December 2025
Turning the Page: A Review of the past and Our Thoughts Heading into Next Year
As we approach the end of 2025, we begin to plan for the year ahead. 2025 had many surprises, including the tariff announcements, a resilient economy, market volatility and the Cubs making the playoffs. Despite falling nearly 20% in April, the US stock market, as referenced by the S&P 500® index years, and build our outlook for 2026.
2025: The Year That Was
Perhaps the biggest news were the tariff announcements in early April. These announcements sent the US stock market into a sharp downturn. Tariffs are a form of a tax, and when businesses cannot forecast their costs, uncertainty can lead to selling in the markets. However, the fear of tariffs seems to have been overblown, as the US stock market came back strong following a wave of successful tariff negotiations. In addition to the tariff news, the job market continues to hold steady, with unemployment at 4.3% (below the historical average of 5%). In terms of corporate earnings and company profitability, earnings continue to move higher. The Federal Reserve cut interest rates twice this fall and will possibly cut several more times in the next 12 months based on their inflation and employment outlook. All of these data points paint a picture of a strong economy and healthy financial markets.
The S&P 500® index is positive as of this update. We’ve been asked in the past how things hold up after three consecutive positive years.
The following chart shows the history since just prior to the mid-20th century:
Streak (Years 1-3) | Fourth Year | Fourth Year Total Return (%) |
1942-1944 | 1945 | +36.44% |
1954-1956* | 1957 | -10.78% |
1963-1965 | 1966 | -10.06% |
1975-1977 | 1978 | +6.56% |
1980-1982 | 1983 | +22.56% |
1985-1987 | 1988 | +16.61% |
1989-1991 | 1992 | +7.62% |
1995-1997 | 1998 | +28.58% |
2012-2014 | 2015 | +1.38% |
2019-2021 | 2022 | -18.11% |
(Source: S&P 500®) |
After a yearlong correction in 2022, we are closing in on a potential new three year run of positive years. While we hope for continual positive years, we realize that corrections happen, are impossible to predict and are a normal occurrence for long-term investing. We continue to focus on the long run when managing our portfolios and are always cognizant that past performance does not guarantee nor indicate future results.
2026 Outlook
Forecasting market returns is largely a thought exercise about where the economy is heading. In years past, we have looked at aggregate S&P earnings forecasts and then applied a forward price-to-earnings ratio (P/E) multiple to arrive at a year-end price target. Given the recent run-up in the market, we don’t think this exercise is as valuable. We expect some choppiness and wouldn’t be surprised by a drawdown at some point. For the market to continue to grind upward, earnings will need to do the heavy lifting. Specifically, we think it will be important for the market to see some of the investments in artificial intelligence come to fruition. Lower interest rates should be a tailwind for mortgage holders and small businesses as well.
Major headwinds for the market include federal deficits, political divide and a slowing labor market, just to name a few. We do think the market will finish higher in 2026, albeit modestly. However, it would be great to make some headway on the issues above, including balancing the federal budget and less news out of Washington.
In today’s world, we are inundated by information. Often times it can be quite exhausting trying to understand the state of the world and economy. Successful long-term investing is largely about choosing an optimal portfolio to weather any type of economic outcome. While we understand that there are challenges ahead, we see many reasons to remain optimistic, including a resilient labor market, lower borrowing costs, and strong corporate earnings. It is our view that the best years are ahead of us and, as a result, worth investing in.
As always, please contact us at any time with questions.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
Stock investing includes risks, including fluctuating prices and loss of principal.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.