S&P 500: Another year of strong gains

The US equity market is approaching the end of 2025 showing another strong year of gains. Since the start of the current bull market that began in late 2022 (the S&P 500 index had bottomed at 3,577 points on 12 October 2022), the index has jumped by over 90 per cent with gains of more than 20 per cent in both 2023 and 2024.

The S&P 500 index has rallied nearly 17 per cent so far in 2025 rebounding very strongly from the sharp downturn in April that briefly threatened the entry into bear market territory. Immediately after the imposition of reciprocal tariffs by the newly-elected President Trump on almost all countries worldwide on “Liberation Day” in early April, the S&P 500 fell by more than 10 per cent in three trading days (at its low, the index was down over 19 per cent from the record high reached on 19th February 2025). The downturn was also caused by concerns about the independence of the Federal Reserve due to threats by the President to replace the Chairman of the central bank.

The equity market then reacted positively to the postponement of tariffs (except on China), the easing of pressure on the Chairman of the Federal Reserve and the strong earnings season for the first quarter of the year together with indications of possible trade talks between the US and China.

Meanwhile, throughout the second half of the year, as the Federal Reserve delivered its first rate cut in September and reduced its benchmark rate again in October, the S&P 500 established new all-time highs on multiple occasions despite fresh concerns on the euphoria surrounding artificial intelligence (AI) in early October. The upturn in valuations of companies across the AI value chain coupled with the trillions of dollars worth of investments announced by some of the largest companies and the advent of a circular economy where technology giants finance and buy from each other, sparked increasing discussion on the fear of a bubble.

Although AI was again the central theme of the year and the market cap of Nvidia briefly surpassed USD5 trillion in October after another very strong share price performance (+38 per cent YTD performance and more than double from the low in April), the best performer among the Magnificent 7 equities is Alphabet (+65 per cent). The other components all registered double-digit gains with the exception of Amazon (+3 per cent).

Meanwhile, among the AI value chain, some of the notable performers this year were Advanced Micro Devices (+83 per cent), Broadcom (+73 per cent), Intel (+101 per cent) and storage specialist Seagate Technology Holdings (+230 per cent).

Despite recent comments from senior members of the International Monetary Fund (IMF), the European Central Bank and also the Bank of England on a possible equity market correction, most analysts remain bullish on the year ahead and currently forecast another positive year for the S&P 500 in 2026. In fact, although we are currently in the 3rd year of a bull market, on average, bull markets last over 5 years.

According to a recent survey across nine major investment banks published in the Financial Times, the S&P 500 index is expected to rise by circa 10 per cent from its current level to more than 7,500 points by the end of 2026 on the back of “easy fiscal, monetary and regulatory policy”.

Many other investment banks have also published their forecasts for next year with most also expecting further upside as a result of sustained strength in company earnings as well as additional monetary easing by the Federal Reserve if inflation remains “contained”.

As always, apart from the continuing unfortunate developments from a geopolitical perspective across various regions, there are a number of other headwinds that will continue to affect sentiment in the months and years ahead. The full economic impact of the trade tariffs remains to be seen and could continue to remain a source of uncertainty. Moreover, the strong upward trajectory of the US government debt will need to be tackled sooner rather than later leading to possible shifts in fiscal policy.

With respect to the ongoing debate on the AI investment boom that has contributed to a sizeable share of the strong upward movement in the S&P 500 in recent years, only time will tell if company valuations are far too elevated or whether they are reflective of this transformative technology.

Over the years, new technology has radically changed the world, mostly for the better. The adoption of AI will be no different. However, as always, investors who pay too much for shares in some businesses will end up worse-off over time.

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