The stock market posted another solid year in 2025, increasing by double digits for the third consecutive year. As expected, the journey was not without volatility. Markets experienced notable pullbacks along the way, including “Liberation Day” in April, when some indices declined by 20% or more, as well as a 43-day government shutdown that limited the availability of economic data. Fortunately, continued resilience in the U.S. economy and advancements in artificial intelligence helped propel markets higher as the year progressed.
For the year, international stocks were the top performer, returning +31.9%. Domestic large-cap stocks followed with a gain of +17.9%, domestic small-cap stocks rose +12.8%, and bonds increased +7.3%.1 While this marked a third consecutive strong year for equities, the underlying drivers of returns differed meaningfully from prior years. In 2025, earnings growth played a much larger role, accounting for approximately 79% of market returns, compared to 55% in 2024 and just 27% in 2023. In those earlier years, a greater share of returns was driven by multiple expansion. 2
Another notable difference in 2025 was diversification. While domestic large-cap equities led performance in 2023 and 2024, international stocks took the lead in 2025. Small-cap stocks also had an impressive second half of the year, rallying more than +15%.
Looking ahead, the U.S. economy is entering 2026 on solid footing, which should provide support for financial markets. Headline inflation came in at +2.7% in the December report3 while the unemployment rate stands at 4.4%, still within the Federal Reserve’s definition of full employment4. The Federal Reserve also provided support by delivering a more dovish outlook at its December meeting, cutting rates by 25 basis points for the third consecutive meeting. While additional rate cuts are expected in 2026, several Fed officials have cautioned that the pace may be slower than in 2025.
As we have noted in prior commentaries, market volatility is normal. We would not be surprised to see periods of increased volatility in 2026 as investors assess geopolitical developments (e.g., Venezuela), possible changes in Federal Reserve leadership, and the midterm elections later this year.
1Market segment (index representation) as follows: Domestic Large Company Stocks (S&P 500), Domestic Small Company Stocks (Russell 2000) International Stocks (MSCI EAFE) Domestic Bonds (Bloomberg Barclays US Aggregate Bond Index) Growth Stocks (Russell 1000 Growth) Value Stocks (Russell 1000 Value)
2https://am.jpmorgan.com/us/en/asset-management/institutional/insights/market-insights/market-updates/on-the-minds-of-investors/whats-driving-stock-market-returns/2https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/
3https://www.bls.gov/news.release/archives/cpi_01132026.htm
4https://www.bls.gov/news.release/empsit.nr0.htm
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