Yet Another Year of Surprises

The least surprising part of 2025 is that it was filled with surprises.  Let’s review some of the events that shaped the economy, market, and geopolitical news this past year.

The Magnificent 7 stocks (Nvidia, Meta, Apple, Amazon, Microsoft, Tesla, and Alphabet/Google), which have driven the market on their own for the past few years and represent nearly a third of the S&P 500's value, were not the only source of market returns as had mostly been the case in prior years.  Although all 7 stocks ended the year with positive returns, only 2 outperformed the S&P 500 in 2025.

International stocks finally outperformed US stocks.  After several years of trailing US stocks, international stocks from developed countries, as a whole, outperformed the US.  Sticking to our strategy of diversification proved worthwhile again in 2025.

New tariffs announced on April 2nd, “Liberation Day,” have yet to have a significant impact on inflation or push us into a recession.  After the spike in inflation during 2021-2022, it looked unlikely that the higher interest rates needed to combat inflation would let us escape from a near-certain recession.  As it has turned out, 9% inflation, 8% mortgage rates, a 5% Fed Funds rate, and many new tariffs have not derailed the economy and triggered a recession to this point.

AI spending was far greater than anyone could have predicted.  The chart on the next page shows the total investment in AI in 2025 as a percentage of the US Economy as measured by Gross Domestic Product.  For perspective, the investments in AI far outweigh previous capital expenditures for public works projects such as those in the 1930s, the Apollo Project, and the interstate highway system of the 1960s. Although the actual results of all this spending are unknown, it is safe to say that the world in 10-20 years will look remarkably different because of these investments. 

In the Middle East, what started as a long-standing proxy conflict between Israel and Iran escalated dramatically. In June, Israeli forces carried out a surprise military offensive targeting Iranian nuclear and missile infrastructure, marking one of the most significant direct confrontations between the two nations in decades. That operation was followed by coordinated U.S. strikes on Iranian nuclear sites, which significantly damaged key facilities. These events were not just military news — they reshaped investors' thinking about geopolitical risk and its implications for energy markets, defense spending, and global trade flows.

What few expected was how these events would ripple into Iranian domestic politics. Sharp economic strain, already driven by inflation and a collapsing currency, was compounded by the aftermath of these military actions. Protests — initially sparked by economic hardship and rising prices — have spread across much of Iran, with demonstrators calling not only for economic relief but also new leadership and systemic reform.

Just like past years, 2025 reinforced the same core investment truth: we simply cannot predict which headlines will matter most — or how markets will react to them.

From surprise military escalations to economic protests that challenge long-standing national leaders, from the ongoing AI boom to unexpected inflation pressures, from central bank interest rate moves— the past year delivered a fresh reminder of how complex and interconnected global events have become.

If we let every shocking headline dictate our strategy, then we never truly had a strategy. Markets don’t move in straight lines, and the world doesn’t unfold according to quarterly earnings calendars or geopolitical forecasts. It is OK to be surprised by markets, but we shouldn’t be surprised by our own surprise.  My only prediction for 2026 is this: it, too, will be filled with surprises. And just as in years past, disciplined, long-term investing — rooted in strategy rather than reaction — is what serves investors best.