Welcome to the monthly market update from Midland Wealth Management. I’m Dan Zeigler, Senior Portfolio Manager. Thanks for taking a few minutes to join me as I recap 2025 and share the Investment Team’s views on how financial markets may evolve in 2026.

Coming into the year, expectations largely centered on the continuation of themes that had already been shaping markets — and none more important than artificial intelligence. Capital spending tied to AI accelerated meaningfully in 2025. After roughly $240 billion in AI-related investments in 2024, estimates for this year range between $300 and $400 billion. In total, AI investment has increased by roughly $200 to $300 billion since 2023. This investment, in turn, has been a meaningful contributor to GDP this year, adding an estimated 0.6% to the inflation-adjusted growth rate in the first nine months of the year.

What’s notable is how broad that spending has been. It’s not just semiconductors — it’s servers, data centers, power infrastructure, cooling systems, and construction. Over time, these investments are expected to significantly improve productivity, with some estimates suggesting AI could lift US labor productivity by about 15% over the next decade. In the short term, the AI boom has delivered only modest productivity gains for US workers. For those using AI tools in some capacity, the benefit often shows up as a time savings — frequently at least an hour per day. At the same time, this trend has further concentrated equity market leadership. Today, the top ten companies in the S&P 500 account for nearly 39% of the index, up from about 37% a year ago.

Trade policy also played a meaningful role in shaping sentiment. Earlier in the year, tariffs were widely discussed, but the scale and timing were unclear. That uncertainty came to a head on “Liberation Day,” which triggered a sharp spike in volatility. The S&P 500 fell more than 12% over four trading sessions. By May, however, markets had recovered nearly all of those losses — a reminder of how resilient equities can be when earnings and liquidity remain supportive.

Equity

Looking at equities more broadly, the S&P 500 posted its third straight year of double-digit gains, finishing up roughly 17%. Once again, returns were driven largely by mega-cap companies tied to AI. As the year progressed, however, investors became discerning. Elevated valuations, increased use of debt to fund capital spending, and questions around how quickly AI investments can be monetized led to some late-year caution.

Small- and mid-cap stocks lagged, with returns of about 8% and 10%, respectively. Structural changes in public markets, particularly companies staying private longer and coming public at higher valuations, have narrowed opportunities in traditional small-cap indices. In response, our team looked beyond conventional benchmarks, including an allocation to the Kensho New Economies ETF, which is designed to capture downstream innovation across both US and global markets.

While US equity returns were strong, performance overseas was even stronger. Developed international markets gained roughly 31%, led by Europe. Improving economic conditions, strength in the banking sector, increased infrastructure and defense spending, and a weaker US dollar all played a role. Emerging markets were the top-performing asset class overall, driven by stimulus measures in China and continued AI expansion in South Korea.

Labor Market

Turning to the labor market, conditions softened meaningfully over the course of the year. Job growth averaged roughly 45,000 new jobs per month, near the level needed to sustain economic growth. The unemployment rate moved higher, from 4.1% to 4.6%, driven in part by more workers reentering the labor force. At the same time, job openings relative to unemployed workers continued to decline, and household balance sheets showed signs of strain through rising delinquency rates. 

Inflation

On inflation, while pressures remained somewhat elevated, there was progress. Headline CPI declined from 2.9% to 2.7% by November, helped by easing shelter costs, particularly rents. In response to cooling inflation and a soft labor market, the Federal Reserve delivered three quarter-point rate cuts and signaled the potential for additional easing ahead.

Fixed Income

In fixed income markets, shorter-maturity bonds benefited from falling rates, while longer-dated bonds faced pressure as concerns around fiscal deficits steepened the yield curve. Despite this, the Bloomberg Aggregate Index returned about 7% for the year. To take advantage of this steepening in the yield curve, the team leaned into mortgage-backed securities, which offered attractive risk-adjusted yields, complemented by short, floating-rate credit to capture price appreciation while keeping front-end credit risk controlled. At the same time, we maintained a risk-off allocation to longer-dated Treasuries, allowing us to clip higher coupons while anchoring portfolio duration close to the Bloomberg Aggregate.

Precious Metals

Outside traditional assets, precious metals stood out, with gold up nearly 65% and silver rising more than 150%, supported by a weaker dollar, countries bolstering strategic reserves, strong demand and supply constraints. Against that backdrop, depressed valuations across natural resource companies, rising demand relative to supply, and higher commodity prices created what the team viewed as a perfect storm, leading our team to initiate a position in natural resources back in September.

Outlook

As we look ahead, markets appear more differentiated. While the macro backdrop remains supportive, elevated valuations and shifting policy dynamics point to a more selective opportunity set. We continue to emphasize diversification, balance, and long-term structural themes while actively managing risk. We will have more to share in our quarterly outlook, which will be published soon. We encourage listeners to reach out to their advisor for a copy, if interested.

Thanks again for joining me for this update.