As we begin 2026, it is a good time to look back on a year that surprised many investors.
Throughout 2025, headlines focused on fiscal policy changes, new tariffs, and even a short government shutdown. Even with that uncertainty, the U.S. economy continued to grow. Behind the headlines, the core parts of the economy stayed strong.
The year ahead also carries special meaning. In 2026, the United States celebrates its 250th anniversary. That milestone reminds us that the American economy has faced much harder challenges in the past. Each time, it has adjusted, rebuilt, and continued to grow.
Economic Growth Gained Momentum
After a slow start, growth accelerated as 2025 progressed.
- Third-quarter GDP: 4.4% annualized growth, the strongest pace in two years
- Consumer spending: Remained steady
- Exports: Improved as the year advanced
Inflation cooled further during the year.
- Consumer Price Index (CPI): 2.7% at year-end
Inflation is not yet at the Federal Reserve’s long-term goal, but it is much lower than it was after the pandemic. From this point, inflation will likely continue to ease over time instead of falling because of sharp interest rate changes.
A Labor Market That Is Cooling
The labor market remains stable by historical standards, but conditions have softened.
- Unemployment rate: 4.4% at year-end
- Job creation slowed
- For the first time in years, more people are looking for work than there are open positions
This is a clear shift from the unusually tight labor market of recent years.
Artificial Intelligence Drove Investment
One of the largest drivers of growth in 2025 was artificial intelligence.
Roughly $1 trillion was invested in AI-related projects during the year. Without that investment, overall economic growth would likely have been much slower.
We are still early in this transition. However, AI is already improving efficiency in:
- Logistics
- Healthcare
- Software development
Over time, higher productivity could help balance challenges from an aging population and change how businesses run. This looks more like the start of a long-term shift than a short-term trend.
Bonds Delivered Income Again
After several years of very low yields, bonds produced solid returns in 2025.
The Federal Reserve cut interest rates three times during the year. By year-end, its target rate range was 3.50% to 3.75%.
- Bloomberg Aggregate Bond Index return: +7.3%
Investors who stayed invested in high-quality bonds and cash were rewarded. The yield curve began to look more normal again. Real interest rates remained positive, which means interest rates stayed above inflation.
This matters because bonds play an important role in balanced portfolios. They can provide a steady income and help reduce overall volatility. When bonds offer higher yields, investors do not have to take as much risk in stocks to earn returns. A more stable interest rate environment also makes it easier for businesses and households to plan for the future.
Overall, the Federal Reserve appears closer to what it considers a neutral rate, one that neither boosts nor slows the economy.
Stock Market Performance in 2025
U.S. stocks delivered a third consecutive year of double-digit gains.
Major Index Returns:
- S&P 500: +17.9%
- Nasdaq Composite: +20.4%
- Russell 2000: +12.8%
- Dow Jones Industrial Average: +13.0%
- MSCI EAFE Index: +31.2%
Excitement around artificial intelligence continued to support markets, particularly among large technology companies.
However, only two of the so-called “Magnificent Seven” stocks outperformed the broader market in 2025: Alphabet and Nvidia. That is a positive sign, as leadership began to broaden.
Still, concentration remains elevated.
- About 35% of the S&P 500 is concentrated in seven stocks
- The market trades at roughly 22 times projected 2026 earnings
- Earnings yield sits near 4.5%
At current interest rate levels, these valuations can be supported. Historically, however, starting from higher valuation levels has often led to more moderate long-term returns.
Future performance will depend on earnings growth, investor confidence, and interest rate direction.
Opportunity in Small and Mid-Cap Stocks
After years of lagging performance, small and mid-cap stocks may be positioned for improvement.
- Small-cap valuations remain near 25-year lows relative to large caps
- Small-cap earnings are projected to grow approximately 34% in 2026
- These companies often benefit more from falling interest rates due to variable-rate borrowing
Early results in 2026 suggest that more parts of the market are starting to lead. If this trend continues, gains could be spread across more industries and companies. That would create a stronger and more balanced market.
Shifting portfolios toward areas that are priced more reasonably may help investors take part in the next stage of growth. It can also reduce reliance on a small group of large companies.
We remain focused on discipline, diversification, and long-term planning.
If your financial situation has changed, or you expect it to change, we encourage you to reach out to our team so we can review your portfolio and overall plan together.