Economic growth and corporate earnings exceeded expectations in 2025, with the upside most visible outside the United States. US growth remained solid, but a meaningful share of the surprise came from Europe, where pessimism at the start of the year was greater than data ultimately warranted. European equities, which lean more toward value-oriented sectors and companies, have been rewarded, and MSCI Europe has been among the stronger developed-market performers this year.
The same dynamic was afoot with US tariffs: lots of noise, yet less bite than feared. Early-year volatility around the “Liberation Day” tariff announcements made life extremely uncomfortable in real time. Thankfully, as the year progressed, the macroeconomic impact proved more modest than many initially assumed. Global equities benefited, not because risks disappeared, but because outcomes landed closer to “manageable” than “catastrophic.”
Regarding inflation, the story has been surprisingly uneventful. Global money supply growth has remained calm, albeit heating up lately, long-term interest rates have mainly stayed range-bound, and there is still little evidence of a broad inflation resurgence. Where inflation exists, it has looked more like the byproduct of steady growth than the symptom of overheating.
2025 “felt” like a volatile year given the first-half US stock market correction and constant political unrest, but the data tell a calmer story. Daily moves of more than 1%, up or down, have remained close to long-term norms. The year often felt dramatic, but by historical standards, it has not been unusual. More importantly, volatility comes and goes and does not tell us where stocks are headed next. So, view volatility as a temperature reading, not a compass.
Another concern that keeps resurfacing is corporate valuations. Price-to-earnings ratios on many indices sit above long-term averages, and it is easy to look at an “expensive” market and assume a reckoning must be near. But there is little consistent relationship between a company’s valuation and its performance one year later. Every bull market eventually ends, yet valuations alone have never reliably signaled an exit.
Since 1945, there have been 15 US bear markets, and the catalysts generally fall into two buckets: a significant negative downside surprise or nearly ubiquitous sentiment that rises into euphoria. The shock of a considerable downside surprise must be both unexpected and economically significant. Thankfully, risks that everyone is already discussing are generally reflected in prices and are less likely to spark a bear market. More often, bear markets begin with developments that are poorly understood, ignored, or underestimated.
That said, it is worth remembering how bear markets tend to start: historically, they begin slowly, not with a bang, they roll over, and they rarely drop precipitously like corrections. Average monthly declines tend to be around -2% early on.
Fundamentally, the global economy still looks decent. Outside of the unusual boom-and-bust around COVID, GDP growth has remained steady. Business surveys have remained in expansion territory, albeit at a slower pace more recently. Global trade has continued to grow despite tariff headlines and issues. Loan growth has slowed from the surge a few years ago but appears to be normalizing, not stressed. Put together, this is an environment where companies can continue growing revenues and earnings.
That does not mean everything looks perfect. Layoff announcements have drawn attention, and they are difficult for those affected. But they have not, so far, pointed to broad economic weakness. When layoffs were higher earlier this year, the economy continued to expand. Jobless claims remain low, although they are often among the earliest indicators to rise when the economy turns down. So far, that signal is not flashing red.
Concerning politics and policies, the tariff story remains fluid. In November, the US Supreme Court heard arguments challenging the legality. If tariffs are invalidated, refunds might become part of the conversation. The key point for markets is not the dispersion between headlines and hard data; it is the gap between expectations and reality that moves markets.
That principle, “markets move on the gap between expectations and reality,” helps explain much of 2025. Concerns about valuations, tariffs, and volatility dominated headlines. Yet the bigger story is that economic growth and corporate profitability performed better than many feared at the start of the year. In many ways, global markets have been climbing what investors call a wall of worry. Those worries are not necessarily a bad thing. They tend to hold expectations down, which lowers the hurdle for reality to surprise on the upside.
For most of 2025, global economic data consistently exceeded expectations. That steady pattern of upside surprise helped push equities higher, not because risks disappeared, but because reality kept clearing a bar that society set too low.
