Global equity markets achieved a third consecutive year of double-digit gains in 2025, despite navigating uncertainties triggered by Trump's trade policies and concerns over a bubble in the artificial intelligence sector. The MSCI All-Country World Index surged over 20% for the year, a performance that exceeded the expectations of most analysts.
The U.S. stock market staged a robust rebound after a steep decline at the beginning of the year, with the S&P 500 index posting a full-year gain of nearly 16.5%. The release of a large language model by DeepSeek early in the year shocked Silicon Valley and triggered a sharp sell-off in technology stocks. In April, Trump's announcement of extensive tariff measures once again ignited selling pressure across stocks, bonds, and the U.S. dollar. However, strong corporate earnings, expectations for Federal Reserve interest rate cuts, and better-than-expected economic growth quickly prompted investors to return to the market.
Despite the strong performance of U.S. stocks, markets in China, Japan, the UK, and Germany all outperformed the S&P 500 this year, while the emerging markets stock index also delivered superior returns compared to U.S. equities. Investors, having experienced volatility in U.S. stocks early in the year, sought more diversified allocations.
Nevertheless, market valuations have soared far above historical averages, prompting analysts to warn that this rally, led by tech giants, may be difficult to sustain. The Shiller Cyclically Adjusted Price-to-Earnings ratio for the S&P 500 approached 40 times, a level only surpassed just before the dot-com bubble burst in the early 2000s. Economic resilience underpinned market performance. The robust earnings resilience of U.S. corporations, combined with the clear prospect of a dovish pivot by the Federal Reserve towards rate cuts, formed the core support for the market. This drove a massive reflow of capital into equities and reinforced investors' long-term bets on the potential of artificial intelligence. Concurrently, better-than-expected U.S. economic growth data further eased market anxieties and boosted risk appetite. Venu Krishna, Head of U.S. Equity Strategy at Barclays, stated: "It's been an exceptionally strong year, stronger than we expected. Despite policy uncertainties, including tariffs, the U.S. economy and stock market have shown remarkable resilience overall." Kasper Elmgreen, Chief Investment Officer for Equities and Fixed Income at Nordea Asset Management, remarked: "If you had told me at the start of the year that we would see this kind of global trade restructuring, I wouldn't have predicted such a strong performance for equities. But what we've witnessed is a resilient economy and very strong corporate fundamentals." Elevated valuations spark concerns. Following such a powerful rally, a sense of caution is beginning to permeate market sentiment. Some investors and analysts are warning about the sustainability of the uptrend, pointing out that this bull market exhibits significant structural concentration and valuation divergence. The gains have been primarily driven by a handful of tech giants in Silicon Valley, causing overall market valuations to deviate substantially from long-term historical averages, with index returns increasingly reliant on the continued performance of leading stocks. Simon Adler, Head of Value Equities at Schroders, commented: "When the market is this strong, there's a risk of complacency. As we enter 2026, some areas of the market look very, very fully valued. The risk of a significant correction has increased markedly." He noted that the Shiller CAPE ratio for the U.S. stock market was nearing 40 times by the end of 2025, an extremely high level historically. The S&P 500 has only seen a higher ratio just before the internet bubble burst in the early 2000s. Starting from such valuation levels, the market has never delivered returns above inflation for investors. Elyas Galou, Investment Strategist at Bank of America, said: "It's very rare for the S&P 500 to achieve double-digit returns for four consecutive years. It can happen, but the bar is very high. We are starting from very elevated valuations." Concentration risk heightens market fragility. Altaf Kassam, Head of European Investment Strategy and Research at State Street Global Advisors, warned that the current market rally, driven by a small number of stocks, is accumulating structural risks. He pointed out that the combined weighting of the so-called U.S. tech "Magnificent Seven" in the MSCI World Index has reached a hefty one-quarter, an extreme concentration that deeply ties the performance of global indices to that of a few giants, thereby increasing the overall fragility of the market. He stated: "This is an uncomfortable bull market. Whenever you see concentration in companies with very similar business models, it's a concern... it makes the market more fragile." The increasingly pronounced trend of market concentration is prompting deep scrutiny of the M&A frenzy in the AI sector. This trend has spawned a complex and interdependent network of financial interconnections. A typical case is that OpenAI, the developer of ChatGPT, not only holds equity in some key infrastructure suppliers but is itself the recipient of substantial investment from other participants in the industry chain. This web of capital relationships is reshaping the industry ecosystem and potentially amplifying systemic risk. Kassam added: "It's like a game of Jenga. If you pull out a key block, the whole structure could collapse."
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