4th Quarter 2025: Market and Economy

2023, 2024, and 2025: A truly incredible three-year run for markets.

That is what we’re celebrating as the calendar turns over to 2026. After rallying 26% in 2023 and 25% in 2024, the S&P 500 added nearly 18% in 2025, resulting in one of the best three-year returns for the S&P 500 since 1960.

Despite being another banner year, 2025’s returns did not come easy. To say “a lot happened” doesn’t begin to capture the year that it was. Amid the constant flow of major headlines, it is easy to forget we even had a bear market. Yet, once again, stocks climbed a wall of worry and investors who stayed the course were rewarded.

2025 was a year when the rules were rewritten, both from policy shifts in Washington to rapid innovation in Silicon Valley. Before looking ahead to 2026, let’s review the lessons learned from a year that challenged the status quo.

Lesson #1: Policy Changes the Path But Earnings Set the Destination

President Trump’s return to office dominated the conversation as his administration upended everything from immigration to social policy to taxes to foreign policy, while also navigating the longest government shutdown in US history. Yet nothing moved markets more than tariffs.

Following “Liberation Day” in early April, when tariffs of 10% to 50% were announced, stocks plunged. The S&P 500 lost 10.5% in just two days, ultimately falling 20% from February highs.

It was brutal but it was brief. A week later, many of the most aggressive tariffs were paused and stocks jumped 9.5% in a just one day. By summer, stocks had fully recovered and reached new highs.

In my college economics classes, the theory was simple: free trade is good, tariffs are bad. Today, tariffs are at their highest levels since the 1930s. If you had told me a year ago that would be the case, I would have guessed stock markets would have fallen and stayed down. And I would have been incredibly wrong. The true effects have been much more muted.

Beneath the headlines, businesses kept doing business. They are still finding ways to adapt to the changing economic landscape. Most importantly, profits are up. According to FactSet, earnings for S&P 500 companies are on pace to have grown 12% in 2025 and follow that up with another 15% growth in 2026. In the end, rising profits—not the loudest headlines—best explain why stocks had another strong year.

Lesson #2: AI Is Growing Up

Money continues to pour into artificial intelligence. Big Tech is spending hundreds of billions of dollars to finance the buildout of data centers, cloud computing capacity, chips and software needed to support AI. Analysts have estimated that GDP likely grew by 2% during 2025, with at least half of that growth coming from investments in AI.

We saw two episodes in 2025 that shook the AI trade: early in the year, evidence that Chinese competitors could build competitive AI models at a fraction of the costs borne by US companies, and later in the year, a sell-off sparked by worries of an AI bubble.

In 2023 and 2024, CEOs needed only to mention the letters “AI” to see their stocks prices pop. In 2025, investors started asking, “How will this project turn a profit?”

The technology is evolving beyond chatbots into products that actually do things, like self-driving cars being tested in several US cities, robots making Amazon warehouses more efficient, and digital agents that handle real office work.

Companies that deliver real products will likely keep winning while those built solely on hype are more likely to get a reality check. New technology can create enormous wealth but it tends to come in waves, and it’s rarely shared evenly.

Lesson #3: Diversification Can Be Frustrating, Right Up Until It Isn’t

Perhaps the least talked about investment story in 2025 was the comeback of the diversified portfolio. For years, a handful of the largest tech companies, dubbed the “Magnificent 7,” dominated returns and owning only those names felt like the only way to win. But in 2025, five of the seven trailed the S&P 500.

Outside of the S&P, the rubber band snapped back. Bonds just had their best year in half a decade and small-cap stocks beat out large-cap over the second half of 2025. But the real standout? International stocks. After years of trailing US markets, foreign equities surged 32%, nearly doubling the S&P 500’s rise.

This is exactly why we diversify. It can be hard when one corner of the market keeps winning and a balanced portfolio looks boring by comparison. Then, suddenly, the market changes and the boring stuff actually helps.

Looking Ahead: One Market, Two Economies

While stocks are up and US GDP is projected to have grown nearly 2% in 2025, we are starting to see some cracks:

• Weakening Labor Market: Nearly a million more people were unemployed in November of 2025 than in December of 2024 and likewise, unemployment has ticked up to 4.6%—the highest since 2021. And overall, available jobs have been falling over the past few years, causing many job seekers to take longer to find new employment.
• Stressed Consumers: Holiday spending was still strong overall but credit card balances are rising and so are missed auto loan payments.

The Federal Reserve was concerned enough about unemployment that they lowered interest rates three times in 2025, hoping to stimulate the economy and spur hiring, even as inflation remains above their 2% target. So while stock markets keep rising and the overall economy is growing, not everyone is feeling better off.

The big question is which trend will break first: economic growth or rising unemployment?

In 2025, we saw business leaders delay investments and postpone hiring because they didn’t know what would happen with trade and tax policy. Today they have more clarity and we’re hoping that stability encourages investment and expansion plans in 2026. Only time will tell.

Why Stocks Look Pricey (and Why That’s Not the Whole Story)

Can this incredible three-year run for stocks continue? While stocks are trading at their richest levels since the dot-com era, there are still values to be found.

The ten largest companies in the S&P 500 trade at about 28 times earnings, while the other 490 trade closer to 19 times. That’s a serious gap. And even after a strong 2025, international markets still trade at a discount to US stocks, which means there could be more room to run.

Plus, there is some justification for today’s higher valuations. As a whole, the companies we own have never had higher revenues or profit margins than they do right now. Earnings are expected to grow another 15% in 2026, supported by AI gains, more stable tariff policy, and tax cuts from the One Big Beautiful Bill Act (OBBBA).

Stocks may not repeat the blockbuster returns of 2023–2025, but today’s prices aren’t supported by hype alone. The businesses we own are getting better.

The Real Lesson: Patience Still Wins

The April tariff tantrum felt awful in real time. Markets were tumbling, headlines were dramatic, and my phone was buzzing with text messages from friends asking “Should I sell everything?” Today, that bear market is just a footnote to another strong year.

Likewise, not all of the excitement has paid off for investors chasing AI returns. The largest IPO of 2025 was CoreWeave, a company that operates the data centers powering the AI revolution. From the IPO price of $40, the stock spiked as high as $187 per share only to collapse all the way back down below $65 per share. While I’m sure there were some winners, most investors who bought the stock during the year have been disappointed.

Emotions can run hot in both directions but letting fear and greed drive portfolio decisions can be costly. Ultimately, patience and diligence are an investor’s greatest tools, especially heading into a year that promises to be just as interesting, and probably just as surprising, as the one we’re leaving behind.

Here’s to another year of climbing walls of worry and, fingers crossed, being pleasantly surprised with the outcome. Happy New Year!

This information is believed to be accurate at the time of publication but should not be used as specific investment or tax advice as opinions and legislation are subject to change. You should always consult your tax professional or other advisors before acting on the ideas presented here.