Review: Ten investor surprises for 2025

Here is a recap of my investor surprises for 2025. As previously noted, the surprises are designed to capture events that the consensus would deem as having less than a 33% chance of occurring, but where I believe the odds are over 50%.

Over the past 24 years, just over half of my surprises have materialized. The positive hit rate was 7/10 in 2023 but just 3/10 in 2024. 2025 was a better year—with a bit of partial credit, 6.5/10 seems to me like a fair assessment. Read on for my surprise-by-surprise recap and review:

1. Inflation remains under control. Investors will almost surely remain fixated on inflation, scrutinizing every economic report to anticipate the Federal Reserve’s (Fed) next move. On balance, it will be a lot of wasted effort as most key inflation indicators remain around 2.5-2.7%, keeping the Fed on the sidelines for most of the year. The GOP’s narrow majority in the House of Representatives precludes any major tax reform beyond extending most of the 2017 Trump tax cuts. Trump imposes some meaningful tariffs, but they are ultimately not as draconian as he initially proposed, nor particularly destructive to the economy. Their impact is largely offset by rising U.S. productivity (aided by deregulation and the early adoption of artificial intelligence (AI) at many large- and medium-sized companies), a meaningful moderation in housing inflation, and a more moderate decline in labor inflation. The Trump Administration’s immigration crackdown focuses overwhelmingly on deporting migrants with a criminal record and does not materially change the inflation outlook.
   
   Several issues were addressed within this one surprise, all of which were offered as reasons that inflation would stay largely unchanged. Inflation levels did indeed stay within a narrow range of 2.5% to 3.0% throughout the year across the key relevant metrics. The most recent data point—the November core CPI reading of 2.6%—was the lowest in five years. The Fed was on the sidelines until September, at which point it lowered rates for the first of what would ultimately be three 25 basis point cuts. The main feature of the One Big Beautiful Bill Act (OBBBA) was the extension of the 2017 Trump tax cuts, although there were some less-consequential tax cuts added in, such as no taxes on tips and social security subject to assorted caps. The OBBBA did contain a 100% bonus depreciation element that was more generous than the 80% bonus depreciation provision in the 2017 Tax Cuts and Jobs Act. Trump imposed meaningful tariffs (far more draconian than I expected) before backing off considerably. Most economists were surprised that the tariffs have not been nearly as destructive as they had feared (nor have they been as beneficial as Trump had predicted). Final U.S. productivity figures for 2025 are still pending, but the combination of better-than-expected GDP that was trending upward (4.3% real GDP in 3Q25, according to the latest data) and a moderate rise in unemployment point to strong productivity growth. Meanwhile, housing inflation has dissipated across most metrics, although not dramatically. Labor inflation has been largely unchanged. The administration’s immigration crackdown has resulted in a near cessation of illegal border crossings. The deportation push has clearly been controversial and there are conflicting data points. According to official numbers from the Department of Homeland Security in late October, nearly 600,000 people are likely to be deported from the U.S., with another 2.0 million or so likely to self-deport, by year-end. According to The Guardian, 328,000 people have been arrested in 2025 by ICE. While the government has maintained that the majority of those arrested have criminal backgrounds, several reports have indicated that most charges appear to be for minor offenses, such as routine traffic violations.
    
2. The U.S. dollar reverses course. After a 7% increase in the trade-weighted U.S. dollar in 2024, bullish U.S. dollar sentiment began 2025 in the 97th percentile relative to its trailing 10-year history. The consensus expects the U.S. economy to keep outgrowing most of the world, aided by Trump’s desire to cut taxes and red tape. The dollar bulls also see the greenback receiving support from a somewhat more hawkish Fed than was the case in 2024 due to fears of a tariff-induced uptick in inflation, America’s safe-haven status in a geopolitically tumultuous world, and the nation’s strong energy reserves. Those factors would more than offset any concerns about America’s ever-growing debt, according to the consensus view. Instead, the combination of Trump’s long-standing distaste for a strong dollar due primarily to its linkage to trade deficits, along with the inherent challenges of weaker currencies outside the U.S., could lead to a coordinated behind the scenes global effort to weaken the dollar, somewhat akin to the more formal 1985 Plaza Accord during Reagan’s first term. Trump could also endorse an unconventional replacement for Fed Chairman Powell, causing global investors to pull away from U.S. markets. The bottom line though is that the dollar’s extended valuation makes it vulnerable to the same kind of decline it experienced in 2017, the first year of Trump 1.0. Ultimately, while the euro mostly treads water, a stronger yen versus the dollar causes a meaningful unwind of the ever-popular “short yen, long technology stocks” hedge fund trade, contributing to a 10%+ intra-year correction in the S&P 500.
   
   The trade-weighted U.S. dollar fell more than 9% in 2025, almost all of which was in the first half of the year. This was a key driver behind the counter-consensus outperformance of overseas stocks for the year. The euro ended the year with a 13% gain versus the greenback. Meanwhile the yen surged by 10% versus the dollar into late April, overlapping with the 15%+ correction in the S&P 500 driven by Trump’s initial ‘Liberation Day’ tariff announcement. The yen has since weakened considerably following Trump’s retreat from his most aggressive tariff proposals and ended the year roughly flat versus the dollar.
    
3. The S&P 500 market multiple finally contracts, but the impact is offset by stronger-than-expected earnings growth. After trading well above the trailing 30-year average price-to-earnings ratio (PE) of 16.3x for the past two years, the one-year forward PE multiple for the S&P 500 falls from 22x at the start of the year to just over 20x at year end. The realization that the Fed is unlikely to cut rates meaningfully in 2025, smaller than anticipated tax cuts from a deeply divided Republican majority, assorted Trump-driven policy shocks, and “peak AI enthusiasm” weigh on market multiples. Importantly though, corporate earnings make up the slack due to improving productivity, benefits from deregulation in manufacturing, energy and financials, and a somewhat weaker U.S. dollar. Whereas consensus earnings expectations for the S&P 500 almost always fall over the course of the year, S&P 500 earnings ultimately exceed the consensus forecast of 13% growth. As such, the major U.S. indices end the year with modest gains, below the consensus expectation of upper single to low double-digit returns.
   
   The resilience of U.S. corporate earnings was a major factor behind the overall strength in the U.S. market in 2025. Pending 4Q25 results, the current consensus is that S&P 500 earnings growth increased by about 15% for the year, exceeding the consensus estimate of 13% from a year ago. Still, despite periodic bouts of multiple contraction, most notably around ‘Liberation Day’ and in early November when fears of an AI bubble escalated, the S&P 500 multiple ended the year largely where it started, helping the index post a 17.8% gain—better than what I expected—largely due to sustained enthusiasm toward AI.
    
4. Value stocks keep pace with growth stocks in a year when stocks do not plunge. The Russell 3000 Growth Index has exceeded the Russell 3000 Value Index in seven of the last eight years with a cumulative return over that timeframe of 318% versus 97% for its value counterpart. The one exception was in 2022’s bear market when the market’s growth darlings suffered disproportionately amid the largest uptick in interest rates in four decades. With value stocks generally trading at their lowest level versus growth stocks in over twenty years, investors finally embrace unloved cyclical sectors and the Dow Jones Industrial Average outperforms the tech-dominated Nasdaq. The same reversion to the mean-oriented trade does not apply to two other longstanding anomalies—the relative weakness in small caps versus large caps and the general weakness in Chinese stocks—as both continue to underperform the S&P 500.
   
   The resilience of the AI story generally aided growth stocks, enabling the Russell 1000 Growth Index (up 18.1%) to continue its dominance over its Value counterpart (up 15.6%). Along similar lines, the Nasdaq gained 21.1%, outperforming the 14.9% increase in the Dow. Small and mid-cap stocks rebounded toward the end of the year as the Fed finally pivoted into rate-cutting mode but generally lagged (Russell 2000 Small Cap Index up 14.5% and the Russell 2500 Midcap Index up 12.8%). The Chinese economy remained generally moribund but Chinese stocks rebounded nicely with the MSCI China Index up 31.3%.
    
5. The most destructive cyber-attacks in history. Cyberwarfare, an existing multi-trillion dollar global “industry” (and yes, it is well into the trillions when including factors such as lost money, destruction of data, intellectual property theft and diminished productivity) becomes even more destructive with help from increasingly sophisticated AI-generated phishing attacks. Multiple attacks target financial markets via a campaign to spread false information about individual companies, sparking a mini “flash crash” via AI-enabled high frequency traders. Key energy, water, transport, healthcare and/or communication infrastructure are penetrated, leading to significant human and economic losses. The damages are extensive enough that politicians call for military retaliation against the state-sponsored perpetrators of the attacks.
   
   There was a 45% or so uptick in global cyber-attacks in 2025 versus 2024, according to recent data from Check Point Software, a leading cybersecurity firm. The attacks included the first large-scale cyberattack by AI in September when a state-backed threat group, likely Chinese, conducted a major attack on Anthropic’s Claude that ultimately targeted roughly 30 entities across the U.S. and allied nations as part of a large-scale intelligence gathering operation. Russian government-backed hackers likewise used a Google AI model to develop malware. These strike me as ominous warnings of the additional cyber challenges facing an AI-enabled world. Still, there was no major event that lived up to the fears expressed in the original surprise.
    
6. The Indian market underperforms. The world’s almost universally favored emerging market economy posts slowing growth, making it more challenging for Prime Minister Modi to keep creating millions of jobs for young people entering the workforce. The slowdown comes as consumers reduce spending after a decline in real wages amid spiking inflation. The rising inflation causes the country’s central bank to remain reluctant to join the many other central banks that have cut interest rates more. India remains a long-term winner as many western countries reduce their reliance on China, but the early-year PE ratio for the benchmark SENSEX index of 23x 2025 earnings per share reverts to its pre-Covid five-year average of just under 20.5x, causing Indian stocks to underperform the MSCI emerging market average for the full year.
   
   The SENSEX ended 2025 up 7.3%, well below the 30.5% increase in the MSCI Emerging Market Index. The MSCI India Index ended the year up just 4.3%. The Reserve Bank of India did indeed hold its key interest rate at a restrictive 6.5% for most of the year to help tame sticky inflation. Although U.S. hyperscalers are investing heavily in India-based AI infrastructure, the country currently has far less of the direct tech/AI exposure that led investors to gravitate to other, cheaper Asian markets such as China, South Korea and Taiwan. The Indian market also suffered from the 50% tariff imposed by the Trump Administration, in part to punish India for its continued purchases of Russian oil.
    
7. An M&A boom exceeds expectations… After the two slowest years in U.S. M&A activity since 2015 due largely to the Biden Administration’s aggressive antitrust policies, pent up demand triggers a 30% increase in deal activity. The increased activity itself doesn’t constitute much of a surprise, but the magnitude proves noteworthy (the consensus appears closer to a 10-15% increase). After a few years of subdued deal activity to exit portfolio holdings, private equity firms feel the pressure to sell long-held assets and return capital to increasingly impatient investors. IPO activity surges by 50% from 2024 levels. Investment banking-related stocks are among the market’s best performers.
   
   The M&A boom took a while to materialize but kicked into high gear after Trump’s post-‘Liberation Day’ pivot and as it became clearer that the Trump 2.0 Justice Department and Federal Trade Commission were taking a far more lenient view of antitrust enforcement than the prior administration. According to LSEG, global M&A increased last year from just over $3 trillion to $4.6 trillion, or 52%, while U.S. M&A increased by over 40% to $2.0 trillion. There have been roughly twice as many deals valued above $10 billion than in the same period in 2024, according to The Wall Street Journal. Meanwhile, U.S. IPO activity increased by 55% from a year ago with high profile plans reportedly in the works for SpaceX and others. Traditional investment banking-related stocks performed well, including Goldman Sachs (up 55.3%) and Morgan Stanley (up 43.6%).
    
8. …and sparks outsized gains in healthcare. Large M&A deals will provide a major boost to portions of the healthcare sector via a ramp in biotech acquisitions, along with mega-cap mergers of traditional drug giants. As per Strategas, healthcare stocks have the second-best outperformance against the S&P 500 of any sector in the first year of a president, with only financials having done better. With the healthcare sector trading at a 20%+ discount to the S&P 500 at the start of the year—well above the 5% average discount over the past 20 years—M&A activity helps to reduce the valuation gap. Beaten down value-oriented pharma and other healthcare stocks such as those selling healthcare tools and equipment also rally as Trump proves largely unwilling to reduce the availability of and reimbursement for popular drugs, vaccines and insurance offerings.
   
   Healthcare ends the year as one of the market’s top three performing sectors. Healthcare didn’t quite live up to my expectations as the S&P Healthcare Select Sector Index ended the year with a 14.5% gain, right in the middle of the pack among the 11 main U.S. sectors. Things looked a lot worse until the last third of the year, at which point it became clearer that the administration’s regulatory policies were likely to be less onerous than initially feared. Biotech and other M&A activity surged in conjunction with the late-year rally generally and the expectations for lower interest rates specifically.
    
9. “Drill baby drill” leads to a new golden age for oil services stocks. Trump’s desire for increased energy production in the U.S. and elsewhere doesn’t do much for oil and gas producers as increased supply puts a lid on prices despite periodic rallies linked to geopolitical flareups. However, the increased drilling is a boon for the companies that provide equipment to those producers. The PHLX Oil Service Index (OSX), which fell by over 12% during the course of 2023 and 2024, more than recoups that decline with a 20%+ rally.
   
   Oil prices were indeed rangebound over the course of the year with WTI crude ending 2025 at $58 per barrel, about 20% below where it started. The OSX rallied by 48% from its April lows and certainly outperformed oil prices but managed only a modest 3.5% increase for the full year. At least for the purposes of the Ten Surprises, if only the 2025 calendar had extended into the first full week of trading in 2026—the OSX surged by nearly 12% through that first week with a boost from the extraction of President Nicholas Maduro from Venezuela.
    
10. DOGE is a bust. No, I don’t expect the much-hyped Department of Government Efficiency to come even remotely close to its originally stated objective of implementing $2 trillion in cost savings, much less Elon Musk’s subsequently revised “more realistic” $1 trillion target. I doubt they get much past $250 billion in true, sustainable cost reductions. There simply isn’t enough discretionary spending to cut to approach the targeted level and a populist like Trump may tolerate trimming some fat, but not much proverbial muscle and bone. Musk is likely to lose interest sooner rather than later and revert his focus to his assorted other endeavors, several of which will struggle without much of his oversight. None of that will strike most folks as particularly surprising. What would be surprising to its proponents though is that Dogecoin, for example, with a year-end 2024 value of about $48 billion, falls more than 50% amid a broad retreat in cryptocurrency values of about 25% as the animal spirits that propelled the crypto rally of 2023 and 2024 fade despite regulatory support from the Trump Administration. It remains unclear why any U.S. administration would champion an “alternative currency” such as bitcoin that threatens to diminish the dollar’s reserve currency status. More broadly, real-world applications for digital currencies remain very limited, at least outside of those that support criminal activity.

The Musk-led Doge effort did indeed flame out quickly. By their own calculations, Doge claimed $214 billion in savings, although most analyses have indicated that the actual savings were far lower. Dogecoin itself was a bona fide bust, falling by 64% for the year. Despite the Trump Administration’s clear embrace of crypto (including the Trump family itself), crypto prices ran out of steam late in the year. Crypto prices broadly were weak with the Nasdaq Crypto Index down 13.3% for the year. Bitcoin, the largest component of the index, suffered a sharp 30% fourth-quarter 2025 correction to end the year down nearly 6%.

I’ll share one more idea for 2025. I can’t quite get to the requisite 50%+ confidence level that it will occur, so please consider it a runner up, but it addresses arguably one of the most common questions that we receive from clients these days:

American equity market exceptionalism takes a pause. 2025 began with the U.S. accounting for about 27% of global GDP but 67% of global market capitalization. The overwhelming consensus has become that U.S. stocks will continue to outperform the rest of the world given the country’s technology leadership, pro-growth policies, relative energy and food self-sufficiency, rule of law, and so on. Those advantages do not lead to outperformance in 2025, however, given an already-rich valuation premium, a decline in the U.S. dollar, a slowdown in AI and tech euphoria, and a European trade agreement with the U.S. that avoids major tariffs. European equities manage to rally despite a continued uninspiring fundamental growth backdrop due to more stimulative fiscal policy from a newly elected German government, central bank easing amid falling inflation, and an increased commitment to enhancing near-term economic growth over longer-term environmental considerations. The MSCI ACWI ex US Index outperforms the S&P 500 by 5%.

Yes, I should have pulled the trigger on this one! The MSCI ACWI ex US ended the year up 33.0% in U.S. dollars, outperforming the S&P 500 by 15.2%, for most of the reasons highlighted above.