By Daniel McGarvey, CFA on behalf of Stonebridge Financial Group advisors
2025 was a remarkable year where almost every type of investment performed well. On the equity side, the S&P 500 returned 17.9%, an impressive follow-up to two years with over 20% returns. International markets were even more impressive, returning 31.9% for developed and 34.4% for emerging markets, thanks in part to the US Dollar declining by 9.4%. Domestic small caps returned 12.9%, and all eleven S&P sectors were positive. On the bond side, the Bloomberg US Aggregate Bond Index returned 7.3%, and high yield and foreign bonds fared even better. Perhaps the greatest surprise is that while stocks and bonds were rallying, metals blew them out of the water with returns around 64% for gold and 145% for silver, their best years in decades.
Although market participation has broadened, 2025’s domestic equity returns were still driven by the “Magnificent 7”, which are the companies most heavily tied to the widescale development of AI (artificial intelligence). These names accounted for 46% of market returns in the year (see chart below), which is lower than the 55% share the previous year, but still quite high. The question plaguing investors has been whether the AI trade is an interdependent bubble that will pop like the Dot-com bubble did, even though this time there is more substantive cash flow and demand behind the lofty valuations. Time will tell whether AI delivers on its promises of productivity gains, but in 2026 we might see investors becoming more selective about which companies to reward as they expect evidence of more tangible use cases. As it stands, Wall Street is expecting another year of double-digit earnings growth and increasing margins under the assumption that the AI supercycle will continue.
Source of chart: J.P.Morgan Asset Management
The market is trending well into the new year, but a potential headwind which could slow the market’s momentum is the uncertainty surrounding the midterm elections. Historically, midterm years have the weakest returns and steepest drawdowns of presidential terms, although they also tend to be followed by strong rebounds (see chart below). Early indications are showing a serious possibility of a blue wave that could slow the pace of President Trump’s policy making.
Source of chart: Strategas Research Partners LLC
Two of the most consequential policy moves of this administration so far have been the steep escalation of tariffs and the passage of the One Big Beautiful Bill Act (OBBBA). Tariffs sent markets into turmoil in April since they would have been the largest tax increase in modern history, but their current effective rate of 12-16% is roughly half of what was initially announced. It is now up to the Supreme Court to decide to what extent to block tariffs and whether there will be refunds. There are ways for the administration to replace the tariffs, however, and they are likely to remain elevated for some time.
The OBBBA is significant for many reasons, including that in 2026 it will lead to roughly $150bn of consumer stimulus through tax refunds, in addition to roughly $230bn of corporate stimulus through provisions like the full expensing of capital goods and the retention of qualified business income deductions. We think these measures should boost GDP (gross domestic product), stave off near-term recession concerns, and ideally cause consumer sentiment to bounce back from being near all-time lows. The benefits are broad across income classes and could lead to a consumption wave. Their stimulating effect might also make it more difficult for inflation to come down to its 2% target.
The mix of a surprisingly warm economy with stubborn inflation could signal that the Federal Reserve is near the end of its rate cutting cycle, although markets are expecting two more 0.25% cuts from the current 3.5-3.75% range (as of the end of 2025). The path is quite uncertain, especially given the added wildcard that we do not know who will be replacing Jerome Powell as chairman in the summer. The current frontrunner is Kevin Hassett, a Trump loyalist who would probably favor looser monetary policy. Whoever wins will be put in the unenviable position of trying to appease both the financial markets and the president.
Assuming the short end of the Treasury yield curve stays flat or lower next year, we do not expect the 10-year rate to move significantly lower or higher from its 3.75-4.5% range since there are forces pushing in both directions. Downside forces include the Treasury issuing more short-term bills to keep the supply of longer-term notes and bonds low, while upside forces include lingering inflation and deficit concerns. The tariffs do help address the deficit issue in theory, but their effect has largely been offset by the tax cuts in the OBBBA. Although the unemployment rate has risen gradually to 4.6%, (as of November), it is concerning to see such large deficits run at such a relatively low level of unemployment.
Investment Allocation
Our allocations have not changed significantly over the course of the year, though we have incrementally added measured exposure to beneficiaries of the AI theme. Of course, at this point it feels like almost every company is a beneficiary of AI in some way. Our preference continues to be for high quality companies with strong cash flow and dividend growth, and our investments are less concentrated than the index in the massive hyperscalers. An allocation to high quality mid and small cap stocks is also compelling as long as the economy remains resilient, which we think it will. For better or for worse, our government has shown that it is willing to go to extraordinary measures to avoid cyclical recessions.
International stocks were standout performers this year, and they are still trading at much cheaper valuations than US stocks. Many countries in Europe and Asia also have the tailwinds of government stimulus and corporate reform at their backs. That being said, the ever-changing nuances of trade policy and war make the case for active management in country and security selection.
Bonds had a relatively calm year compared to the last few years, with the 10-year rate falling from 4.6% to 4.2% and credit spreads remaining historically tight. Given their high starting yields, we think quality bonds should be able to act as a portfolio ballast and income source going forward. We remain underweight duration as we expect the yield curve to continue normalizing.
Gold had its best year since the late 1970s, primarily because of central banks diversifying away from the US Dollar and its mounting fiscal concerns, along with geopolitical turmoil and falling rates. We think these factors are unlikely to subside quickly, and we like the diversification that the precious metal and other uncorrelated alternative assets can provide.
Material discussed is meant for general/informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions.
2025 Market and Economy Review and 2026 Look Forward
By Daniel McGarvey, CFA on behalf of Stonebridge Financial Group advisors
2025 was a remarkable year where almost every type of investment performed well. On the equity side, the S&P 500 returned 17.9%, an impressive follow-up to two years with over 20% returns. International markets were even more impressive, returning 31.9% for developed and 34.4% for emerging markets, thanks in part to the US Dollar declining by 9.4%. Domestic small caps returned 12.9%, and all eleven S&P sectors were positive. On the bond side, the Bloomberg US Aggregate Bond Index returned 7.3%, and high yield and foreign bonds fared even better. Perhaps the greatest surprise is that while stocks and bonds were rallying, metals blew them out of the water with returns around 64% for gold and 145% for silver, their best years in decades.
Although market participation has broadened, 2025’s domestic equity returns were still driven by the “Magnificent 7”, which are the companies most heavily tied to the widescale development of AI (artificial intelligence). These names accounted for 46% of market returns in the year (see chart below), which is lower than the 55% share the previous year, but still quite high. The question plaguing investors has been whether the AI trade is an interdependent bubble that will pop like the Dot-com bubble did, even though this time there is more substantive cash flow and demand behind the lofty valuations. Time will tell whether AI delivers on its promises of productivity gains, but in 2026 we might see investors becoming more selective about which companies to reward as they expect evidence of more tangible use cases. As it stands, Wall Street is expecting another year of double-digit earnings growth and increasing margins under the assumption that the AI supercycle will continue.
Source of chart: J.P.Morgan Asset Management
The market is trending well into the new year, but a potential headwind which could slow the market’s momentum is the uncertainty surrounding the midterm elections. Historically, midterm years have the weakest returns and steepest drawdowns of presidential terms, although they also tend to be followed by strong rebounds (see chart below). Early indications are showing a serious possibility of a blue wave that could slow the pace of President Trump’s policy making.
Source of chart: Strategas Research Partners LLC
Two of the most consequential policy moves of this administration so far have been the steep escalation of tariffs and the passage of the One Big Beautiful Bill Act (OBBBA). Tariffs sent markets into turmoil in April since they would have been the largest tax increase in modern history, but their current effective rate of 12-16% is roughly half of what was initially announced. It is now up to the Supreme Court to decide to what extent to block tariffs and whether there will be refunds. There are ways for the administration to replace the tariffs, however, and they are likely to remain elevated for some time.
The OBBBA is significant for many reasons, including that in 2026 it will lead to roughly $150bn of consumer stimulus through tax refunds, in addition to roughly $230bn of corporate stimulus through provisions like the full expensing of capital goods and the retention of qualified business income deductions. We think these measures should boost GDP (gross domestic product), stave off near-term recession concerns, and ideally cause consumer sentiment to bounce back from being near all-time lows. The benefits are broad across income classes and could lead to a consumption wave. Their stimulating effect might also make it more difficult for inflation to come down to its 2% target.
The mix of a surprisingly warm economy with stubborn inflation could signal that the Federal Reserve is near the end of its rate cutting cycle, although markets are expecting two more 0.25% cuts from the current 3.5-3.75% range (as of the end of 2025). The path is quite uncertain, especially given the added wildcard that we do not know who will be replacing Jerome Powell as chairman in the summer. The current frontrunner is Kevin Hassett, a Trump loyalist who would probably favor looser monetary policy. Whoever wins will be put in the unenviable position of trying to appease both the financial markets and the president.
Assuming the short end of the Treasury yield curve stays flat or lower next year, we do not expect the 10-year rate to move significantly lower or higher from its 3.75-4.5% range since there are forces pushing in both directions. Downside forces include the Treasury issuing more short-term bills to keep the supply of longer-term notes and bonds low, while upside forces include lingering inflation and deficit concerns. The tariffs do help address the deficit issue in theory, but their effect has largely been offset by the tax cuts in the OBBBA. Although the unemployment rate has risen gradually to 4.6%, (as of November), it is concerning to see such large deficits run at such a relatively low level of unemployment.
Investment Allocation
Our allocations have not changed significantly over the course of the year, though we have incrementally added measured exposure to beneficiaries of the AI theme. Of course, at this point it feels like almost every company is a beneficiary of AI in some way. Our preference continues to be for high quality companies with strong cash flow and dividend growth, and our investments are less concentrated than the index in the massive hyperscalers. An allocation to high quality mid and small cap stocks is also compelling as long as the economy remains resilient, which we think it will. For better or for worse, our government has shown that it is willing to go to extraordinary measures to avoid cyclical recessions.
International stocks were standout performers this year, and they are still trading at much cheaper valuations than US stocks. Many countries in Europe and Asia also have the tailwinds of government stimulus and corporate reform at their backs. That being said, the ever-changing nuances of trade policy and war make the case for active management in country and security selection.
Bonds had a relatively calm year compared to the last few years, with the 10-year rate falling from 4.6% to 4.2% and credit spreads remaining historically tight. Given their high starting yields, we think quality bonds should be able to act as a portfolio ballast and income source going forward. We remain underweight duration as we expect the yield curve to continue normalizing.
Gold had its best year since the late 1970s, primarily because of central banks diversifying away from the US Dollar and its mounting fiscal concerns, along with geopolitical turmoil and falling rates. We think these factors are unlikely to subside quickly, and we like the diversification that the precious metal and other uncorrelated alternative assets can provide.
Material discussed is meant for general/informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions.
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