When asked to define the 2025 US stock market, Tony Pasquariello, head of global hedge fund coverage at Goldman Sachs, hesitated. After careful consideration in his annual review, Pasquariello ultimately chose the phrase "Very Good" to describe the past year— after all, the S&P 500 not only delivered double-digit returns but also achieved the remarkable feat of rising for eight consecutive months, a record not seen since 2017; the Nasdaq 100 index surged 21%, while the Dow Jones Industrial Average also posted a 15% gain. However, for investors on the front lines, this was far from a year of easy gains. Behind the impressive index performances lay a realized volatility of 19%, the heart-stopping moment when Nvidia lost a trillion dollars in market capitalization within seven weeks, and severe turbulence caused by several episodes of liquidity drying up. If 2025 was a dance between high returns and high volatility, then in Pasquariello's view, the market in 2026 is set to become even "Wilder":
"I don't think next year will be dull either. While the overall trend is favorable, my intuition tells me next year will be wilder."
High Returns and High Volatility in Tandem On paper, 2025 was undoubtedly a feast for the bulls. The Nasdaq 100 index (NDX) soared 21% for the year, the S&P 500 recorded an 18% total return (including dividends), while the Dow Jones and Russell 2000 indices rose 15% and 13%, respectively. The S&P 500 even closed with a rare "8-month winning streak," a show of strength not seen since 2017.
The cost of achieving these returns, however, was significantly heightened market volatility. Pasquariello pointed out that the defining characteristic of the 2025 market was a classic "high return, high volatility" environment:
Realized Volatility Soared: Full-year realized volatility reached 19%, sitting at a high level in the 83rd percentile historically.
Sharpe Ratio Halved: The S&P 500's return/volatility ratio was a mere 1.0. Compared to the "steady happiness" of ratios exceeding 2.0 in 2023 and 2024, investors in 2025 endured twice the turbulence for every unit of return gained.
Deep Drawdown Scares: The maximum intra-year drawdown for the S&P 500 reached 19%, almost double the historical median annual drawdown of 10%.
The market was far from calm. Whether it was the flash crash in the AI sector triggered by DeepSeek (causing a basket of AI leaders to plummet 18% at one point) or the severe market swings following Trump's tariff policies (the S&P fell over 9%, with the VIX fear index briefly touching 60), the difficulty of navigating the year increased exponentially. Pasquariello stated:
"History books will record 2025 as a good year for US stocks, but that's a superficial conclusion. For traders in the thick of it, the difficulty level spiked multiple times throughout the year."
Cracks in Tech Giants: The Law of Large Numbers and Nvidia's 'Rollercoaster' Tech stocks remained the absolute protagonists of 2025, but the script began to change. The Nasdaq 100 index has posted positive returns in 16 out of the past 17 years, a long-term dominance that is astonishing. However, internal fragmentation is intensifying: in 2025, approximately one-third of the index's components finished the year in negative territory, indicating significantly heightened divergence in individual stock performance. The marginal effect of the "Magnificent 7" is waning. Although Google led with a 65% gain and Nvidia recorded a 39% increase, the group's aggregate market capitalization growth is narrowing:
2023 Increment: $5.1 trillion 2024 Increment: $5.6 trillion 2025 Increment: $4.0 trillion
While $4 trillion would be an astronomical figure for any other sector, for this super-weighted group, the gravitational pull of the "law of large numbers" seems to be emerging, making incremental gains increasingly difficult to achieve. Nvidia best exemplifies the market's schizophrenic character in 2025. Pasquariello depicted this AI titan with a set of contradictory data:
Miracle: Nvidia's market cap grew by another $1 trillion (or, as his former boss would say, "it's the fourth comma that matters"), with the single stock contributing 15% of the S&P 500's total annual return.
Collapse: The stock peaked in late October, only to see $1 trillion in market value evaporate over the subsequent seven weeks.
Since the advent of ChatGPT, Nvidia's earnings and stock price have both increased roughly tenfold, a rare miracle in financial history. But this has also sparked Wall Street's deepest anxiety: how long can such extremely high profit margins and market share be sustained? Pasquariello noted that the internal rift is even more noteworthy: despite the Nasdaq's strong rally, about one-third of its components ended the year lower. Perhaps this data is hinting that the era of easy gains from "mindlessly buying tech stocks" is receding into the past. Drivers Deconstructed: EPS Reigns Supreme, Options Gambling What underpinned the 2025 bull market? The answer is fundamentals, not froth. Pasquariello analyzed that within the S&P 500's 18% total return, EPS (Earnings Per Share) growth contributed the vast majority (14 percentage points), while valuation expansion contributed only 3 points. Despite periods of low CEO confidence indices, US corporations once again demonstrated their remarkable ability to defend profit margins amidst a 75 basis point rate-cutting cycle and a wave of deregulation. Simultaneously, the options market has become a "hidden hand" influencing short-term price action. Data shows that nearly 90% of the trading volume in listed SPX options is concentrated in maturities of one month or less, with about two-thirds of that trading being 0DTE (Zero Days to Expiry) options. While these instruments provide convenience for institutional risk management, they have also raised concerns about "excessive retailization," acting as a core engine amplifying intraday volatility—when a large portion of market participants are engaged in ultra-short-term speculation, sudden liquidity dry-ups become the norm. 'Safe Haven' Throne Changes Hands: Gold Soars, Bitcoin Lags If there was one asset in 2025 that not only beat inflation but also beat conviction, it was gold. The US dollar had a tough year, with the trade-weighted dollar index falling 7%. Against a backdrop of shaken fiat currency credibility, funds did not flow into Bitcoin on the expected massive scale but instead poured frantically into precious metals.
Gold emerged as one of the year's biggest winners, skyrocketing 65%. Silver recorded an astonishing 148% surge, while industrial metals like copper (+43%) and platinum (+127%) also performed strongly. Pasquariello pointed out that gold's rise reflects sustained demand from structural investors like global central banks, serving as the ultimate hedge when investors are "unsure which currency to hold." In contrast, Bitcoin (BTC) had a disappointing year. Despite briefly breaking through the $125,000 mark, BTC ultimately finished the year down 6%, having retreated more than 30% from its peak. Pasquariello believes:
"Bitcoin has no yield and no intrinsic value; it is primarily driven by narrative and fund flows."
He suggests that unlike gold, which is supported by structural buyers like central banks, Bitcoin in 2025 faced significant profit-taking and liquidation.
Shifting the gaze globally, opportunities are no longer confined to the US. European equities, despite weak macroeconomic growth of just 1.5%, surprisingly delivered a 21% return (in local currency), with bank stocks surging 80%. In Asian markets, South Korea (+79%) and Japan (+29%) performed exceptionally well, particularly assets linked to AI, advanced manufacturing, and defense strategy, offering investors valuable convex returns.
2026 Outlook: Embrace the "Wild" Standing at the threshold of 2026, the market faces higher stakes: historically high price-to-earnings ratios (rising from 21.5x to 22.0x), extremely narrow corporate credit spreads, swelling sovereign debt, and astronomical AI capital expenditures. Pasquariello predicts that 2026 will be anything but a平淡 (dull) year. While the base case expectation remains net positive, the market is set to become "wilder." In an era characterized by high valuations and rapid technological change, simple "buy and hold" strategies may face challenges, and tactical flexibility will become paramount. As is often said of the financial titan George Soros:
"The secret to investing is to preserve capital, plus a few home runs."
In closing, Pasquariello writes: 2026 might just be the perfect year to test this wisdom. Happy New Year, and good hunting in 2026!
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