Equity Overview

The S&P 500 finished 2025 with a gain of 16.39%, exceeding long-term historical averages. Despite a complex macro backdrop—including persistent inflation, a divided Federal Reserve, and a narrowly divided Congress that limited legislative flexibility—equities demonstrated notable resilience throughout the year.

Sector performance was uneven. Technology and communication services led the broader market, driven by sustained investment in and adoption of artificial intelligence. Semiconductor companies and other AI infrastructure beneficiaries produced particularly strong gains, while energy stocks lagged as oil prices moderated from early-year levels.

Market volatility remained moderate for much of the year, with episodic increases tied to economic data surprises and monetary policy communication. By year-end, the S&P 500 was trading at a forward price-to-earnings multiple in the low-20s, reflecting elevated but not historically extreme valuations.

Growth stocks outperformed value stocks for the full year, extending a multi-year trend favoring companies with strong earnings momentum and exposure to secular technology growth.

Macro Overview

2025 presented an unusual combination of economic crosscurrents that tested both investors and policymakers.  The Federal Reserve implemented three quarter-point rate cuts during 2025, lowering the federal funds target range to 3.50%–3.75% by year-end.  Inflation moderated during 2025 but remained persistent.  The U.S. labor market showed signs of cooling, with job growth slowing and the unemployment rate edging modestly higher. Even so, the economy continued to expand and avoided the recession many had anticipated following the 2022–2023 tightening cycle. Economic growth, while moderate, remained sufficient to support corporate profitability.

Corporate earnings were the primary driver of equity performance in 2025. S&P 500 earnings growth for the year is estimated to have exceeded 12%, led by large-capitalization technology companies and businesses benefiting from artificial intelligence investment. This earnings strength has underpinned equity valuations and supported the positive returns realized by investors.

Artificial intelligence remained the dominant market theme, with Microsoft, Alphabet, Amazon, and Meta collectively expected to invest more than $440 billion in AI-related infrastructure in 2026, about one-third above current levels. While questions have emerged regarding the long-term returns on this investment, the near-term impact on semiconductor manufacturers, software platforms, and infrastructure providers has been significant. An important question for markets is whether productivity gains from AI will ultimately broaden beyond core infrastructure and software providers to a wider range of industries. A broader diffusion of benefits would strengthen the foundation for sustained economic and earnings growth.

Closing Remarks

2025 was a strong year for equities and a strong year for Ocean Park Investors Fund.  Our performance relative to broad market indices reflects the investment discipline we have followed for more than two decades: identifying companies with underappreciated earnings potential and positioning the portfolio accordingly.  This approach does not produce uniform results in every market cycle, as 2022 clearly demonstrated. Over time, however, corporate earnings and earnings surprises remain the primary drivers of long-term equity returns, and we remain committed to this discipline.