As we close the books on 2025, one theme stands out clearly: investors who remained disciplined and focused on long-term fundamentals were rewarded. Despite ongoing concerns about inflation, interest rates, geopolitics, tariffs, and market valuations, financial markets delivered another year of solid performance.
Below, we recap what mattered most in 2025 and outline how we’re thinking about the road ahead in 2026.
A Strong Year for Markets
Equities posted another impressive year of gains. The S&P 500 rose approximately 16%, while the Dow Jones Industrial Average gained about 13%. These returns came despite persistent skepticism and frequent calls for a slowdown or recession.
Fixed income also played an important role in diversified portfolios. Taxable bonds returned roughly 7%, while tax-free municipal bonds gained approximately 5%. While not without volatility, bonds once again demonstrated their value as a source of income and stability.
One clear laggard in 2025 was cash, which underperformed nearly every major asset class. While cash can be useful for short-term needs and liquidity, the opportunity cost of holding excessive cash remained evident throughout the year.
Earnings Growth: The Foundation Beneath the Markets
The most important driver of market performance in 2025 was not speculation or sentiment—it was earnings growth.
Corporate earnings have steadily improved over the past several years:
- 2023: 1.4% growth
- 2024: 6% growth
- 2025: approximately 11% growth
This progression has provided a strong fundamental backdrop for equities. Looking ahead, analysts are projecting earnings growth of around 14% for 2026, which supports the case for continued expansion if the economy avoids a recession.
Inflation and the Economy: Cooling Without Breaking
Inflation declined more quickly than many expected. As of November 2025, inflation stood at 2.6%, well below forecasts coming into the year.
Our expectation for 2026 is inflation around 2.5%, which is:
- Below the 100-year historical average of roughly 3%
- Far removed from the 9.1% peak reached in 2022
The labor market remains healthy. Unemployment is approximately 4.6%, and although conditions have softened modestly, there are still about 7.7 million open jobs. This balance between cooling and stability reduces the likelihood of a recession while giving the Federal Reserve flexibility to adjust policy.
Fixed Income: Steady Returns and a Constructive Outlook
Fixed income delivered solid and reliable results in 2025. Taxable bonds returned approximately 7%, while tax-free municipal bonds gained about 5%, providing meaningful income and diversification benefits within portfolios.
Looking ahead, the outlook for fixed income remains constructive. The likelihood of additional interest rate cuts should be supportive for bond prices, particularly across high-quality taxable and municipal markets. While bonds may not capture headlines the way equities do, we continue to view fixed income as an important component of a balanced portfolio and expect another solid year for bonds in 2026.
Looking Ahead to 2026: Volatility Is Normal
We are currently a long way from the October 12, 2022 cycle low and continue to be firmly in a bull market.
That said, bull markets are rarely smooth. Historically, midterm election years experience an average market pullback of roughly 18%. We saw a 19% pullback in 2025, proving once again that meaningful corrections can occur even during strong years.
For 2026, our base case remains:
- A continued economic expansion
- No recession
- An intact bull market, accompanied by periods of volatility
Volatility should not be feared—it should be expected and planned for.
Addressing Common Investor Concerns
Markets at all-time highs
Many investors hesitate to invest when markets are setting new highs. Historically, however, investing at all-time highs has produced better 1-, 3-, and 5-year returns than investing on most other days. Waiting for the “perfect” moment often results in missed opportunity.
Politics and tariffs
In 2025, markets performed well despite significant tariff increases, reinforcing the reality that markets adapt far better than headlines imply.
Artificial intelligence
While AI remains a powerful growth theme, we do not believe we are in an AI bubble. Adoption, productivity gains, and earnings impact suggest the technology is still in relatively early stages.
Final Thoughts: The Value of Staying the Course
The past several years have reinforced a timeless investing truth:
Long-term success is built on discipline, patience, and a focus on fundamentals—not predictions or emotion.
As we move into 2026, our approach remains consistent:
- Maintain diversified portfolios
- Manage risk intentionally
- Expect volatility without reacting to it
- Keep investment decisions aligned with long-term goals
Markets will always provide reasons to worry. History shows they also provide rewards to those who remain invested through uncertainty. Our focus is not on predicting the next correction or headline, but on helping our clients navigate markets thoughtfully—through both calm and turbulent periods—so they stay positioned for long-term success.