For the period December 1 – December 31, 2025.

Executive Summary

U.S. equity markets ended 2025 with their third year of double-digit gains overall, bringing the S&P 500’s total annual gain to 18%. It was a strong year across nearly every sector, and, whether concentrated or diversified, investors generally ended the year in the green. Despite broader contribution from stocks beyond the “Magnificent Seven”, AI has remained a primary theme in markets and valuations.

We also saw meaningful shifts in monetary policy to stem a weakening labor market, with the Federal Reserve trimming interest rates a third time in December, bringing the target Federal Funds Rate to 3.50-3.75%. At the same time, we experienced a temporary data blackout following the longest government shutdown in history. The delayed economic numbers, once released, showed the highest unemployment rate in four years (4.6%), largely attributable to Federal labor force cuts—stoking some economic growth concerns.

Still, if the year had a word, it was resilience. Consumption had a banner year despite sticky inflation and the impact of higher tariffs. Treasury yields came down in anticipation of further rate cuts in 2026. And while the Supreme Court ruling on tariffs remains a closely watched unknown, economic growth should remain stable in 2026, due in part to tax refunds from the One Big Beautiful Bill Act, which are set to hit wallets by spring. 

What Piqued Our Interest

AI Bubble Concerns Held a Steady Drumbeat

There’s still plenty of debate surrounding the elevated equity valuations of Mega Cap Tech companies, with 28% year-over-year (YoY) earnings growth versus 12% for the broader S&P 500. Forward P/E multiples for Tech-heavy indices sit well above the broader market, and concentration remains an issue. But while bubble concerns haven’t abated, current Tech valuations are nowhere near the sky-high valuations we saw during the dotcom bubble of the late 1990s. Investors today are more focused on tangible, near-term earnings over speculative, long-term potential, and companies like Nvidia, Microsoft, and Alphabet (Google’s parent company) are some of the most profitable in history—and growing—with strong operational cash flows and balance sheets. 

There is some concern that earnings may not ramp up fast enough to justify the hundreds of billions in AI infrastructure spending, particularly since top names carry a premium, which assumes flawless execution on AI. So, if Tech is indeed facing a bubble, the timing and effects of its burst will depend on the degree to which its leaders can deliver the AI productivity gains they’ve been promising. 

The K-Shaped Divide Persisted

Consumers propelled the strongest economic growth that the U.S. has seen in the last couple of years. But the strength of the consumer continues to be bifurcated, with strong household spending among the wealthiest individuals, while middle- and lower-income households remain stretched thin, searching for discounts and bargains. With 67% of the U.S. wealth distribution sitting among the top 10% of earners, the affordability standard continues to be deeply polarized, causing the market’s attention to begin leaning away from inflation and towards the labor market. From a sector standpoint, Healthcare and Government demonstrated some gains in hiring. But Manufacturing, Retail, and Transportation—all sectors that are statistically the hardest hit among the bottom portion of the “K”—are still struggling. Moving forward, tax stimulus and further easing of inflation pressures would help all consumers to some degree.

Market Recap

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Global Equities Boasted a Banner Year

Large Cap Growth stocks drove U.S. earnings throughout the year, with the Information Technology sector easily leading the charge with earnings growth of 28% YoY. But it wasn’t just Tech. We saw compelling numbers across nearly every S&P 500 sector in 2025. Communication Services was close behind (up 19%), followed by Healthcare (up 13%), Industrials (up 9%), and Consumer Discretionary (up 7%). Energy Industry, the smallest portion of the index, was the only sector that fared poorly (down 11%). But it was in the Materials sector that we saw one of the most noteworthy gains. Gold was up a remarkable 65%—its biggest one-year gain since 1979—setting the tone for Commodities. 

Even with the strength in U.S. equities, it was international equities that stole the spotlight in 2025, with notable earnings growth contributions and attractive valuations staging a striking comeback. The MSCI Emerging Markets Index posted a year-to-date (YTD) gain of 33.6% in 2025, marking its best annual performance since 2017. On the developed markets front, the MSCI All Country World ex USA Index outpaced the S&P 500 in 2025 after several years of underperformance, with a total YTD gain of 32.4%. In both cases, the outperformance was driven by a combination of favorable market dynamics, global monetary easing, and a weaker U.S. dollar.

Fixed Income Found Rooted Resilience

The bond market finished the year strong. Investment grade credit spreads edged near historic tights on the back of strong corporate balance sheets, and securitized credit continued to outperform. As interest rates moved lower, so did the short end of the yield curve, while the long end remained sticky. Importantly, inflation, economic growth expectations, and the outlook on fiscal policy dictate the direction of the long end.

The 10-year Treasury yield moved nominally higher in December, up to 4.18% at year-end. The Bloomberg US Aggregate Bond Index was up 7.30% for the year, and the Bloomberg US Corporate High Yield Total Return Index performed similarly, closing the year up 8.62%. With some exceptions, municipal bond valuations remained attractive.

Wealth Enhancement Perspective

As we close out 2025 and shift into the new year, we continue to monitor the path of monetary policy, the Supreme Court’s decision on tariffs, labor market softness, and consumer durability. Perhaps most importantly, we are cognizant of concerns around an AI bubble, the timing of AI productivity payback, as well as the crowded bullish consensus on the sell side. 

We expect earnings growth to maintain its steady footing throughout 2026, based on a variety of factors: A possible reversal of tariff headwinds, significant fiscal stimulus, lower interest rates, a potential bounce-back of the middle-class consumer, and AI—assuming further productivity gains are realized.

From a portfolio construction perspective, the low correlation between stocks and bonds is returning to historical norms, meaning a diversified stock/bond portfolio is coming back, creating a very favorable dynamic from a risk standpoint. For long-term investors, this is a good opportunity to rebalance, diversify, and focus on fundamentals.

This information is not intended as a recommendation. The opinions are subject to change at any time, and no forecasts can be guaranteed. Investment decisions should always be made based on an investor's specific circumstances.

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