During the holiday season, my wife, daughter, and I enjoyed a few family movie nights. We watched National Lampoon’s Christmas Vacation, White Christmas, and my daughter introduced us to Zoolander. My contribution to the family film fest was The Matrix, a movie I enjoyed when it came out in the late ’90s and wanted to revisit in light of current technological trends.
If you’ve not seen it, the film is about a computer hacker named Neo who discovers that the world we are living in is not real, but rather an elaborate computer simulation called the Matrix. The world is actually run by artificial intelligence (AI), and humans are used as batteries to power these energy-hungry machines. A group of rebels aim to set humans free by bringing down the machines. The rebels believe Neo is “The One,” destined to achieve this seemingly impossible goal. As Neo learns the truth, he must decide whether to accept the illusion — what we all know as life — or fight to reshape reality. As I watched, I saw many interesting parallels between the movie and 2025.
Whereas in The Matrix AI ruled the world, in 2025 AI ruled the stock market. The so-called “Magnificent Seven” stocks (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla) were up a combined 23%, compared to a combined 13% for the other 493 stocks that make up the S&P 500. The S&P 500 returned a very respectable 17.9%, but in a welcome display of broadening leadership, the U.S. was bested by international peers. The MSCI EAFE, an index tracking stocks in developed international markets, returned 31.2%. It was only the fourth time in 16 years that international stocks outperformed, and by the widest margin since 1993.
U.S. small-cap companies also saw robust returns, gaining 12.8% and benefiting from a late-year rally, after years of underperformance. Strong small-cap performance was one of our themes entering 2025. Rounding out the performance recap, even bonds posted solid returns, rising 7.3%. While headlines focused on tariffs, shutdowns, and political noise, the real engine of market performance was corporate earnings. S&P 500 profits rose nearly 13%, far above initial expectations.
So, after three years of strong market performance, many investors are wondering: is this reality, or some artificial simulation? More on that later.
In The Matrix, the interests of the AI overlords are enforced by their own police force, known as Agents. Because Agents are merely bits of computer code operating within the Matrix, they can bend many of the physical rules humans believe they are bound by. In 2025, there were Agents in our system too – high inflation, federal employment upheaval, government shutdowns, elevated interest rates, and trade policy uncertainty all conspired to take markets down.
In April, President Trump announced reciprocal tariffs on many of our trading partners. These tariffs were far larger than expected and sent markets into a tailspin. On April 3rd and 4th, the S&P 500 lost 10.4% of its value, marking the fifth-largest two-day decline since 1950. But much like our hero Neo, the market fought back once Trump announced a 90-day pause on April 9th. Following patterns we’ve seen in the past, short-term turbulence was followed by a rapid recovery.
After peaking at 9.1% in 2022, inflation has come down considerably, but stubbornly remains above the Federal Reserve’s target. Inflation retreated to 2.3% in April 2025 before rising to finish the year at 2.7%. Nonetheless, the Fed cut interest rates three times, lowering borrowing costs for consumers and providing a boost to both stocks and bonds.
One trend that may signal economic weakness is a softening labor market. The U.S. economy added only 584,000 jobs in 2025—the weakest year for job gains outside of a recession since 2003. As payroll growth slowed throughout the year, the unemployment rate trended higher, reaching 4.6% in November. While this remains below the 30-year average of 5.5%, job growth appears to have stalled and warrants close attention in the coming months.
Also of note, the top ten companies by market capitalization accounted for a record 40.7% of the S&P 500. Eight of these companies are in technology, with the remaining two in financials. This means that roughly 41 cents of every dollar invested in the S&P 500 is allocated to just ten companies. This level of concentration is unusual and bears close monitoring. Rather than investing solely in the S&P 500, our approach breaks the index in two. By segmenting the exposure in this manner, we seek to control the concentration risk in a deliberate manner.
As mentioned, 2025 was once again dominated by artificial intelligence. But are these returns real—or merely a simulation? To help answer that question, consider the following data from Alger: 17% of businesses currently report using AI in some capacity, a figure expected to rise to 20% over the next six months. It is estimated that major AI companies invested $400 billion in 2025, with spending expected to grow to $533 billion in 2026 and $605 billion in 2027.
In the 1960s, Gordon Moore observed that the number of transistors on a computer chip was doubling roughly every two years. Now known as Moore’s Law, it suggests that computing power doubles every two years. By comparison, AI model capabilities have been doubling approximately every six months.
In The Matrix, Neo’s turning point comes when he decides to follow the “white rabbit” – a reference from Alice in Wonderland that symbolizes following curiosity into a new reality. He does this not because the path is clear, but because remaining comfortable means never understanding the truth. Investing often works the same way.
As 2026 begins, the market is presenting investors with its own white rabbit. Artificial intelligence continues to drive returns, market leadership is becoming increasingly concentrated, and economic signals are mixed. Following these trends doesn’t mean abandoning discipline or taking unnecessary risk but staying informed and willing to adapt as conditions evolve.
Our 2026 Outlook explores what we believe matters most in the year ahead and how we’re positioning portfolios to balance opportunity and risk. If you’re wondering which signals are worth following and which are simply noise, now is the time to take a closer look.
Securities offered through Cetera Wealth Services, LLC (doing insurance business in CA as CFGAN Insurance Agency LLC: CA Insurance License #0644976), member FINRA/SIPC. Advisory Services offered through Cetera Investment Advisers LLC, a Registered Investment. Adviser. Cetera is under separate ownership from any other named entity.
The views stated in this letter are not necessarily the opinion of Cetera Wealth Services, LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future returns.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
MSCI EAFE – Designed to measure the equity market performance of developed markets (Europe, Australasia, Far East) excluding the U.S. and Canada. The Index is market-capitalization weighted.