With 2025 almost wrapped up, how has this year lived up to or defied expectations, and what could we expect from the market next year?
When making predictions about the market, it’s easy to get caught thinking that it will move closely around its average, with year-ahead analyst estimates for the S&P 500 usually ranging closely around 10% from current levels. However, for better or for worse, the market rarely tends to do what most people expect it to. Going back to 1950, the S&P 500 has gained a “normal” return between 5% and 15% in only 18% of calendar years. Put differently, the market has an “abnormal” year 82% of the time, meaning that we should expect the unexpected more often than not as investors. In fact, the last time we saw a “normal year” from the market was 2016 in which SPX gained 12%. With this year almost wrapped up, how has 2025 lived up to or defied expectations, and what could we expect from the market next year?
Despite some early year jitters in the market, such as the DeepSeek announcement and Liberation Day, it’s been another solid year for the S&P 500. Specifically, the index has gained 19.32% on a total return basis, which is better than roughly two-thirds of years for the index. 2025 now marks the third consecutive year with at least an 18% gain in the S&P 500 and the sixth such year to occur in the last seven years.
While the S&P 500 once again had a great year, it was by no means the only index to rise on the year. Growth stocks continue to be some of the strongest areas within Domestic Equities, seeing the Nasdaq-100 gain 22.9% YTD. Meanwhile, small caps also had a solid year, with the Russell 2000 gaining 15.1% as it returned to new all-time highs. Comparing this year’s return to the indices’ rolling one-year returns (not just calendar year) since 1950 or their respective inceptions, the S&P 500 performed the best of the three relative to its previous years. SPX’s 2025 return was better than 66.1% of other one-year periods for S&P 500, while NDX and RUT were better than roughly 56% of previous one-year periods. Overall, domestic equity indices have been solid this year, but their returns weren’t extremely abnormal, unlike some other areas of the market
Several groups did have more eyepopping numbers in 2025, with both international equities and precious metals outshining US Stocks. ACWX gained more than 33% for its best year since 2009, in addition to being in the 94th percentile one-year returns for the fund. Additionally, gold has seen a herculean YTD rise of 72.48%, placing the last twelve months in the 98% percentile of 1Y returns for gold. Said differently, a year this good for gold has only come around once every fifty years.
While investors love to see returns, the unfortunate reality of investing is that volatility is the price we pay for gains. Historically, there's a ~21% chance the SPX ends the year lower on a total return basis. Meanwhile, the index falls by at least 9.2% in roughly 10% of years, with some of those instances like 2022 seeing even further downside. Additionally, the market often dips before returning back to all-time highs. Despite the median year for SPX seeing the index gain 13.5%, the market still sees a 10% correction in roughly half of all years. Even this year, SPX was able to gain nearly 20% despite seeing a drawdown (peak-to-trough decline) in April of 18.7%. Understanding the potential and likelihood of those dips before they occur can help prepare investors—advisors and individuals alike—for those inevitable pauses in upside.
Asset classes differ not only in their returns but also in the severity of their declines. Fixed income has been a laggard over the last several years, but the group is historically the least prone to movement—both to the downside and upside—making them a less risky bet than the other assets in the table. Conversely, the Nasdaq-100 averaged the highest returns by a wide margin, but the group is also more prone to sharp one-year drawdowns. NDX and RUT are more than four times as likely to see a 35% drawdown in a year relative to SPX. In no way are we predicting a decline of that magnitude in 2026, but it does demonstrate the higher magnitude of movement for the two indices.
History can provide us with a baseline of what outcomes are possible in the coming year, while relative strength can provide insight into which of those outcomes is more likely. Domestic equities continue to hold the most long-term relative strength of any asset class, with international equities and precious metals continuing to look strong as well. All three groups look primed to for a solid 2026 if they’re able to maintain their strength. Meanwhile, risk-on areas like technology and growth stocks continue to lead the way to the upside. While anything could happen to the market next year, especially with investor anxiety over AI expenditure and elevated valuations, the weight of the technical evidence continues to signal a green light for the broader market entering the new year.
