The S&P 500 completed one of the strongest three-year periods in its history, delivering a total return of 86% since the start of 2023. Much of that performance came from a small group of technology leaders benefiting from the growth of artificial intelligence. In 2025, the S&P 500 gained 18%, driven largely by Google and Nvidia, which accounted for 38% of the return. The other five stocks in the Magnificent Seven underperformed the S&P 500 this year.
Valuations ended the year higher as well. The S&P 500 now trades at a next twelve months price-to-earnings ratio of about 22x, well above the pre-COVID average of roughly 16x. Investors have shown a willingness to pay more for growth, particularly for companies viewed as long-term beneficiaries of artificial intelligence.
While U.S. stocks delivered solid gains, international markets performed even better. The S&P 500 lagged the MSCI All Country World ex-U.S. Index’s 33% return by the widest margin since the global financial crisis in 2009. After 15 years of U.S. market leadership, this marked a notable shift in global returns.
The broader economic backdrop remained supportive of stock market valuations. U.S. growth was steady, corporate profits continued to rise, and consumers kept spending despite inflation remaining above the Federal Reserve’s 2% target. Over the course of the year, the Fed cut short-term interest rates by 0.75% and longer-term yields moved lower, helping support both stocks and bonds. In fact, U.S. bonds had their best year since 2021, gaining 7.3%.
As always, we believe successful investing requires a disciplined, long-term approach that emphasizes thoughtful asset allocation, broad diversification and prudent risk management. While market leadership and economic conditions will inevitably evolve, we remain focused on building portfolios designed to compound value over time rather than reacting to short-term market movements.
