The best-performing factor in 2025 was High Beta. On a market-neutral basis, high-beta stocks outperformed low-beta stocks by 22.5% during the year. Momentum also gained significantly, with high-momentum stocks delivering a 15.8% return premium over low-momentum stocks (though trailing the prior year). Large-cap stocks continued to lead small- and mid-caps, and Value began to regain traction after a two-year slump.
Looking at long-term returns, it becomes clear why equity market factors need to be actively managed. In the short term, factor returns can swing by 30% in either direction; as the time horizon stretches, factor return differentials compress into the low single digits and are far less pronounced. A simple buy-and-hold approach to factor investing can introduce significant short-term volatility while being unlikely to add much value over longer horizons.
Only three sectors outperformed the S&P 500 in 2025. In other words, last year’s market was driven by Technology, Communication Services, and Industrials. Rate-sensitive sectors such as Real Estate and Homebuilders, as well as consumer sectors, were drags.
There was significant dispersion in last year’s returns. Even with the year-end tumble, AI stocks greatly outperformed the rest of the market, cementing 2025 as an AI-driven year.
The Magnificent Seven outperformed broad tech, but not by a wide margin. Broad tech, in turn, outperformed the Dow, small caps, and equal-weight indexes.
Within the Magnificent Seven, dispersion was even wider. GOOGL gained 65.8% versus AMZN’s 5.8%, underscoring selective investor positioning rather than indiscriminate buying across the group.
Equities led across asset classes as they often do, with international markets standing out. Alternatives and private investments followed closely, while bonds also delivered strong returns. Gold gained 26.1%, and Bitcoin was the lone value eroder, down 7.1%.
If the 2025 market taught us anything, it is that prediction is difficult, while adaptation is more realistic. The year began with high expectations for the economy, quickly gave way to tariff-related uncertainty, and was later challenged by doubts around AI. Yet few anticipated how resilient the economy would prove, or that the stock market would deliver a third consecutive year of double-digit returns—even as the labor market softened and fiscal stimulus faded.
What stands out to us is this: despite isolated pockets of irrationality (as noted in our October Recap), the broader market has remained largely rational. Prices have maintained a strong—if imperfect—relationship with underlying growth, as illustrated in the tables above.
Looking ahead, we believe earnings will continue to drive returns, and that active management will be increasingly important as fundamentals diverge and volatility picks up.