Key Drivers of 2025 Performance
- Artificial Intelligence (AI) – AI stocks were the main driver of US stock market returns during 2025 with Alphabet gaining more than 60% and chip maker NVDIA gaining more than 30%. However, they did come under pressure several times during the year. In January, Chinese company DeepSeek announced that it had succeeded in training an AI model using less than 10% of the resources required to train leading US AI models. This led to concern that demand for AI chips might be overestimated and US companies were spending too much to develop their models. In November, the massive level of spending on AI projects and the circular nature of some of the spending raised doubts on the sustainability of the AI boom. At other times, concerns that the Federal Reserve might delay or forgo interest rate cuts pressured AI stock prices.
- Tariffs – Announcements of substantial tariff increases on Canadian & Mexican goods in March and on imports from the rest of the world in April contributed to a 15% drop in the S&P 500 early in the year. The stock market recovered quickly as proposed tariff increases were reduced and effective dates for the increases were delayed.
- US Federal Reserve – As always, changing investor expectations regarding the timing and magnitude of potential cuts in the Fed Funds rate impacted stock prices. In addition, stocks were negatively impacted by threats to the Fed’s independence as President Trump pushed for a dramatic lowering of interest rates, threatened to terminate Fed Chair Powell, and fired a Fed governor.
Potential Key Drivers of 2026 Performance
- Artificial Intelligence (AI) – The extreme valuations of some AI stocks combined with the ever-growing weight of these stocks within market indices draws increasing comparisons to the dot com bubble of late 1999 – early 2000. Although history doesn’t repeat, it often rhymes. AI stocks appear likely to experience a correction. The timing and magnitude of a correction are much less certain.
- Tariffs – Thus far, the US economy has held up well. However, most of the tariff increases became effective during the second half of 2025 and many firms had stocked up on goods at pre-increase rates, minimizing the 2025 impact of the tariff increases. The full effect of tariff increases on consumer prices is likely to be felt in 2026. A substantial rise in price levels could pressure the Federal Reserve to delay or forgo interest rate cuts.
- US Federal Reserve – Will the Federal Reserve cut rates in 2026 and, if so, by how much? Who will President Trump nominate to succeed Fed Chair Powell when his term ends in May and how independent/effective will the new Fed Chair be?
- Investment Spending – There were signs that many industries were cutting back on investment during 2025 due to continual modification of tariff rates and policies. These cutbacks were largely offset by massive investments in AI infrastructure. It remains to be seen if non-AI investment spending will recover and/or AI investment spending can be sustained.
- Geo-political developments – Will the Ukraine-Russia war continue to escalate? Alternatively, if a peace agreement is reached will it be structured to promote a lasting peace? How will the situation in Venezuela play out?
This report has been generated from information that Arbor Financial believes to be reliable and accurate. We do not represent or warrant the accuracy or completeness of the information contained in this report. As such, all calculations, estimates, and opinions included in this report constitute our best judgment as of this date and may be subject to change. Past performance does not guarantee future results.
Peter has more than 25 years of experience in the financial industry as a researcher, strategist, and portfolio manager. As a portfolio manager at Arbor, Peter performs quantitative analysis on current and prospective portfolios.
Peter is a CFA charter holder. He earned his PhD in Economics as well as dual Bachelors of Science degrees in Computer Science and Pure Mathematics from the University of California, Santa Barbara.
Before joining Arbor, Peter was a Founding Member of institutional money manager OakBrook Investments and worked there for 22 years serving in a variety of roles including portfolio manager, Director of Research, and co-Chief Investment Officer. Prior to forming OakBrook, Peter worked at ANB Investment Management & Trust Company as a strategist, portfolio manager, and Head of Research.
Peter has lived in Lisle, Illinois since 1997. Outside of work he enjoys sports car racing and is an active member of the Autobahn Country Club in Joliet, Illinois and the Sports Car Club America (SCCA).