2025 is now in the books. This frenetic market started out optimistic, pivoted to despair over trade turmoil, and then finished the year strong despite geopolitical uncertainties. In this newsletter, we will recap the three major phases of the market over last year and show where that leaves us as we start 2026.
Investment Returns (as of 12/31/2025)
Part 1: A Cautiously Optimistic Start
The market started the year strong for both equities and fixed income, respectively exemplified by the S&P 500 rising 2.78% and the Bloomberg Agg rising .53% in January. Value stocks finally outperformed growth stocks, while bonds eked out a decent return on the back of favorable inflation reports. The US market seemed comforted by the peaceful transfer of power between presidential administrations and hopeful that business conditions would remain favorable. Value stocks looked poised to finally get some time to shine in the spotlight and lead the equity market higher, while bonds still offered attractive, stable yields. January and February were relatively quiet and suggested that maybe 2025 would be less volatile than years passed.
Part 2: He Wasn’t Bluffing
On April 2nd, President Trump announced his massive tariff regime and declared it to be “Liberation Day”. The stock market reacted negatively, with the S&P 500 dropping 5% and the tech-heavy NASDAQ dropping 6% on that day. Equity markets continued to decline the week following as companies and countries scrambled to respond to the new tariffs. The S&P 500 was close to 20% off its February high by April 8th. On April 9th, President Trump announced a pause in tariff implementation and a reduction in some of the most extreme tariffs. Since then, with only minor interruptions, the stock market has moved steadily higher. Below is a chart from J.P. Morgan that shows the recent tariff changes and puts them in the broader historical context, going back to 1900.
Concurrent with the tariff announcements, Congress was working on the Republican’s tax plan. This eventually passed and was signed into law on July 4th. This package made immediate depreciation of tangible asset investments and research and development costs permanent, made the tax cuts found in the expiring Tax Cuts and Jobs Act of 2018 lasting, and doubled the gift and estate tax exemption.
Part 3: Finishing Strong but Feeling Uncertain
Fast forward to the end of the year and all the major indices secured above-average returns. Stocks and bonds, whether domestic or foreign, had a banner year in 2025. The big winner was international stocks, which finally outperformed domestic stocks after years of lagging far behind. The AI narrative continues to hold as we see companies implement it in their operations. Despite these large gains, a relatively healthy jobs market, and an ongoing Fed easing cycle, the average American does not feel good about the economy. The December University of Michigan Consumer Sentiment index hit 52.9 in, which is just slightly above its all-time low of 50 from 2022 during the COVID inflation peak. Inflation is still above target, and geopolitical uncertainty abounds, with the most recent example of this being the US’s apprehension and extradition of the indicted strongman leader of Venezuela, Nicholas Maduro, on January 3rd.
Concern is a natural human emotion, especially when it involves your hard-earned wealth. In an unsettling world where the markets perform well but the economy feels anxious, it is important to take a step back and focus on what you can control. Your core goals have not changed and we plan for volatility. Rebalancing, cash management, diversification- these tools and others at our disposal are most important at times like these. There is a silver lining to this uncertainty as well. As you can see from the chart below, consumer sentiment and stock market returns often travel in opposite directions. Often, when the masses are most concerned about the economy, that is when solid opportunities present themselves. Staying on the course with your long-term plan allows the patient investor to capitalize on those opportunities.
As we look ahead to 2026, uncertainty remains but there are reasons for optimism. GDP growth in the United States increased at the end of 2025 and could continue around 4% or better if infrastructure investment continues to rise. The rate of change in inflation could also decrease due to multiple factors including no further increases in tariffs and productivity improvements from technological advances, including artificial intelligence. An environment with rising GDP growth and a steady or decreasing rate of inflation has historically been a favorable environment for the stock market. That type of environment may lead to a broadening positive performance beyond the Magnificent 7 stocks into value stocks and smaller company stocks. Additionally, both political parties are motivated to offer financially favorable policies before the midterm elections, driving parts of the economy and markets higher. Geopolitical risks are high and unexpected events could transpire at any time, leading to market volatility. Thus, we will maintain diversification in portfolios and work with all our clients on their specific situations to be sure they have conservative investments for their near-term cash needs.
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