A stellar year for US stocks
US stocks beat expectations and notched multiple record highs in 2025, overcoming the odds amid a slowing economy and an increasingly squeezed consumer base. Will this trend hold next year?
Wall Street had its best year yet in 2025, with market appetite seemingly unfazed by the global tariff war waged by President Donald Trump and a continuously rising public debt burden. Stocks hovered just above bear market territory in April before surging to 36 all-time highs for both the S&P 500 and Nasdaq in January-November.
The initial shock of Trump 2.0’s higher and harsher tariffs on imported goods had been more than offset by a rally driven by artificial intelligence (AI), with the news of rapidly developing large language models powering chatbots and multibillion dollars in investments for data centres fuelling the boom.
Months later, it appears that the initial excitement has simmered down. Now, some market watchers including the International Monetary Fund (IMF) are warning about a potential AI bubble bursting soon. The IMF went as far as likening this AI hype to the 1990s dot-com bubble, referring to a crash in stock valuations after an initial bullishness towards the internet.
Is 2025 a case of “the higher you climb, the harder you fall” for US stocks? We think not, and we disagree with the IMF’s doomsday forecast.
Artificial fears
US stocks rallied for most of 2025, erasing traces of market anxiety over disruptive, flip-flopping trade restrictions imposed by Trump on all its major partners particularly China, Mexico, and Canada. By doing so, Trump created more problems than what he could fix, and this has translated to higher living and costs and increasingly squeezed US households.
Big tech led the charge, riding high on the AI train as big names like Google, Microsoft, and OpenAI committed to pour more funds into creating even smarter AI models. The USD 100-billion Stargate Project sparked the AI rally in January after Silicon Valley giants agreed to ramp up their investments covering microchips, software, and facilities. This robustness is shown in Graph 1, where AI and tech-specific stocks under the Nasdaq US Benchmark Technology index surged by 27 per cent in January to November to outperform the broader composite index, which climbed 21 per cent during the same period. In turn, the tech-heavy Nasdaq Composite beat the S&P 500 at +16 per cent and the Dow Jones at +12 per cent over the same 11-month period.
To us, worries about an AI bubble bursting soon are unfounded. It may be true that AI stocks were overhyped at the start of the year, but the recent decline merely reflects tempered exuberance among market players as the dust is settling. The sector is far from overheating as demand for AI-related infrastructure, technology innovation, and support services continue to rise as AI usage is rapidly increasing, which justifies the aggressive investment activity in this space.
Rather than a sector-specific crash, we at Lundgreen’s anticipate a stock market-wide correction soon, likely at a magnitude of 10-15 per cent. Day-to-day declines seen in recent weeks reflect profit-taking as investors seek to cash in on their gains, but we do not expect nor recommend a broad exodus of equity placements.
We forecast a market correction – not a market collapse – in 2026 as several other factors will dampen the appeal of US stocks. Softer private consumption due to sticky inflation and slower wage growth will likely carry over into the new year given the persistent “low hire, low fire” phenomenon in the labour market. Further, enthusiasm over rate cut bets from the Federal Reserve will wane after successive reductions in 2025 and as prospects of future easing remain uncertain.
Foreigners upbeat
The past year likewise saw sustained global attention on US stocks, parallel to efforts to diversify investment portfolios outside the US and Europe. Graph 2 shows how net foreign purchases of US equities soared between 2024 to 2025, creating a snowball effect for a stronger market rally. These were enough to offset the value of stocks discarded by foreign retail and institutional investors in 2022-2023.
The rebound in global investor appetite has been strong, but we do not expect the same gusto to continue into 2026 in the face of even greater volatility in the financial markets. As the US government returns from a 43-day shutdown that paralysed public services including economic data releases, it has casted doubt on the accuracy of major investment and policy decisions. Trump’s Republican party is likewise looking ahead to the November midterm elections, which will probably result in more populist policies that will not exactly support a sustainable economic recovery. These same policies will likely bloat government debt even further, which will keep the dollar weak as a result.
Overall, we anticipate the prevailing market fatigue to spill over into next year. Rather than an exit to cash, our advice to investors is to take this correction period as an opportunity to recalibrate portfolios and assume well-considered risks. It would be unwise to pull out entirely from the stock market as we do not see a crash unlike what a few quarters predict. We maintain a neutral position towards US equities – a view we have held since April when Trump unleashed the second wave of his global tariff war – but continue to see individual, highly profitable companies in high-growth sectors such as those involved in AI and technology, financials, and healthcare worth betting on.
