In the stock markets, the year 2025 turned out to be a paradoxical pseudo-roller-coaster ride that scared more than actually shook the market. We had prepared for high volatility related to the return of the “Red Swan” to the White House and various possible geopolitical upheavals.
In reality, however, the markets proved surprisingly resilient, quickly overcoming several negative impulses without lasting consequences. The only truly unexpected fundamental event was Trump’s April tariff “release week,” which caused a brief panic, but stocks got over it within days and further news of new tariffs or changes to them didn’t trigger any significant market reaction.
The seven-month rally marathon of the US stock market, which in the case of the Nasdaq only ended in November 2025, could be singled out as the most striking event. On the other hand, the S&P 500 rally continues, although the index closed the month of November relatively modestly. European stocks started 2025 with a strong upswing, but since then they have significantly lagged behind the US.
It cannot be said that the rally in US stocks was unexpected, but certainly unexpectedly long and intense, giving market participants no respite. The main driving force remains the artificial intelligence (AI) “hype”, which significantly increased and continues to inflate the valuations of tech giants to dangerous heights. This was not a surprise to us, but we hoped for a “more objective market” that evaluates other sectors as well, not only Mag7. Therefore, our last year’s thesis that “US indices are very expensive and investment opportunities should be looked for elsewhere (but also elsewhere has its own problems and risks)” is still relevant.
The US economy and politics have become dependent on AI expectations: high valuations promise future profits from huge capital investments, but in reality consumer sentiment (except for wealthy households) remains weak, inflationary pressures are still felt, and the labor market is weakening. Thus, the FRS recently started to cut rates and also started a cycle of quantitative easing. Is this a signal of crisis? We do not think so, but we are following the situation. Liquidity in the markets is sufficient and it is rather a preventive step against the shadow of recession. In Latvia, in 2025, the focus on the development of the bond market continued – 34 issues took place in 11 months, attracting EUR 1.49 billion, which already exceeds the record-high results of 2024, and thanks to the ECB’s annual rate reductions, many issuers used the opportunities to refinance bonds. The segment is growing rapidly, there is increasing interest from both local and international investors – we see this as a sign of the maturation of the Baltic region.
Unfortunately, IPO activity remains low, and we do not expect an increase in activity in the near future. Defense spending recently increased to 5% of GDP, which makes sense in the geopolitical context. There is also a significant discussion about the possible payment of pension level 2 savings, where the experience of Estonia and soon Lithuania will serve as a reference point. While in Estonia part of the population chose to channel this money into the local capital market, Lithuania’s challenge will be to ensure that these savings work for the benefit of the country. The main priority is to avoid a scenario where this capital is diverted to short-term consumption.
What will 2026 bring? – this year’s “big boys” forecasts are likely to be closer to reality than 2024 forecasts – this can be explained by clearer macroeconomic signals at the beginning of the year and analysts’ profit growth expectations, which mostly coincided with company results. Looking to 2026, we can predict increased volatility, but with potentially positive changes until the end of the year. The FRS and ECB are likely to continue monetary easing, which could maintain liquidity, but geopolitics and recessionary risks will bring their own risks. The AI sector could start to show real ‘tangible’ returns or trigger a correction if corporate profits prove to be out of step with huge capital investments.
