Economic Commentary

2025 Year in Review and 2026 Outlook: Resilience Rewarded

Happy New Year! As we welcome 2026 and America’s semiquincentennial, the mood is undeniably brighter following a third straight year where both the economy and the stock market defied skeptics. The recession anxieties that dominated headlines just two years ago have largely evaporated, replaced by a growing consensus that the elusive “soft landing” may have been successfully navigated. The outlook for corporate earnings remains robust, driven by productivity gains and technology adoption. In what was at times a volatile year, disciplined investors were rewarded.

These conditions paint a picture of a durable mid-cycle expansion. If this stability holds, equity markets could well extend their positive run, though it would be prudent to anticipate a more moderate pace of gains compared to the exceptional rallies enjoyed recently. The investment landscape for the coming year will likely be shaped by fiscal and monetary policy decisions, the evolution of artificial intelligence and the dynamics of a K-shaped economy as well as the ever-present potential for exogenous shocks.

Market Strength

In 2025, global equities posted another year of solid performance. Domestic large caps gained 17.9%, while developed international and emerging market stocks rose 31.2% and 33.6%, respectively. In the fixed income arena, bond returns ranged from 7.0% to 8.5% as the Federal Reserve implemented rate cuts. Even a balanced portfolio comprised of 60% global equities and 40% bonds generated a return of approximately 15.0%, building substantially on the wealth created in 2023 and 2024.

Measuring Up 2025

Entering 2025, market participants expected strong corporate earnings coupled with continued labor market strength and cooling inflation. Investors were hopeful but guarded, debating whether the Fed could lower rates without reigniting inflation. Now looking back at 2025, expectations were on the nose in some areas (e.g. S&P 500 Earnings) but missed the mark in others – most pronounced being the cooling of the labor market and corresponding rate cuts. While the path to getting here was not always smooth, 2025 will be looked upon as a strong year for capital markets and the broader economy.

Reasonable Expectations for 2026

To the extent 2025 outcomes were palatable, expectations for 2026 call for a very similar experience. Forecasts call for a normalization of growth rather than a contraction with GDP growth of approximately 2.0% for the year ahead. While valuations are elevated after three strong years, earnings growth is expected to remain healthy, providing fundamental support for stock prices. Additional interest rate cuts are expected, and a stabilization of the labor market resulting in a relatively steady unemployment rate of around 4.4%. We view these expectations as reasonable, however policy missteps or a reemergence of inflation pose a downside risk.

Of course, the year ahead will be defined by the shift from proposed policy to implemented policy under the Trump administration. With the first round of tariffs now active, we are seeing early signs of price pressures in specific goods sectors, which has kept inflation estimates for 2026 in the 2.9% range. Conversely, the administration’s deregulation efforts, particularly in energy and finance, may provide tailwinds for business investment and offset some of the drag from trade friction. Ongoing investment and potential earnings realization from AI will play a crucial role in determining the direction of equity markets.

It isn’t practical to account for every known and unknown driver of the economy over the next twelve months. We believe base-case expectations consistent with a continued expansion are reasonable. Rather than relying on precision forecasts, we continue to focus on scenario planning and portfolio resilience.

Looking Forward – Capital Market Assumptions

While short-term market movements are often noisy, the long-term compounding potential of capital markets remains attractive. We have updated our ten-year capital market assumptions below, representing the midpoint of our annualized return expectations for each asset class. U.S. Large Cap Equities are expected to return 6.5% per year whereas fixed income markets are likely to return somewhere in the ballpark of 4.0%. A broadly diversified portfolio of 60% stocks and 40% bonds is estimated to generate an annualized return of about 6.0% over the next ten years.

Over the next decade, actual returns will inevitably vary from these averages – some years will surprise to the upside, others to the downside. We believe short-term market-timing strategies are unlikely to improve long-term outcomes.

Despite an ever-evolving investment landscape, our commitment to a disciplined, long-term philosophy is steadfast. We strive to build robust investment solutions designed to help you achieve your specific financial objectives, always with your best interests at the forefront. From all of us on the investment research team, Happy New Year and thank you for the privilege of managing your wealth.