6 Surprises From 2025

In 2025 only two of the 'Mag 7' — Google and Nvidia — outperformed the S&P 500 while Microsoft, Tesla, Amazon, Apple and Meta underperformed, and P/E ratios for several large tech names (Broadcom, Nvidia, Amazon, Oracle, Apple) generally declined rather than spiking. Despite high inflation (cited ~9%), elevated mortgage rates (~8%) and a 5% Fed Funds rate, the U.S. avoided recession, foreign developed and emerging markets outperformed the U.S. by roughly 14% (MSCI EAFE vs. S&P, largest gap since 1993), momentum and beaten-down value deciles led returns, and Waymo reported about 14 million rides in 2025 — all suggesting ongoing structural shifts from AI/autonomy and international reallocation rather than a tech valuation bubble.

Analysis

Market structure: 2025 showed durable winners (NVDA, GOOGL) driven by AI capex and cloud demand and clear losers among broadly diversified tech (MSFT, AMZN, AAPL, META, TSLA) that underperformed despite hype. Semiconductor supply tightness (GPUs, HBM, packaging) and concentrated pricing power at Nvidia/Broadcom suggest 12–24 month gross-margin tailwinds for suppliers and OEMs, while beaten-down names have lower near-term pricing power. Cross-asset: a non-recessionary backdrop keeps bond yields elevated (Fed onhold/hawkish risk), supporting USD but persistent international outperformance implies incremental FX and equity flows into EAFE/EM and modest upside for industrial commodities from capex.

Risk assessment: tail risks include regulatory/antitrust action on AI/cloud (6–18 months), export controls on advanced nodes (30–90 days to materialize), and autonomous-adoption liability shocks from Waymo-scale rollouts. Immediate risks (days) are earnings and options expiries; short term (weeks–months) is rotation into international equities; long term (quarters–years) is secular AI capex sustaining demand unless ROI disappoints. Hidden dependencies: TSMC/TSMC capacity, memory supply, freight constraints and corporate capex budgets; catalysts are NVDA/GOOGL guidance, Fed decisions (next 60 days) and any new chip export policy within 90 days.

Trade implications: establish a 2–4% long in NVDA via 9–12 month call spread (buy ATM, sell 30% OTM) to cap cost; add 1–2% long GOOGL for cloud/search optionality. Reduce blended exposure to MSFT/AMZN/AAPL/META by 15–25% vs benchmark and hedge with 3-month 5–10% OTM puts on TSLA (size 0.5–1% portfolio) to protect cyclicality. Rotate 3–5% of portfolio into EAFE/EM (IEFA/EEM or Korea/Taiwan semis) over 2–6 weeks, trimming into NVDA/GOOGL positive catalysts.

Contrarian angles: consensus underestimates durability of international recovery and overestimates an immediate AI valuation blow-off — many megacaps have cut P/Es, not expanded them. NVDA upside is priced for perfection; a >25% drawdown is plausible on supply relief or export curbs, so size and hedges matter. Conversely, persistent underperformance in MSFT/AMZN could revert if enterprise AI monetization proves stickier than feared; consider small tactical recon on a 10–20% pullback.

Key Decisions for Investors

• Establish a 2–4% portfolio position in NVDA via a 9–12 month call spread (buy ATM, sell ~30% OTM) to capture AI secular demand while limiting cost; size to 2% if concentrated risk tolerable, 4% only with cross-hedges.
• Add a 1–2% long position in GOOGL (GOOG/GOOGL) as a cloud/search optionality play; scale in over 2–6 weeks and trim 20–40% into upside guidance or >10% post-earnings pop.
• Reduce net exposure to MSFT/AMZN/AAPL/META by 15–25% vs benchmark over the next month, reallocating 3–5% of portfolio into EAFE/EM ETFs (IEFA/EEM) focused on Korea/Taiwan semiconductors and Europe industrials.
• Buy 3-month TSLA puts 5–10% OTM sized at 0.5–1% of portfolio as short-term tail hedges; alternatively use cash-secured collars on large tech longs if NVDA/GOOGL exposure exceeds 4%.
• Monitor within 30–90 days for three binary catalysts before additional sizing: (1) NVDA/GOOGL guidance, (2) Fed policy signal on rates, (3) any new US/China chip export restrictions; scale out 30–50% of positions on positive binary outcomes and add hedges on negative outcomes.