Market Trends | December edition

The U.S. economy remained remarkably resilient in 2025, a year with multiple shocks. Growth ultimately surprised to the upside: The Atlanta Fed’s GDPNow is tracking 3.9% for Q3, and full-year consensus estimates have steadily climbed. Meanwhile, U.S. equity returns have been driven primarily by earnings growth, not multiple expansion.¹

Every single quarter in 2025 saw earnings surprise to the upside, led by tech.² While we are cognizant of AI-related growth and its upside potential, we are thankful that parts of the market not driven by AI have also grown earnings at a robust 9%³. While AI bubble headlines are going to be with us for some time, we believe the returns that have stemmed from solid earnings growth from AI and non-AI related names have the potential to maintain equity strength in the medium term.

Strong earnings keep our preference on equities, where we prefer a dynamic approach as can be found via iShares U.S. Equity Factor Rotation Active ETF (DYNF). And we continue to believe in AI exposures, which can be accessed via the iShares A.I. Innovation and Tech Active ETF (BAI).

With momentum still intact, we remain optimistic on the U.S. and see further opportunity into 2026, as detailed in our 2026 Investment Directions. 

Explore our 2026 investment outlook

The Fed resumed its easing cycle in September – it's first cut since December 2024 – and cut another 25 basis points* in December, providing a tailwind for stock and bond performance. Bonds returned to being an effective ballast in 2025, offsetting weekly S&P 500 declines as stock-bond correlations dipped back into negative territory.⁴

Whether investors stepped out of cash into the front end of fixed income or focused on boosting yield with high yield credit, or really leaned into risk with emerging market bonds, many were rewarded with respectable returns.

With cash rates likely falling further in 2026, we prefer duration into the belly of the yield curve, which can be accessed via the iShares 3-7 Year Treasury Bond ETF (IEI). We also are keeping an eye on income opportunities in harder-to-reach areas of fixed-income – including U.S. high yield corporate debt, securitized products, and global debt – which can be accessed via the iShares Flexible Income Active ETF (BINC).

*A basis point (bps) is one hundredth of one percent (e.g. one basis point = 0.01%).

Explore our 2026 investment outlook

Portfolio diversifiers delivered strong returns in 2025: gold and international stocks were two of the best performers.

In an environment of continued macro uncertainty, we believe gold may continue to function as a viable alternative in investor portfolios. Rising deficit levels across many developed economies, particularly in the U.S., have raised concerns about currency stability, making safe-haven assets like gold more attractive. In addition, correlations between gold and AI equities suggest it can be an attractive diversifier if the AI theme comes under stress.

Heightened international returns follow a supportive mix of fiscal and monetary spending abroad, a weaker dollar, and Fed rate cuts. The dollar has long benefited from a cycle of robust U.S. growth and investment. But we believe 2025 marked the beginning of a weaker dollar cycle given current U.S. trade policy and demand for alternative reserve currencies.

Looking into 2026, we continue to see benefits to diversifying beyond U.S. stocks and bonds.

Explore our 2026 investment outlook