By William Power
Many people are skeptical about what artificial intelligence could bring. But for now, most fund investors are in the AI fan club.
Powered by gains in AI-tied technology stocks, the average U.S.-stock mutual fund or ETF rose 14.6% for 2025, including a 2.5% gain in the fourth quarter through Dec. 24, according to LSEG.
Stock funds have now risen in double digits for three straight years, even though each performance has been a bit less than the previous years: 21% in 2023, then 17.4% and now 14.6%. (See the Mutual-Fund Yardsticks table.)
"The biggest surprise in 2025 was how dominant the AI stocks were," says Ellen Hazen, portfolio manager and chief market strategist at F.L.Putnam Investment Management in Lynnfield, Mass. "Everyone thought the AI trade was over, that the Mag 7 [the Magnificent Seven tech stocks including Nvidia and Amazon.com] were done, and the market broadening that everyone was eagerly looking forward to was going to happen."
But after what President Trump dubbed Liberation Day -- the broad tariffs announced in April -- "the market dramatically narrowed again. And since that day the Mag 7 has trounced the rest of the market again," says Hazen.
Now the question for 2026 is whether the AI trade will continue. "There are more yellow flags appearing than disappearing for the AI trade, but they do not yet reach the level that makes me bearish on the markets or bearish on AI," says Hazen. But it would be good if the rally extended to more stocks, she adds, and it could happen based on earnings growth in nontech sectors.
International-stock funds, which have often trailed their U.S. counterparts over the years, outpaced them this time. International funds, benefiting in part from tariff tumult early in the year, hammered out a 29.8% gain for 2025, drubbing the previous year's 4.8% advance.
The Federal Reserve cut interest rates three times during 2025. Bond funds held their own during the year. Funds focused on investment-grade debt (the most common type of fixed-income fund) were up 7.3% for the year, including a 1.1% gain for the fourth quarter.
Fund flows
Even as U.S. stocks climbed to records in 2025, investors poured money into both international-stock funds and bond funds, rather than U.S.-stock funds.
Investors withdrew a net $391.6 billion from U.S.-stock mutual funds and exchange-traded funds in 2025, based on Investment Company Institute estimates -- much of it occurring during July when there were intense concerns over tariffs, a market worry that abated as the rest of the year wore on.
Some $102.1 billion flowed to international-stock funds during the year, and a net $669.4 billion flowed to the perceived reliability of bond funds.
Winners' Circle
Managers of large-cap funds took most of the top positions in our latest Winners' Circle review of the top-performing actively managed U.S.-stock mutual funds. They cashed in on the zest for artificial-intelligence darlings and other tech stocks.
Taking the crown was Permanent Portfolio Aggressive Growth Portfolio (PAGRX), a $376.2 million fund that notched a 36.9% total return for the past 12 months, based on Morningstar Direct data. Runner-up was the $5.4 billion PrimeCap Odyssey Growth Fund (POGRX) with a 33% gain. Four funds from the Alger group placed in the top 10, including No. 3 finisher Alger Capital Appreciation Portfolio (ALVOX), with a 32.9% total return.
Overall, the 1,185 funds that were tracked in the survey -- which includes only funds with assets of at least $50 million -- managed a total return of 11.5% for the year.
FINANCIAL FLASHBACK
A look back at Wall Street Journal headlines from this month in history
-- 45 YEARS AGO: Reagan and the markets
On the day that Ronald Reagan was inaugurated as the 40th U.S. president in 1981, the Dow Jones Industrial Average fell 2%. Voters didn't expect miracles from him.
To be sure, the Dow had already rallied 1.7% on the day after his election the previous November. But the lack of market enthusiasm for his Inauguration Day speech wasn't much of a surprise given that economic growth was beset by an inflationary spiral, unemployment had been creeping higher and many voters were disappointed in President Jimmy Carter's handling of the problems facing the country.
"The bottom line is these people aren't expecting Ronald Reagan to be some kind of miracle worker," said Peter Hart in a Wall Street Journal front-page article the morning of Inauguration Day. Hart's polling firm was commissioned by the Journal back then to conduct a series of interviews with two groups of voters after Reagan's victory over Carter.
The interviews found several broad themes. First was "a strong sense that the country remains in serious straits, at home and abroad," according to the Journal. Also, those polled had "a tentative feeling that President Reagan will make steady, if slow, progress on the nation's economic problems."
Lack of postelection enthusiasm didn't stop Reagan. He embraced something called supply-side economics. The broad idea was to cut unnecessary regulations and allow companies -- the supply side -- to produce more products and boost gross domestic product. At the same time, the administration increased the cost of borrowing and eventually crushed the inflationary surge.
Reagan's efforts set forth an economic and market boom. During Carter's last full year in office, the U.S. economy's GDP totaled $2.9 trillion, according to Macro Trends. But it would almost double to $5.3 trillion at the end of Reagan's last full year in office in 1988. Likewise, the stock market boomed under Reagan, almost doubling. The S&P 500 rallied to 297 in January 1989, up from 129.6 in January 1981.
-- 25 YEARS AGO: Surprise Rate Cut Spurs Monster Rally / Nasdaq Surges Record 14.17%
-- 70 YEARS AGO: Henry Ford, II, Cautions on Get-Rich-Quick Attitude Toward First Public Offering of Ford Motor Stock
--By Simon Constable
William Power is deputy section editor of Journal Reports in South Brunswick, N.J. Email him at william.power@wsj.com.
(END) Dow Jones Newswires
January 03, 2026 10:00 ET (15:00 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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