Weekly Investment Perspective

U.S. equities closed out 2025 with another year of solid gains, even as the final trading sessions were muted by holiday-shortened schedules and lighter volumes. For the full year, the S&P 500 returned 17.9% (including dividends), the Nasdaq advanced 21.14%, the Dow gained 14.9%, and the Russell 2000 added 12.8%. Bonds also delivered strong results with the Bloomberg U.S. Aggregate Bond Index returning 7.3% in 2025 as inflation pressures moderated and the Federal Reserve began easing policy. Trading during last week’s shortened trading schedule leaned softer, with modest pullbacks across major U.S. equity indices, a reminder that year-end liquidity can amplify otherwise limited news flow.

Stepping back, 2025 returns reflected a familiar but evolving mix of drivers. Corporate earnings growth remained resilient, supported by productivity gains and sustained investment tied to artificial intelligence. Late in the year, the Federal Reserve began a gradual easing cycle, delivering cumulative rate cuts while reinforcing its data-dependent stance. Leadership was concentrated again—the equal-weight S&P 500 returned 11.4%, trailing the cap-weighted index by almost seven percentage points—while the U.S. dollar logged its worst calendar year since 2017 (DXY -9.5%). That weaker dollar was a meaningful tailwind overseas: the MSCI All Country World ex-U.S. Index returned 33.1% in 2025, supported by USD weakness alongside improving fundamentals and lower relative valuations.

Over the weekend, geopolitical headlines re-entered focus as U.S. forces captured Venezuelan President Nicolás Maduro. President Trump said on Saturday that the U.S. will run Venezuela until there can be a proper transition. In isolation, the immediate market response has been limited with only a very modest increase in oil prices, the key area of focus. Venezuela’s oil production remains well below historical levels, and global energy markets are not currently facing acute supply shortages. Initial price movements reflected that context, with oil volatility driven more by OPEC+ production decisions than by the headline itself. Still, the episode serves as a reminder that geopolitical developments can matter quickly when they intersect with energy markets, inflation expectations, or broader policy alignments.

Looking ahead, Venezuela underscores two interconnected themes shaping the market landscape. First, geopolitical fragmentation is becoming a more persistent feature of the global environment, with regional conflicts, shifting alliances and trade blocs, and policy actions increasingly intersecting with markets. Second, energy security is re-emerging as a strategic priority at the same time global energy demand is rising, particularly from energy-intensive AI infrastructure and electrification trends. While markets have shown an ability to absorb individual geopolitical shocks, the cumulative impact of energy security concerns, trade alignment, and geopolitical stress points bears watching as these forces increasingly shape inflation dynamics, capital investment decisions, and longer-term growth trajectories.

The economic calendar is busy in the week ahead, but labor-market data will be the primary focus for investors. A series of employment-related releases will culminate with Friday’s December jobs report, which remains a key input into Federal Reserve decision-making. Measures of hiring, wage growth, and unemployment will help shape expectations around the pace and scope of further policy easing in 2026, particularly as officials continue to balance cooling inflation against signs of softening labor conditions.

Beyond economic data, attention will also turn to the Consumer Electronics Show (CES) in Las Vegas. CES is one of the world’s largest technology trade events and often provides an early-year pulse on innovation trends across consumer tech, semiconductors, and artificial intelligence. Announcements from major hardware, chip, and software companies can influence sentiment around AI investment, capital spending priorities, and longer-term growth expectations, making the event an important backdrop for markets early in the year.

As we begin 2026, our focus remains squarely on longer-term drivers rather than short-term market signals. We continue to emphasize diversified global exposure to high-quality businesses with durable cash flows, strong balance sheets, and the ability to navigate a more complex policy and geopolitical environment. Looking ahead, we are watching several key themes: whether AI investment translates into sustained productivity and earnings gains beyond the build-out phase; how labor-market dynamics influence the path of monetary policy; and whether geopolitics becomes a more persistent source of volatility rather than a series of isolated events. We will continue to monitor these developments closely and keep you informed as conditions evolve.

2025 The Long View | First Merchants Bank