December brought a measured close to a year of above average gains as major US equity indices all finished generally flat for the month with non-US markets moving slightly higher.

The modest finish to 2025 didn’t prevent markets from ending the year just below record highs, as a third consecutive year of double-digit returns for US stocks underscored the resilience that has characterized this market cycle despite varying headwinds that have arisen along the way. After markets rebounded sharply in the first half of the year following the tariff-induced volatility in April, more modest gains toward the end of the year were less a reflection of deteriorating fundamentals than a function of investors’ risk appetites being fairly full.

While the impact of the AI infrastructure capital spending boom continued to shape markets – both in December and throughout the entire year – the specific impacts of that secular theme began to look slightly different than in previous years as the Magnificent 7 were joined by a host of other names tied into the AI build-out as primary drivers of market returns. Thus, while domestic market returns have appeared to spread out to a degree, a meaningful amount of concentration remains linked to the broader AI ecosystem.

From an economic perspective, December provided more evidence for the tension that exists between growth, inflation, and policy. Consumer spending remained resilient, but job growth slowed and unemployment edged higher. The juxtaposition of accelerating business investment alongside a softening labor market is historically unusual, and its persistence remains one of the keys to the economy’s health moving into 2026. At the same time, inflation came in below expectations, signaling continued disinflationary progress, but it remains above the Fed’s long-term target. Meanwhile, the Federal Reserve cut interest rates once again, another tension that will continue to be important to monitor this year.

Markets finished the year strong yet appear to be growing increasingly selective as they remain supported by powerful but narrow structural tailwinds. As investors look ahead, the focus seems to be shifting from the prospect of continued market gains to the durability and makeup of the next market cycle phase. After several years in which concentration was consistently rewarded over diversification, the environment may be shifting as we enter the new calendar year.

Our Perspective

With a bifurcated economy driven by an AI investment boom, markets near all-time highs after a three-plus year bull run, and an evolving monetary policy outlook, we continue to be in a unique environment. As an experienced manager with a time-tested investment process across asset classes, we feel well prepared to navigate these evolving market conditions by remaining disciplined in our approach. We continue to believe the current environment calls for process-driven active management to maintain a focus on mitigating risk while prudently pursuing attractive investment opportunities.

Our View

Economic Cycle		Economic growth accelerated in 3Q but remains increasingly reliant on narrower subsets of the economy. The Fed is easing policy at a time when inflation remains elevated and financial conditions are generally not restrictive by historical standards.
Stock Market		The US stock market continues to trade near all-time highs and earnings expectations reflect a rosy outlook. With the Fed looking more cautious in its approach to rate cuts, can earnings growth support higher stock prices in the potential absence of multiple expansion?
Bond Market		Risks to the economy and inflation look balanced. While elevated levels of inflation and resilient growth could push yields higher, a sudden slowdown in growth could also see cuts priced back into the market and yields fall from their current levels. Corporate spreads remain near their lows.
Important Issues on the Radar		Geopolitical Risk: Trade policy, rolling conflicts including US involvement, and broader turmoil around the world present a backdrop of lingering uncertainty when it comes to the geopolitical impact on markets. These types of risks and events can often not be handicapped, so broadly prudent portfolio and risk management are key.
		AI: Booming investment in semiconductors and AI infrastructure has been a feature of markets for years now. The hyperscalers are committing more of their cash flow towards these initiatives, many players have begun to raise debt, and investors will eventually demand tangible return on this massive spending.
		Stock market concentration: The US equity market has become more concentrated in the largest companies than even before, and many of them are tied to the same theme (AI). A diversified portfolio can help mitigate this “hidden risk” in investors’ portfolios.

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Source: Wall Street Journal.

All investments contain risk and may lose value. This material contains the opinions of Manning & Napier, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but not guaranteed.