Market commentary equities: 2025 between AI euphoria and valuation discipline

The stock market year 2025 will be remembered as another fascinating and exceptionally strong year for equities. It was a period in which economic robustness, technological euphoria, and a dose of scepticism met head-on. While geopolitical uncertainties, falling inflation rates, and a cautious monetary policy shaped the macroeconomic backdrop, the fascination with Artificial Intelligence (AI) captured investors’ imaginations. At the same time, issues such as valuation, factor rotation, and the renaissance of traditional sectors moved back into the spotlight. The result was a dynamic yet demanding market environment that clearly separated winners from losers.

Macroeconomic stability as the foundation

In 2025, the global economy proved to be remarkably resilient. After years of uncertainty and inflationary pressures, global growth remained stable—supported by strong labour markets, falling energy prices, and a moderately restrictive monetary stance. Both the US Federal Reserve and the European Central Bank adopted a more reserved approach, signalling that the peak of the interest rate cycle had been reached.

Consequently, bond yields began to normalise, improving the attractiveness of risk assets. Emerging markets benefited particularly from capital inflows and stable currency developments. China recovered noticeably, but the strongest growth momentum came from the Korean market, which posted gains of more than 75% in local currency.

Global markets on the rise

International equity markets ended the year with substantial gains. In local currency terms, the MSCI World increased by around +18%, the MSCI Europe by +21%, and the MSCI Emerging Markets by +31%. In euro terms, performance was slightly more muted, given the Euro strength yet overall momentum remained clearly positive. While the first three quarters were characterised by a broad appetite for risk, the final quarter saw a more cautious stance on valuations—particularly within the technology sector.

Sector trends: Outperformance of banks illustrates the return of fundamental market factors

The year 2025 revealed a fascinating duality in market performance.
While AI-related industries—especially semiconductors, software, and infrastructure—continued to deliver impressive results, investors increasingly rotated towards traditional industries from the third quarter onwards.

For the full year, banks recorded the highest returns in EUR at +34%, followed by semiconductors (+25%), capital goods (+19%), and commodities (+12%). Defensive consumer goods and several service sectors, however, lagged well behind.

After years of low interest rates and heavy regulatory burdens, stable interest rate structures and improved earnings prospects provided fresh impetus for the banking sector. Many European institutions benefited from steeper yield curves, moderate credit growth, and declining loan-loss provisions, after having strengthened their balance sheets during the preceding years of crisis.

In the second half of 2025, investors responded to improved profitability with significant revaluations of bank stocks. Indices such as the STOXX Europe 600 Banks posted double-digit returns over the year, substantially outperforming the broader market. This trend was not confined to a few top performers but reflected a broader sectoral rotation. Institutional factors also played a role: many value and multi-factor strategies increased their weightings in bank shares, as these offered an appealing combination of dividends, rate sensitivity, and valuation catch-up compared with pure growth sectors.

The positive sector trend was also visible in individual European markets such as France, Spain, and Italy, where large universal banks and savings institutions benefited from a gradual improvement in economic conditions. The expansion in market breadth suggests that investors are once again paying greater attention to substance and fundamental earnings strength—rather than relying solely on future technologies.

Active management in a challenging environment

Despite strong overall index performance, 2025 proved to be a challenging year for active fund managers. The continued dominance of a small group of US mega-caps, the so-called ‘Magnificent Seven’, made it increasingly difficult to outperform benchmarks.

According to Bloomberg Intelligence, investors worldwide withdrew approximately USD 1 trillion from active equity funds, while passive ETFs attracted more than USD 600 billion—marking the eleventh consecutive year of outflows and the largest of the decade.

This highlights a structural dilemma for traditional asset managers: those who deviate too far from benchmarks risk underperformance; those who remain too close lose their unique value proposition. In the US, where the S&P 500 was once again dominated by a handful of technology giants, 73% of active funds lagged behind their benchmarks. This underscores how difficult it has become to generate alpha in an environment of extreme market concentration.

There were, however, exceptions: specialty funds with a focus on small caps, value equities, or commodity-related themes achieved above-average results. But also, systematic investment approaches managed to create value in this challenging environment, as shown by the positive relative performance of MSCI’s multi-factor indices.

The combination of various investment styles was able to outperform the broader market, and advanced forecasting models based on factors even produced notable excess returns compared with these standard Smart Beta concepts. These examples demonstrate that discipline, diversification, and a clear stylistic approach continue to pay off—even in years when benchmarks appear overpowering.

AI as an investment narrative – opportunities and risks

Few topics influenced 2025 more than artificial intelligence. Companies around the world invested over USD 500 billion in data centres, semiconductors, and software. While this surge generated remarkable share price gains for technology firms, concerns about excessive valuations also increased. With the Nasdaq 100 trading at more than 30 times earnings, some observers drew parallels to the dot-com era—albeit on a more solid foundation. Analysts stressed that the productivity and profitability effects would only become visible over the long term, while short-term disappointments remained possible.

Regional perspectives: Europe, the United States and Emerging Markets

Europe proved to be a stable stock market with attractive valuations in 2025. Value and industrial stocks benefited from robust earnings and easing energy prices. In the United States, growth momentum remained strong, fuelled by innovation and consumption, though valuations were demanding. Emerging markets were even more dynamic—led by South Korea, China, and Taiwan, where capital inflows and structural reforms provided strong tailwinds.

Precious metals on the rise – gold and silver as anchors of stability

Alongside developments in the equity markets, precious metals experienced an exceptional rally in 2025, surprising many investors and challenging traditional asset classes. Gold and silver reached historic highs, well above their long-term averages—a development that caught the attention of both technical traders and long-term strategists alike.

Gold reaffirmed its role as a safe haven in 2025: prices rose by more than 60% during the year, surpassing the USD 4,400 per ounce mark several times—the highest level in history. Silver performed even more dynamically, at times doubling to over USD 75 per ounce. This meant silver outperformed gold in percentage terms, marking one of the strongest precious metal rallies in modern market history.

Several factors contributed to this surge: expectations of lower real interest rates amid potential monetary easing in 2026, a weaker US dollar making metals more attractive to international investors, and persistent geopolitical uncertainty that intensified the demand for safe-haven assets. Central banks—particularly those in China, India, and Eastern Europe—also expanded their gold reserves substantially to mitigate currency risks and increase diversification.

Market psychology: Between euphoria and rationalisation

As the year progressed, a noticeable shift in sentiment took place. While the first half of the year was dominated by euphoria, the autumn saw a more sober reassessment. Investors began to scrutinise valuations more critically and took profits in some areas. This phase of rationalisation is viewed as a healthy development—a transition from exuberant optimism to a more fundamental, data-driven perspective. Many market observers interpret this as the beginning of a new normal, where quality, balance-sheet strength, and valuation discipline once again play a central role.

Outlook 2026: Stability, selection and discipline

Looking ahead to 2026, the environment offers both opportunities and challenges. Markets are now far less one-sided than in recent years. Valuation discipline, factor diversification, and selective risk allocation will be crucial. Artificial Intelligence will remain a central driving force, yet sustainable success will depend on distinguishing between substance and speculation. In this respect, 2026 is shaping up to be a ‘transitional year’: profit potential remains intact, but elevated valuations, debt levels, and geopolitical risks call for prudence.

In so-called ‘grey-swan scenarios’, strategists identify potential downside surprises for 2026, including: a possible bursting of the AI bubble amid inflated expectations; rising credit risks within the private equity sector; and political turbulence in Europe if reform gridlock and fiscal conflicts in France and Germany escalate.

At the same time, opportunities persist: resilient US consumption data, fiscal impulses in the US and Germany, and a continued recovery in emerging markets—particularly in Latin America and Asia. Europe, with its solid balance sheets and attractive dividends, remains a compelling investment landscape, while Asia offers promising long-term growth potential. For investors, the conclusion is clear: do not put all your eggs in one basket—diversity is strength.