In our quarterly Economic & Market Update Newsletter, we separate the relevant from the noise, to bring you timely content that helps you on the path to and through retirement!
4th Quarter 2025 Commentary & 2026 Outlook
Stock Market Update
Despite the first part of 2025 being dominated by trade worries, 2025 marked the first year since the pandemic where investors experienced positive returns across every major asset class, including the 3rd straight year in a row for standout stock market performance. Optimism over AI was the main driver behind stock market gains, leading the S&P 500 to a 16% return in 2025. Bond investors benefited from higher yields at the beginning of the year, and interest rate cuts by the Fed led to additional gains. The Morningstar US Core Bond Index finished the year up 7%.
Economy Update
The defining economic theme of 2025 was a K‑shaped economy: the top 20% continued to thrive thanks to rising asset values, while most Americans grew more pessimistic than ever, with consumer sentiment falling below the lows of 2008 and the late‑1970s.
Many Americans are struggling with worries about the jobs market, and the affordability of everything – all of which do not support continued robust growth. Looking ahead to 2026, economic signals are mixed and investors should prepare for a variety of economic outcomes. Continued rate cuts by the Fed, less regulation, and tax cuts expected in 2026 make a strong case for growth. But a pessimistic and debt-laden consumer, a cooling jobs market, and high stock market valuations suggest a wide range of possible economic outcomes.
Looking Ahead
After three consecutive years of strong growth for stocks and valuations at historically high levels, caution, diversification, and discipline are paramount. The stakes are high for stocks now, and any misstep or an economic slowdown leaves investors (many of whom have high concentrations of higher-risk stocks in their portfolios) vulnerable. Still, economic resilience, additional interest rate cuts, solid earnings, and booming AI investment could support further stock market gains in 2026.
Bond investors should expect slightly lower returns in 2026. With yields now below early‑2025 levels and the Fed likely to cut rates at a slower pace, both factors point to positive, but more muted bond returns in the year ahead.
The stock market rally of recent years has been driven by riskier stocks, with markets largely ignoring fundamentals and rewarding risk in an outsized way. These excesses eventually correct (often sharply) and that remains our main concern heading into 2026. With both the economy and markets possibly losing steam, we’re focused on discipline and maintaining quality in client portfolios, especially for those near or in retirement.
Bottom Line:
2025 saw strong gains across all major asset classes, driven by AI-fueled stock performance and falling interest rates, even as most Americans felt economic strain. Entering 2026, elevated valuations and mixed economic signals call for caution.
