The US stock market started the year on a positive note, faced early setbacks, but eventually recovered to scale fresh highs.
Major US indices such as the Dow 30, S&P 500 and Nasdaq 100 ended 2025 on a positive note, despite a sharp slump triggered by former President Donald Trump’s tariff announcements, early in the year.
On January 2, the S&P 500 stood at 5,868 but fell sharply to 4,982 by April 4 after Trump announced reciprocal tariffs. The index, however, staged a strong recovery and closed at 6,845 on December 31.
In 2025, the S&P 500 posted gains of 16%, while from the April lows, the benchmark surged nearly 37%.
While the Dow 30 index gained 13% in 2025, the Nasdaq 100 increased by 20% for the year.
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2025: Ups and Downs
The year began on a strong note after Trump assumed the US presidency. Markets were also buoyed by expectations of further rate cuts after the US Federal Reserve reduced rates by 50 basis points in December.
However, the optimism proved short-lived as Trump’s tariff announcements triggered fears of trade wars among nations. Sentiment improved after Trump backtracked on implementation timelines and reduced tariffs on select nations, signalling that the severity of the tariff war may be lower than initially feared.
This marked the beginning of the market recovery. Attention once again shifted to the US Federal Reserve and Chair Jerome Powell. Trump repeatedly pressured Powell to cut rates, but the Fed opted for a prolonged pause, citing tariffs as inflationary.
With interest rates remaining higher for longer, signs of weakness began to emerge in the US economy. The labour market started witnessing layoffs, increasing pressure on the Fed to ease rates. Inflation, meanwhile, remained sticky, hovering around 3%, well above the Fed’s 2% target.
This was followed by a wave of rate cuts. Powell implemented three 25-basis-point rate cuts in September, October and December, responding to weakness in the labour market.
If one factor stood out as the key driver of US market gains, it was the AI trade. AI-led stocks emerged as the star performers, keeping indices elevated throughout the year. NVIDIA was the brightest among them, with other ‘Magnificent Seven’ stocks also making significant contributions to the S&P 500.
“The Magnificent 7 drove 50-60% of the gains till Q3 as we are watching the AI revolution play out in real-time, and the market seems to be pricing in future earnings from companies that own the infrastructure. The market now estimates Big Tech 2025 capex to be above $400 billion, consuming up to 90%+ of operating cash flows (after dividends and buybacks) in 2025-26, up from about 75% in 2024,” says Subho Moulik, Founder & CEO, Appreciate.
NVIDIA became the first company to surpass a $5 trillion market capitalisation in 2025. Aggressive investment deals by major technology companies sustained momentum in AI stocks through the year.
AI-linked stocks faced a brief scare in late January, when DeepSeek, the Chinese start-up firm, announced products to take in the tech bigwigs. But the rally soon resumed. “As tariff fears faded, markets shifted back to what matters most: fundamentals, capex and profit growth across the AI value chain,” says a JP Morgan report.
More than 10 major AI infrastructure deals—nine of which disclosed spending of nearly $500 billion—led by OpenAI, Nvidia and Amazon Web Services (AWS), fuelled the expansion of the AI boom in 2025.
Outlook for 2026
Looking back to December 31, 2024, very few could have predicted that Trump tariffs, a prolonged Fed pause on rate cuts and an AI-led rally would define the trajectory of US markets in 2025. Practically none.
While these factors may continue to play a role, it remains unclear what new triggers could emerge in 2026. Arihant Bardia, CIO & Founder of Valtrust, offers a note of caution for investors, “The key near-term risks include a resurgence of inflation, which could delay or reverse expected rate cuts, and a slowdown in hiring or consumption, which would impact earnings growth. Structurally, one of the longer-term risks is excessive concentration in a handful of large technology stocks, which increases market vulnerability to earnings disappointments or regulatory interventions. Valuations in certain pockets also leave limited room for error.”
