2025 turned out to be a paradoxical pseudo “roller coaster” ride that was more frightening than shocking. We were prepared for high volatility in connection with the return of the “Ginger Swan” to the White House and various possible geopolitical shocks, however, in reality, the markets proved to be surprisingly resilient, quickly overcoming several negative impulses without lasting consequences. The only truly unexpected fundamental event was Trump’s April tariff “liberation week,” which caused a brief panic, but stocks recovered within a few days and subsequent news of new tariffs or changes to them no longer caused any significant market reaction.
One of the main highlights of the year was the seven-month rally marathon in the U.S. stock market, which, particularly in the case of the Nasdaq, only came to an end in November. Meanwhile, the S&P 500 rally continued, although the index ended November on a relatively modest note and ultimately broke its winning streak in December.
It cannot be said that the rally in U.S. stocks was unexpected for us, but it was certainly unexpectedly long and intense, giving market participants no respite. The main driving force behind the market remains AI hype, which continues to push technology giants’ valuations to potentially dangerous levels. While this came as no surprise to us, we had hoped for a more “balanced” market that would also reward other sectors, rather than concentrating solely on the “Mag7”. As a result, our thesis from last year remains highly relevant: “U.S. indices are expensive, and investors need to look elsewhere for opportunities – though those alternatives come with their own challenges and risks”.
The U.S. economy and, increasingly, domestic 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. As a result, the Fed recently began lowering interest rates and embarked on a cycle of quantitative easing. Is this a sign of crisis? We don’t think so, but we are monitoring the situation. There is sufficient liquidity in the markets, and this is more of a preventive measure against the shadow of recession.
During the year, Latvia continued to focus on the development of the bond market – 34 issues took place in 11 months, attracting EUR 1.49b, which already exceeds the record high results of 2024, and thanks to the ECB’s interest rate cuts over the year, many issuers took advantage of the opportunity to refinance their bonds. The segment is growing rapidly, with increasing interest from both local and international investors, which we view as a clear sign of the Baltic region’s market maturation.
Unfortunately, IPO activity remains low, and we do not expect it to increase in the near future. Defense spending recently increased to 5% of GDP, which is logical in the context of geopolitics. There is also significant discussion about the possible payouts of second pillar pension savings, with Estonia and soon Lithuania serving as reference points. While some Estonian residents chose to invest this money in the local capital market, Lithuania’s challenge will be to ensure that these savings work for the benefit of the state. The main priority is to avoid a scenario where this capital is diverted to short term consumption.
What will 2026 bring? – this year’s institutional forecasts are likely to be closer to reality than the 2024 forecasts which can be explained by clearer macroeconomic signals at the beginning of the year and analysts’ earnings growth expectations, which largely coincided with corporate results. Looking ahead to 2026, we can expect increased volatility, but with potentially positive changes by the end of the year. The Fed and ECB are likely to continue easing monetary policy, which could maintain liquidity, but geopolitics and recession risks will pose their own risks. The AI sector could start to show real “tangible” returns or trigger a correction if corporate earnings prove to be inconsistent with the huge capital investments.
Author: Kārlis Mārtiņš Gulbis,
Investment Analyst, Signet Bank
