The U.S. equity market delivered its third straight year of double-digit and above-average gains, with the S&P 500 rising 17.9 percent including dividends in 2025. That boosted the bull market's total return to 100.6 percent since this cycle began in October 2022 through year end.

The path was far from straight. The S&P 500 and stock markets globally dropped meaningfully in the spring of 2025, punctuated by the Trump administration's introduction of ultra-high "reciprocal" tariffs on dozens of countries. Then the index surged nearly 39 percent on a total-return basis from the April low through year end as tariff rates were subsequently lowered via trade deals and a temporary truce with China, and AI companies went on to post strong earnings growth and raise profit forecasts meaningfully.

The market was also boosted as the domestic economy surprised to the upside with well above-average GDP growth in Q2 and Q3, rebounding from a slight retreat in Q1. The economic backdrop improved due to an unanticipated surge in AI capital spending, three more Federal Reserve 25 basis-point interest rate cuts, passage of the taxpayer- and business-friendly One Big Beautiful Bill Act, and strong consumer spending among upper-income households—forces that helped offset tariff headwinds.

"High prices for goods, services, and housing due to cumulative inflation growth since the pandemic continued to pinch lower- and middle-income households, acting as a drag on some retail and consumer stocks that greatly underperformed the broader market."— Gabriel Abbas, Chief Financial Officer, Wealthy Asset Management

Big gains from a narrow group of stocks

This bull market cycle has been dominated by AI-oriented stocks. Seven stocks represented just over half of the S&P 500's gains in 2025: NVIDIA, Alphabet, Microsoft, Broadcom, JPMorgan Chase, Palantir Technologies, and Meta Platforms. All of these stocks—even banking behemoth JPMorgan Chase—have at least some exposure to the AI theme.

This group punched well above its weight. While these seven stocks represented 25 percent of the S&P 500's market capitalisation last year, they accounted for 52 percent of the index's total return. This is the second year in a row that NVIDIA, Meta, Alphabet, Broadcom, and Microsoft were among the stocks delivering the bulk of S&P 500 gains—partly due to their mega-sized market capitalisations as a proportion of the index, and also because of their strong share price performances.

AI investment's starring role

The unprecedented capital spent to build AI data centres—including purchases of advanced semiconductor chips and other hardware equipment—not only helped drive the U.S. economy in 2025, it also fuelled AI stocks. The continued development and training of AI large language models contributed to the advance of hyperscaler and chip/hardware stocks, as did high cloud computing revenue growth.

Based on assessments of company data, our team estimates that seven large tech firms invested $437 billion in capital in 2025—61 percent above what was spent in 2024 and almost 2.5 times more than in 2023. Even higher spending appears likely in 2026.

"We continue to view AI as a transformative technology—at least as much, if not more so, than the development and mass commercialisation of the internet. Volatility events, up or down, could reasonably be expected to emanate from AI and the related components of the stock market."— Cameron Moshfegh, Chief Executive Officer, Wealthy Asset Management

Impact of earnings growth from the supporting cast

As AI stocks outperformed in 2025, so too did the tech-heavy S&P 500 Growth Index and Nasdaq—largely due to strong profit growth. Information Technology sector net income grew 22 percent in Q1 2025 and accelerated to 29 percent in Q3 on a year-over-year basis. The consensus forecast for Q4 and the first half of 2026 calls for strong Tech sector earnings growth to persist, with estimates rising in the past couple of months.

But last year's rally and profit growth were not solely about AI and Tech stocks. Excluding the Tech sector, the rest of the S&P 500 grew earnings by an average of 9.8 percent from Q1 through Q3 2025—a solid clip given the tariff headwinds during that period.

Prospects for 2026 earnings are bright—but so are the hurdles

Prospects for 2026 earnings are also encouraging. The Bloomberg S&P 500 consensus forecast calls for $313 per share—up from $308 just two months ago—representing 13.6 percent growth above the current 2025 forecast. While that is a tall order, our team believes the S&P 500 has the potential to deliver respectable earnings growth this year. Whether the rate beats, matches, or misses the current consensus will largely hinge on whether Tech sector earnings remain robust.

Seven of 11 S&P 500 sectors delivered double-digit gains in 2025, and five sectors have risen 80 percent or more since the bull market began in October 2022. Communication Services and Information Technology led the cycle with cumulative gains of 190.5 percent and 189.6 percent respectively, while Industrials, Financials and Consumer Discretionary also posted strong multi-year returns.

Tempered optimism for 2026

With the U.S. market's three-year winning streak now in the books, it is only natural to question whether the rally can be extended. Since 1945, the S&P 500 has delivered back-to-back above-average gains for three or more consecutive years on five other occasions—including one streak that ran for four years and another for five. So history does not rule it out.

However, the combination of lower inflation, lower interest rates, and roughly two percent or better GDP growth required for continued stock market gains may not be easy to achieve simultaneously in 2026. The typical volatility associated with midterm election years could also take its toll on the market at times.

"We think a 'positive' rather than 'above-average' year is the outcome to plan for in 2026. That is still a meaningful result—but investors should calibrate their return expectations accordingly and ensure their portfolios are positioned for a wider range of outcomes."— Elizabeth Prasad, Portfolio Manager, Wealthy Asset Management