Written by: Trek Investment Committee
Annual Gains Among Muted Volatility1
Despite elevated policy and geopolitical uncertainty late in the year, U.S. equity markets finished 2025 with double-digit gains across major indexes. According to Reuters’ year-end market wrap, even though stocks closed lower on the final trading session of the year, all three major benchmarks posted healthy annual returns:
- The S&P 500 rose 16.39% in 2025
- The Nasdaq Composite advanced 20.36%
- The Dow Jones Industrial Average gained 12.97%
While the fourth quarter included several bouts of volatility, most of the movement was event-driven rather than fundamental. Investors continued to favor large, profitable companies with durable earnings, a pattern that has historically appeared when confidence remains intact, but caution rises around the edges.
Slower Growth, Not a Stall
From a macroeconomic perspective, the U.S. economy continued to expand through 2025, even as the pace of growth moderated. According to the U.S. Bureau of Economic Analysis (BEA), real gross domestic product (GDP) increased at an annual rate of 4.3% in the third quarter of 2025, following 3.8% growth in the second quarter, indicate that while growth moderated in some areas, overall economic activity remained positive.
While overall output remained positive, some areas of the economy showed signs of cooling. The Institute for Supply Management (ISM) reported that U.S. manufacturing activity remained in contraction territory late in 2025, reflecting softer demand and the impact of higher financing costs. ISM’s Manufacturing PMI remained below the 50 level that separates expansion from contraction, signaling ongoing pressure in interest-rate-sensitive sectors.
At the same time, the Congressional Budget Office (CBO) emphasized that temporary disruptions, including federal funding lapses, tend to reduce measured economic output only briefly, with much of the lost activity recovered once normal government operations resume. The CBO does not characterize these episodes as signaling a broader economic stall.
Taken together, these data points support the conclusion that economic growth slowed in parts of the economy, but the broader expansion remained intact, an important distinction when evaluating market risk late in the cycle.
Sources 2, 3, 4
Policy Risk Comes Into Focus
Policy risk became tangible in October 2025, when the U.S. government entered a shutdown that ultimately lasted 43 days, making it the longest federal government shutdown in U.S. history. The shutdown halted non-essential government services, delayed the release of key economic data, and temporarily reduced income for federal workers, contributing to short-term uncertainty.
While markets continued to function through the disruption, the uncertainty focused on a broader concern that fiscal brinkmanship has become a recurring macro risk rather than a one-off event.
Looking ahead, Some policymakers and analysts have noted ongoing budget negotiation risks heading into 2026.
Sources 5,6
Geopolitical Developments
Geopolitical risk rose following Operation Absolute Resolve, launched on January 3, 2026, in response to escalating tensions involving Venezuela. According to CBS reporting, the operation marked a significant escalation in international efforts to address developments in the region and prompted swift global reaction.
Markets showed limited immediate reaction following the announcement. Energy markets showed brief sensitivity, with oil prices moving higher initially on concerns about potential supply disruptions before prices later declined as trading activity adjusted. Broader equity markets remained relatively stable as investors assessed the situation.
As with many geopolitical events, this remains a dynamic and evolving situation, shaped by diplomatic response as much as by military action. Broader global discussions around strategic geography and resource security, including renewed attention to areas like Greenland underscore how geopolitics continues to intersect with markets in less predictable ways.
Sources 7,8
What to watch as we enter 2026
Markets enter 2026 with several overlapping themes:
- Policy execution risk, particularly around fiscal negotiations and shutdown avoidance
- Geopolitical developments, including Venezuela and broader energy security concerns
- Economic follow-through, as higher interest rates continue to work through the system
- Questions remain about how market leadership may evolve across sectors
None of these factors individually point to a specific outcome, but together they help explain why markets may remain headline-sensitive, even after a strong year.
Final Thoughts
2025 was a reminder that strong returns and elevated uncertainty can coexist. Markets delivered double-digit gains despite slower growth, policy disruptions, and geopolitical surprises, highlighting how markets can deliver varied outcomes during uncertain periods.
As we look ahead, investors should expect continued crosscurrents rather than clear narratives. Historically, many investors have considered diversification and long-term planning during uncertain periods.
Sources:
- Reuters: Wall Street ends year’s final session lower but posts big annual gains for 2025
https://www.reuters.com/business/us-stock-futures-inch-down-thin-trading-wall-street-eyes-yearly-gains-2025-12-31/ - S. Bureau of Economic Analysis: Gross Domestic Product
https://www.bea.gov/data/gdp/gross-domestic-product - Institute for Supply Management: ISM Manufacturing PMI (Report on Business)
https://www.ismworld.org/supply-management-news-and-reports/reports/ism-pmi-reports/pmi/december/ - Congressional Budget Office: Effects of Federal Shutdowns on the Economy
https://www.cbo.gov/system/files/2025-10/61823-Shutdown.pdf - CBS News: How the longest government shutdown in history came to an end – CBS News
- CBS News: CBS News — Why another government shutdown in 2026 remains a risk
https://www.cbsnews.com/news/government-shutdown-risk-2026-budget/ - CNBC: Oil falls on supply outlook, Venezuelan output uncertainty
- CNBC: Stock market news for Jan. 5, 2026
Disclosure :
This overview presents a cautious interpretation of current economic indicators and their potential implications for investors. It’s important for investors to remember that market conditions are inherently uncertain and subject to change. The information provided here should not be considered as personalized investment advice or a prediction of future market movements. Investors are encouraged to consult with their financial advisor to discuss their individual financial situation and goals. A comprehensive investment strategy should consider the investor’s risk tolerance, investment time horizon, and any changes in economic conditions.
Investment Advisory Services offered through Trek Financial LLC, an investment adviser registered with the Securities Exchange Commission. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. Trek 26-06
