2025 in the Rearview and the Road Ahead for 2026

February 4th, 2026 by Cory Large

A year defined by concentration, resilience, and the rise of second-order AI winners.

As investors, we devote considerable time to preparing for the future. But once a year ends, hindsight becomes the better teacher. And if 2025 taught us anything, it is that markets do not need perfect conditions to move higher. They simply need resilience, steady earnings, and an ability to tune out the noise long enough to let fundamentals do their job.

That does not mean 2025 was calm. Tariffs were introduced and adjusted several times, interest rates stayed higher for longer, and geopolitical tensions rotated through time zones with impressive consistency. Even so, markets delivered strong results. Below is what drove those gains and how we are positioning for 2026.

2025: A Year of Concentration, Dispersion, and a Few Surprises

If you only looked at the return of the S&P 500, which gained roughly 18 percent in 2025, you might assume the entire market moved higher together. Reality looked different.

A Few Quick Stats Help Frame the Year

• The S&P 500 (a broad index of large-cap U.S. companies) returned about 18%.
• The NASDAQ Composite, which contains many technology-focused companies, rose just over 20%.
• The Dow Jones Industrial Average, which tracks 30 established blue-chip companies, lagged both the S&P and NASDAQ due to lighter exposure to fast-growing technology names.
• Small-cap and mid-cap stocks were positive, but meaningfully trailed large caps.
  • Examples of size categories:
    • Small-cap: market value of about $300 million to $2 billion
    • Mid-cap: about $2 billion to $10 billion
    • Large-cap: above $10 billion

The Biggest Story: Concentration at the Top

A small group of mega-cap technology companies, often referred to as the Magnificent Seven, accounted for an outsized share of the S&P 500’s gains.
This group typically includes Apple, Microsoft, Amazon, Alphabet, Nvidia, Meta, and Tesla.

According to our internal research, these companies contributed an estimated 46 percent of total S&P 500 returns in 2025. Even within this group, performance varied widely. Leaders like Nvidia and Meta surged, while others were more muted. This shows that market leadership was not only narrow but also uneven.

Another important comparison is between the standard market-cap-weighted S&P 500 and its equal-weighted counterpart.

• Market-cap weighted index: larger companies have more influence on performance.
• Equal-weighted index: every company receives the same weighting.

In 2025, the equal-weighted S&P 500 significantly lagged the traditional version, reinforcing that much of the year’s return came from a small number of very large companies.

The Takeaway

The market did well, but it did not rise evenly. A handful of mega-caps did much of the work, which makes thoughtful diversification, not just mixing between stocks and fixed income but diversifying across industries, sectors, and company sizes, far more important moving forward.

The 2025 Plot Twist: Long-Cycle Industries Stepped Forward

While headlines focused on AI and geopolitics, several long-cycle industries quietly delivered steady, fundamentals-driven performance:

• Infrastructure
• Aerospace and Defense
• Financials

Infrastructure

Infrastructure needs continued expansion across transportation, power, water systems, and reshoring, which would bring manufacturing back to the United States.

• The United States faces more than $2 trillion in infrastructure needs through the early 2030s.
• Globally, the number is more than $100 trillion through 2040.

Water Infrastructure in Particular

Water infrastructure deserves specific attention. The funding gap between current investment levels and long-term needs is substantial, and we believe that markets have not fully priced in the multi-decade reinvestment cycle underway. When we state that an area remains a focus, we mean that, based on our research, we expect to maintain or increase portfolio exposure in it when appropriate.

Aerospace and Defense

Global defense spending accelerated, creating multi-year visibility for companies across the aerospace and defense ecosystem.

• The United States proposed $1.5 trillion for FY26 defense funding.
• Europe announced more than 800 billion Euros in additional defense investment.

Why Visibility Matters

Visibility refers to the clarity and reliability of future revenue streams, often driven by long-term government contracts, backlogs, and multi-year modernization programs. These industries benefit from the kind of stable, predictable demand that is not dependent on quarter-to-quarter economic shifts.

If the United States continues to trend toward a de-globalized economic stance, it implies higher spending on national security, supply-chain sovereignty, and military preparedness, all of which support long-cycle defense companies.

Financials

Instead of diving into yield-curve terminology, here is the simpler explanation:

When short-term interest rates fall faster than long-term interest rates, banks generally benefit.

• They pay depositors based on short-term rates
• They lend at rates tied to the longer end of the curve

This improves the spread banks earn, which began to re-emerge toward the end of 2025. If this environment continues in 2026, financials may experience a more favorable backdrop.

AI’s Next Phase: Second-Order Winners Took the Spotlight

AI remained one of the most important investment themes in 2025, but the most significant shift was not in software. It was in the physical infrastructure required to power AI systems.

Big Tech’s Capital Spending Surged

Technology companies continued to increase capital expenditures, driving demand across:

• Utilities and power producers
• Data center operators
• Semiconductor equipment firms
• Cooling technologies and electrical infrastructure providers

These companies are effectively the picks and shovels of the AI buildout.

One of our key findings:
Data centers are projected to consume about 8 percent of total U.S. electricity generation by 2030, up from about 3 percent in 2022. This is a structural shift in how the grid must operate.

How We Are Positioned for 2026: Focus on Structures, Not Stories

Rather than attempting to predict precise economic outcomes, we are positioning portfolios around long-duration forces supported by capital spending, policy alignment, and structural demand.
When we say we are focused on an area, it means that based on research, fundamentals, and valuation, we are inclined to allocate a portion of portfolios toward these themes when appropriate.

Our Key Themes Heading Into 2026

• Aerospace and Defense: Multi-year global spending commitments and strong backlogs create revenue visibility for industry leaders.
• Financials: A more normalized yield curve and improving capital markets activity support select institutions with strong balance sheets.
• AI Second-Order Beneficiaries: Power demand, grid upgrades, utilities, and industrial technologies supporting data center expansion continue to see accelerating investment.
• Infrastructure Development: Transportation, energy, water, and reshoring projects drive sustained demand for engineering, equipment, and materials.

These themes are driven by structural necessity, not short-term market narratives.

We remain flexible, evidence driven, and prepared to adapt as conditions evolve.

Final Thought: 2025 Rewarded Patience. 2026 Will Reward Positioning.

2025 was not always comfortable, but it rewarded investors who stayed disciplined and avoided reacting to every headline. As we enter 2026, the real opportunity lies in positioning ahead of the capital cycles that will influence markets for years to come.

We appreciate the trust and confidence our clients place in us and look forward to navigating 2026 together.

About the Author

Cory Large, IAR, CRTP is a Portfolio Analyst and Wealth Strategist at Anchor Bay Capital.
He specializes in investment research, portfolio construction, and personalized tax-planning solutions for clients. Cory is a licensed Investment Advisor Representative and California Registered Tax Preparer. In addition to his work in investment strategy, he manages client relationships, contributes to the firm’s market publications, and supports thematic and quantitative research across Anchor Bay portfolios. Cory can be reached at [email protected].