stock market has outperformed earnings and economic growth and is trading at valuation metrics at the high end of the historical level. Profits are also at a record level of GDP.”2
Positive Investor sentiment has certainly sustained stock prices. As markets moved up, investors with money on the sidelines moved into equities for fear of losing out. That drove markets even higher creating a positive feedback loop bringing even more money into equities that pushed prices even higher. Margin borrowing further amplified gains, and this leverage remains one of the more concerning risks. Sharp drawdowns can force leveraged investors to exit, accelerating market declines.
Earnings Still Matter
Investors betting on strong future earnings, have won. Some Tech earnings are off the charts. Margin growth has fueled earnings growth, which has pushed multiples higher, but multiple expansion is not the whole story. Here’s what drove some of the Mag Seven’s returns for 2025. The returns of Apple, Meta, Microsoft, and Nvidia were all attributable to earnings growth. All four saw a shrinkage in their earnings multiples. (Source: Fact Set). That shrinking reflects a moderation of investor return expectations. By contrast, 36% of Google’s return was attributable to multiple expansion and only 29% was due to earnings growth. The reason was its Gemini release, arguably making it the leader in the chatbot arena. One hundred percent of Tesla’s return was from multiple expansion as investors bet on its robotic business. Earnings growth was negative.
So, earnings still matter. It’s not all about multiple expansion and recent cutbacks in tech prices are arguably a healthy adjustment. Both suggesting that we are not in a bubble. Yes, margin improvements may be difficult to maintain due to rising costs, but, if anticipated AI-driven productivity gains materialize, they may offset margin slippage. Big Tech earnings may falter. There are risks. Not all hyperscalers will win. There will be fallouts. Big Tech belongs in portfolios but should not be the portfolio for most investors.
What about valuations and the S&P as a whole? A chart plotting S&P Forward PE Ratios (multiples) against Forward Net Margins (profitability) across four-year intervals since 2005, shows that multiples grow as net margins grow. The 2026 22.03 forward PE multiple for the S&P 500 measured against the forward Net Margin Increase is just above the 12-year trend line, an indication that the S&P 500’s PE multiple valuation is reasonably supported by profitability. (Source: FactSet) Encouragingly, leadership has broadened. Value stocks have rebounded, and multiple expansion has helped other profitable companies gain traction.
The Dollar: A Shifting Landscape
Although the U.S. dollar has strengthened recently, its 9.4% decline in 2025 raised legitimate concerns. That decline, the threat of ever shifting U.S. tariff adjustments, increasing concern about the U.S.’s ability to support the interest on its national debt, fear that it might choose to inflate its way out of the debt burden as it did in the 1940’s and 1970’s, all drove central banks to move some reserves out of the dollar and into gold. Retail investors jumped on the bandwagon and the price of gold went up by a ridiculously high 64%! This caused 3EDGE Asset Management to opine that, “It (meaning gold) became another speculative asset class”. Silver was another “safe haven” asset with price growth even greater than gold.3
Gold now represents a larger share of global central bank reserves than U.S. Treasuries. China, a major buyer of U.S. bonds, has almost doubled its gold reserves in 2025 relative to its average from 2000 to 2025. Emerging market country central banks have moved most heavily into gold and away from debt heavy currencies, like the dollar.
Long the dominant currency for international trade due its stability, the dollar is under threat. De-dollarization has been going on for some time. China has coerced some of its Latin American and African trading partners to use the Yuan vs. the dollar. Bitcoin is enjoying greater use due to the ease and speed of its transfers.
For the U.S. Treasury, waning demand for dollar assets could increase borrowing costs. As existing bonds mature, the questions becomes: who will buy the replacements? If the Federal Reserve becomes the buyer of last resort, inflation risks would rise accordingly.
Economic Outlook: Near Term
Economic data has been shaky due to December’s government shut down but recent numbers are generally encouraging, though mixed. The Fed’s GDPNow estimate for Q4 is 5.1%. But that number includes net exports, inventory, and government spending, which are not measures of economic productivity. Eliminate those items and Core GDP comes in at 2.7%, a reasonably strong number given the government shutdown.
Other signals about the health of the economy are mixed. Job growth is weak, as evidenced by the non-farm payroll number, but unemployment ticked down to 4.4%. Core inflation is steady at 2.6% year over year, but above the Fed’s 2% target. The Producer Price Index rose .03% to 3%, presumably a reflection of tariff-driven supply cost increases. Corporate CapEx spending is up, and tax refunds are due soon which could spur consumer spending—a core factor for economic growth. Other fiscal stimulation from the OBBBA may provide further support.
While some expect two quarter-point rate cuts this year, inflation data and relatively low unemployment make that outcome uncertain. Unemployment is far from triggering inflation concerns. Credit spreads are tight, a good indicator that a recession is not likely. Widening spreads are a warning signal. The stock market is also a good leading indicator. So far so good there.
In short, we think the near-term economic outlook is generally positive, which could bode well for stock prices. Earnings season has begun. Early reports have been mostly favorable. If that continues, investor confidence should improve and we may see stable, if not growing, markets. FactSet put out a piece a few weeks ago showing that analysts’ earnings forecasts tend to be fairly accurate. For 2026 analysts are predicting S&P 500 EPS growth at 14.9%, the information tech sector leading with an EPS growth estimate of 28.5%4.
Long Term Outlook
Markets, like the economy, are cyclical. Bull markets do end and reversions to the mean do happen. Expectations are for muted returns. Most major investment firms and Callan Associates, whose capital market assumptions have driven our asset allocation modeling since 1985, foresee 10-year S&P 500 returns in the 6.7% range (JP Morgan5) to 7.5% range. Callan’s estimate is 7.25%.6 Returns expectations for the Bloomberg Aggregate bond index range between 4 and 4.5%. The bears will have their day, too. When? No one knows.
Chuck Baldwin, MBA
President & CCO
Baldwin & Clarke Advisory Services, LLC
Email: chuckbaldwin@baldwinclarke.com
Sources
#MarketOutlook #InvestmentCommentary #StockMarketAnalysis #EconomicOutlook #MarketValuations #U.S.Dollar