2025 Year in Review and 2026 Market Outlook

2025 Year in Review

2025 will go down as the Year of Perpetual Change. Throughout the year, consumers and corporations were forced to digest an onslaught of uncertainty stemming from significant shifts in federal policy.

In (mostly) chronological order, these changes included:

a)      The creation of the Department of Government Efficiency (DOGE)

b)      The introduction of a high tariff regime

c)       A subsequent move to a more modest tariff strategy

d)      Changes in immigration policy

e)       Questions on Federal Reserve independence

f)       The “business-fication” of government policy

g)      A lengthy government shutdown

This was plenty for a full presidential term - let alone a single year. While there will be ample debate as to the long-term merit of these policies, these events dampened economic growth in the first half as uncertainty over the future economic rulebook led companies to delay hiring and investment while lower-income consumers curbed spending.

Although consumer spending improved during the second half of 2025, employment remained sluggish, continuing to restrain growth. Complicating matters further, incomplete data and policy-driven distortions make it difficult to assess the economy’s true underlying trajectory.

All the while, U.S. and global economies started to feel the impact of the next great technological wave – artificial intelligence (AI).

Clearly, the long-term impact on society of AI will be enormous. In the near-term, investment in AI infrastructure acted as somewhat of a savior to otherwise tepid first-half U.S. economic growth. Some estimates suggest that tech sector capital investment contributed 35%-45% of overall U.S. GDP growth in recent quarters. Corporate earnings reflected this trend, with S&P 500 earnings likely increasing by 12% in 2025, driven primarily by large U.S. tech companies.

For the third straight year, U.S. equities produced stellar returns. The S&P 500 gained 17.9% in 2025, adding to the 57.9% cumulative rise during 2023 and 2024. However, as in prior years, gains were a little misleading as the average stock in the S&P 500 gained a more modest 11.4% (S&P 500 Equal Weight Index) while small-cap stocks rose 6.0% (S&P 600). International equities finally enjoyed their day in the sun, with the MSCI EAFE Index rising 31.2%.

Of note, with the largest technology companies making up an ever-increasing percentage of the S&P 500, the U.S. equity market as measured by the S&P 500 is becoming less correlated with overall U.S. economic and employment trends and more associated with the success of technology. Conversely, the average S&P 500 stock is still likely to be more related to U.S. economic trends. Thus, the performance disparity over the last several years.

Bonds have once again resumed their role as a reliable portfolio buffer while generating attractive income thanks to the higher interest rate environment. Broad fixed income indices rose 4%-7% in 2025. 10-year U.S. Treasury bond yields fell modestly from 4.57% at the close of 2024 to 4.18% at the end of 2025. 2-year Treasury yields fell from 4.24% to 3.47% thanks to three Federal Reserve interest rate cuts totaling 0.75%.

Source: Refinitiv, S&P Global                                                                                                                       

2026 Market Outlook

As we turn our attention to 2026, those who crave a calmer year may be disappointed. While the pace of dramatic policy initiatives may slow, let’s not forget that Federal Reserve leadership will change and mid-term elections will likely add uncertainty. Still, our job is to filter out the noise and remain focused on what matters most to financial markets – corporate earnings, employment and the economy.

On that front, we have reasons for cautious optimism. As we enter 2026, several positive economic developments seem to be in place.

1) Pent-up demand following Indecision 2025. As we cycle tariffs and uncertainty lessens, it is reasonable that some deferred corporate investment and hiring decisions begin to materialize in 2026. If the employment picture brightens, consumer spending may also accelerate.   

2) Fiscal policy tailwinds. Targeted tax incentives and fiscal measures could boost disposable income and business investment.

3) Further AI adoption. Should result in investment spending and productivity advances.

4) Monetary policy flexibility. While the Federal Reserve has appropriately proceeded cautiously with rate cuts, they will likely lower short-term rates if employment falters – possibly more than needed under a new Fed Chair.

While not all the factors above are durable, they are supportive of the economy, employment and corporate earnings. As a result, we see the economy growing steadily through 2026 with the potential for corporate earnings to grow at or above 2025’s 12% pace.

Market Forecasts for 2026

With a catalyst of double-digit earnings growth and an improving economic outlook, we project the S&P 500 could rise by 10%-12% in 2026. Our enthusiasm is restrained somewhat by higher than ideal valuations with the S&P 500 trading near 22 times estimated 2026 earnings. Still, excluding the ten largest S&P 500 stocks, valuations are more palatable with the remaining 490 trading at a P/E ratio below 20x. That said, we do anticipate periodic, and ultimately healthy, pullbacks in certain technology stocks that currently dominate index performance. Should our forecasts prove accurate, equity returns could remain solid while valuations gradually improve.

International equities could continue to produce double-digit gains as investors gain excitement about 2025 outperformance. Compared to their U.S. counterparts, international stocks provide lower valuation and offer diversification benefits against U.S.-specific risks.

As for fixed income, we expect total returns in the 3%-5% range, driven primarily by income generation rather than price appreciation. While we will likely see the Federal Reserve lower short-term interest rates by 50-100 basis points during 2026 (assuming a more dovish Fed Chairman), longer-term interest rates are unlikely to fall given concerns over Fed independence, Federal debt levels as well as the likelihood that the overall economy shows solid growth.

Obviously, all the predictions above may or may not occur depending on how the year unfolds. We are naturally trying to give you our best reasoned forecasts.

A note about Artificial Intelligence – Technology investment occurs in waves with each successive wave larger than the last. Artificial intelligence is the next great wave and is dwarfing prior technology spending. We are still at the early stages of its impact.

From an investment perspective, it is likely some companies will emerge as long-term winners with substantially higher market capitalizations, while others will fail or become irrelevant. As each wave matures, stock market leadership tends to shift along the technology value chain - moving away from elements that become commoditized towards solution providers and, ultimately, to the companies most effectively deploying the new technology. In the end, thoughtful analysis and research will be crucial in navigating between the winners and losers.

So now let me end my 2026 outlook as I end all my outlooks: Of course, despite our best laid plans, events through 2026 will likely conspire to force us to alter our thinking. We will continue to be vigilant and adjust our thinking and strategy as events warrant.

Wishing you a Happy, Healthy, Safe and Successful 2026!

*Past performance is not indicative of future results. Statements herein reflect the advisor’s opinion as of the date of this communication and are forward-looking, subject to risks and uncertainties, and may differ materially from actual results; there is no guarantee that any forecast or opinion will be realized. Market and index commentary is for informational purposes only, does not represent client portfolio performance or a specific investment recommendation, and index returns do not reflect fees or expenses. Investors cannot invest directly in an index. The S&P 500 is a market-cap-weighted index of 500 large-cap U.S. companies; the S&P 500 Equal Weight Index assigns equal weight to those constituents; the S&P 600 SmallCap Index measures U.S. small-cap equities; the MSCI EAFE Index measures developed international equities; and the S&P U.S. Aggregate Bond Index measures U.S. investment-grade fixed income.