There appears to be some law that all articles written this time of year have to be based on the calendars changing. I was going to write a different article on some other topic, but on the advice of my legal counsel, I’ll assimulate.
I’ll stick to larger financial trends or macroeconomics if you like words with many syllables. Let’s start with the year in review. Since you already lived this year, it shouldn’t come as too much of a surprise.
Year 2025 in review
Artificial Intelligence is the whole economy
A few analysts have shown that all the gains in the stock market this year are due to AI companies. That’s a big claim as the stock market is up almost 17% this year. I’m not sure if it is completely true, but it seems like every day there was a new $100+ billion dollar AI infrastructure deal. It was often one AI company passing it to another. For example, Nvidia invested in OpenAI. OpenAI invested in Oracle. Oracle invested nearly $250 billion in data centers. Amazon, Microsoft, Google, and Meta all invested in nuclear power.
(On a personal level, I invested in exchange-traded funds of ZAP and NLR. These ETFs hold companies that work with power grids and nuclear respectively.)
The whole AI boom has lead the Roundhill Generative AI & Technology ETF (symbol: CHAT) to 50% returns on the year. It’s impressive because a lot of the AI companies had already seen huge gains in 2024.
Tariffs weren’t that big of a deal
The big numbers that were given on “Liberation Day”, mostly never came to pass. Some countries made “deals” that they weren’t obligated to follow through with. For example, Japan promised $550 billion in U.S. investments in certain sectors by 2029. One of the sectors is AI and a Japanese company, Softbank, already agreed on co-funding a $500 billion Stargate project with OpenAI.
Trump got mad at Apple for making iPhones overseas. Apple gave Trump a trophy that was “Made in America” featuring New York-based Corning Glass and gold. Corning Glass has made iPhone screens since 2007. In fact, almost every phone manufacturer has used it for a long time. Trump loves anything gold. Apple also announced increased spending in the United States, some of which are… can you guess? You win if you said, “Data centers for AI.”
Most everyone that was due to get hit hard with tariffs quickly found out that they were able to get out of it fairly easily. Simply give Trump a promise so that he has something to brag about.
There were a couple of other reasons why tariffs didn’t impact consumers too much. Many companies bought supply in advance, so they weren’t impacted right away. They could spread the price increase gradually. Some companies “ate” part of the cost themselves. Studies have shown that tariffs were responsible for 0.7% of the overall increase in inflation.
The US Government got decimated
The government started the year in a civil war. DOGE became a government agency that was charged with cutting government agencies and programs. To use my favorite saying from Thomas the Tank Engine, it “created a lot of confusion and delay.” In the end, government spending was more in 2025 than it was in 2024.
The government was also shut down for about a month and a half, because Democrats noticed that some people were going to have super high health care bills in the New Year. Republicans wanted to ignore it and in the end the Democrats caved and no new health care plan was made. Republicans then spent the next month realizing that the Democrats had a point and should do something about it. They argued with each other about what to do and nothing got done in time.
If the two political parties had worked together on a compromise over the last two months, it could have been solved without a government shutdown at all. We recently found out that the DC pipe bomber from January 2021 hated both political parties. Clearly things have not gotten better. I pray that they start working together soon, because it seems like more and more Americans are considering violence a viable solution. To give some numbers to back it up, Pew polling shows that 85% of Americans believe politically motivated violence is increasing in the U.S.. It’s HARD to get 85% of Americans to agree on anything, so this is quite sobering. Additionally, NPR shows that more Americans say that they may have to resort to violence.
Sorry for getting a bit political there, but a stable government is a good thing for financial markets.
The Big Beautiful Bill kept taxes consistent
While Republicans were dead set against helping people with soaring health care costs, they felt very different about taxes. Trump’s Tax Act of 2017 was set to expire at the end of the year, which would have set taxes back to the higher rates in 2016. If Republicans hadn’t passed it, many Americans would have looked at their higher tax bill and been upset at taxes being raised. That wouldn’t be a good look for the next election. However, to pass it, Republicans had to find a way to cut spending. Otherwise, it would just continue to grow the national debt. They cut health care (Medicaid) and food assistance (SNAP) programs.
Overall the continued tax cuts will cost 4.5 trillion over the next 10 years and the spending cut was only around 1.5 trillion.
The Fed cut rates a bit
The Federal Reserve was on track to cut the rates a lot in 2025 as inflation had come back under control. However, increased inflation from tariffs changed the plan by adding a lot of uncertainty.
What’s going to happen in year 2026
I got a new crystal ball for Christmas and here’s what it says. We’ll find out if my friend got scammed next year.
The stock market will go down 3%
The stock market has been up three years. Historically, that’s not a great sign for the fourth year. In addition to that, the Shiller P/E is above 40. The only other time it spiked this high was a 19-month span in from 1999 to 2000. That was just before the NASDAQ crashed more than 75%.
I don’t think we’ll see a big drop like back then. Many of the companies investing in AI have been making piles of cash for more than a decade. They aren’t going to drop like Pets.com in the Dot-dom bubble.
AI will get even bigger
I talk to some people who still don’t use AI much. An electrician friend of mine recently said that he used to spend 10-12 hours creating an estimate for putting in the wiring of a new house. It was laborous with using a CAD program to measure wiring and spacing. It was the worst part of his job (doing the actual electrical work is fun for him). A friend told him that ChatGPT is actually really good at it. So he put it to the test and found that he could get about the same result in 20 minutes.
It was a complete game changer in a field that most people feel won’t be impacted much by AI. (That is, until humanoid robots get much, much better which will be at least another five years.)
I think people will find more wins like my electrician friend in 2026.
Government will get more back to normal
This isn’t so much as a prediction as just noticing a trend since DOGE went away. Also, it’s hard to go up from chaotic.
Fed will lower rates
I’m expecting about three-quarters of a point. I think a lot of people are expecting half a point, but Trump is going to be able to pick a new chairman. I suspect that will move things lower as Trump wants.
Final Thoughts
I wrote most of this today (New Year’s Eve), so one thing that I don’t expect to change in 2026 is my ability to procrastinate.
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