Equity markets in 2025 unfolded in ways few investors would describe as familiar. Political uncertainty, abrupt policy shifts and sharp reversals in risk appetite combined with an ongoing surge in technology-led enthusiasm to produce market behaviour that challenged many long-held assumptions. Traditional relationships between risk, valuation and return broke down, leaving even well-established investment styles struggling to behave as expected.
David Walsh’s latest paper explores this extraordinary period in global equity markets, focusing on what sat beneath the headline volatility and why outcomes diverged so sharply from historical experience.
From Risk-Off to Risk-On-and Back Again
2025 was marked by rapid transitions between caution and exuberance. Periods of heightened uncertainty triggered sharp sell-offs, only to be followed by equally powerful rallies as policy fears eased and investor sentiment reversed. These swings are illustrated in the sharp drawdown and recovery of global equity indices over the course of the year (Chart 1).
Chart 1: Cumulative Index Returns: MSCI World and MSCI World (US stocks only) (in AUD)
From: 1 January 2025 to 1 December 2025
Source: RQI Investors, MSCI, 2026
These shifts were not evenly distributed across markets. Sector returns before and after key policy inflection points reveal stark differences in performance, particularly between technology, defensive and more cyclical areas of the market (Table 1).
Table 1: Sector returns in US MSCI World stocks – before and after “Liberation Day”
Again, note returns are in AUD, so bottom of the market was actually April 21.
From: 1 January 2025 to 1 December 2025
Source: RQI Investors, MSCI, 2026
Concentration, Shorts and Market Structure
One of the defining features following “Liberation Day” was how strongly returns clustered around particular stocks and characteristics. Technology and communications stocks dominated market leadership, while heavily shorted names and high-beta stocks experienced some of the most dramatic reversals. The rebound in heavily shorted stocks was especially pronounced following the market trough (Chart 2), while the largest technology stocks also played a central role in driving index returns (Table 2).
Table 2: Mag 7 fall and bounce, before and after “Liberation Day”1, plus % short at December 1 20252
From: 1 January 2025 to 1 December 2025
Source: RQI Investors, MSCI, 2026
When Familiar Factors Stop Behaving Normally
Factor-based investing also faced a challenging environment. Quality, value, size and volatility factors – typically relied upon for diversification and risk management –delivered unexpected outcomes. High-beta stocks underperformed sharply during the sell-off, before dramatically outperforming during the subsequent rally (Chart 3).
Chart 3: Cumulative Returns to 100 highest and 100 lowest beta US Stocks in MSCI World (in AUD), equally weighted
From:1 January 2025 to 1 December 2025
Source: RQI Investors, MSCI, 2026.
Smaller stocks lagged larger peers into the market trough and recovered at a similar pace thereafter (Chart 4), while higher-quality stocks, measured by return on equity, delivered stronger rebounds than lower-quality counterparts (Chart 5). At the same time, expensive stocks significantly outperformed value stocks for much of the year, highlighting the unusual nature of factor returns during this period (Chart 6).
Chart 6: Cumulative Returns to 100 most expensive and 100 best value US stocks in MSCI World (in AUD)
From: 1 January 2025 to 1 December 2025
Source: RQI Investors, MSCI, 2026
Making Sense of an Abnormal Market
Rather than offering prescriptive outcomes or forecasts, Far From Normal provides a framework for understanding why markets behaved as they did by breaking the year into its underlying drivers and examining how policy uncertainty, investor positioning and market structure combined to produce outcomes that were far removed from historical norms.
Explore the full article to understand what made 2025 far from normal, and how these dynamics can inform interpretation of recent market behaviour across different regions, sectors and investment styles.
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1 Yes, Google has had a greater than 100% return since April 21.
2 Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of RQI Investors’ portfolios at a certain point in time, and the holdings may change over time.
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