The past two years have served as a reminder that the US equity market is not just resilient—it’s adaptive. Following consecutive annual gains of 24% in 2023 and 23% in 2024, 2025 opened with cautious optimism. Not because of momentum alone, but due to shifting fundamentals that are changing the complexion of returns. Broader earnings participation, sectoral transitions driven by artificial intelligence, and the policy overhaul under the reinstated Trump administration are reshaping how the US market functions within global portfolios. Parsing these developments is essential not just to understand performance drivers, but to see where concentration, correlation, and risk might evolve next.
Broader Earnings Participation
Until recently, the S&P 500’s performance was heavily dependent on a select group of mega-cap tech names—the Magnificent Seven. Their dominance compressed market breadth and skewed returns in capitalization-weighted indices. In 2025, that concentration is showing signs of easing.
JPMorgan analysts forecast that the remaining 493 companies in the index are set for double-digit earnings growth. This is more than a reversion to mean; it reflects a maturing cycle in which more companies are beginning to benefit from structural tailwinds, including productivity gains and moderating interest rates. The implications are clear: the opportunity set within the US market is expanding across sectors and capitalization bands, which may challenge the logic of heavily concentrated exposures.
AI Momentum Moves Downstream
Artificial intelligence continues to define investor narratives, but the conversation is evolving. The initial capital surge into chipmakers and hardware enablers, most notably firms like Nvidia, is now transitioning. According to Goldman Sachs, 2025 is likely to see increased focus on companies that are positioned to monetize AI through software, services, and integration, rather than infrastructure alone.
This shift opens up opportunities beyond the usual suspects. The meteoric adoption of AI has broadened across sectors, creating ripple effects in industries like healthcare, industrials, and even financial services. This dispersion of AI’s impact invites a more nuanced approach to identifying beneficiaries, not just by sector, but by the specific ways firms are implementing or commercializing these technologies.
A Rebound Case for Small and Mid-Caps
One of the more closely watched narratives this year is the potential resurgence of small and mid-cap equities. These companies, which have underperformed large caps in recent years, may benefit from the declining interest rate environment. Their higher reliance on floating-rate debt and domestic revenue exposure means falling rates can have an outsized positive impact on their cost structures and capital access.
However, the case for smaller caps isn’t purely cyclical, it’s also political. With Donald Trump’s return to the presidency, the administration has already enacted a series of policy shifts, particularly around trade, immigration, and deregulation. Early signs include higher tariffs on select imports and a scaling back of regulatory constraints in sectors like energy and manufacturing. For smaller firms operating domestically, reduced compliance burdens and a more favorable tax stance could offer margin support.
At the same time, not all implications are benign. Tariffs may push up input costs for certain industries, and labor market restrictions from tighter immigration policies could affect wage pressures and hiring flexibility. This policy mix creates both tailwinds and headwinds for small-cap equities, demanding a more selective approach to evaluating their potential.
Valuation and Volatility Considerations
The enthusiasm around US equities in 2025 is tempered by valuation awareness. Goldman Sachs has flagged that US stocks are currently trading at historically elevated levels—an environment in which any unexpected policy misstep, macroeconomic shock, or geopolitical event could prompt a sharper drawdown.
While earnings growth remains the main engine of returns, the pricing of that growth leaves little room for error. For advisors, this may not alter long-term allocation logic, but it does underscore the importance of understanding which segments of the US market carry the most valuation risk and how that might correlate with global macro events.
Another development worth noting is the expected outperformance of the equal-weighted S&P 500 relative to the capitalization-weighted index. This suggests that dispersion in returns is narrowing, and that performance may become more balanced across sectors and company sizes. In a year where the fundamentals of more companies are improving, this may shift the rationale behind index exposure strategies.
Looking Ahead
If the last two years were defined by concentration and momentum, 2025 may be remembered for dispersion and normalization. The return of broader earnings participation, combined with a changing regulatory and macro backdrop, signals a market that is recalibrating. For investment advisors, the US equity market in its current form presents a more complex, multi-dimensional asset class—one where familiar narratives are evolving and new entry points are emerging across size, sector, and strategy.
As the US equity market continues to evolve, driven by structural shifts in earnings, sector dynamics, and policy, having the right tools to interpret, access, and act on these changes is essential. EQBAC is built for distributors and investors who demand more than just market access. With integrated access to instruments across geographies, real-time insights, and intuitive execution, EQBAC helps you stay aligned with market intelligence, timing, and flexibility. In a year where the US market is anything but one-dimensional, EQBAC ensures you’re equipped to build portfolios that reflect insight and direction. Reach out to us to learn more.
