2025 turned out to be an excellent year for many asset classes and marked the third positive year for stocks following strong returns in 2023 and 2024. The S&P 500 index of large US stocks surged 17.9% for the year, while bonds (as measured by the Bloomberg US Aggregate Bond index) returned 7.3% in 2025.
Last year’s gains were driven by strong corporate profits, declining interest rates, and continued enthusiasm about progress in artificial intelligence (AI). However, these returns also came despite investor concern about tariffs, rising government debts, and the fragmentation of the global order, which created the somewhat unusual scenario where gold, traditionally an asset for uncertain times, skyrocketed 65% even as stocks gained.
As we look ahead to 2026, the most often-heard themes include whether the AI boom can continue, how much impact tariffs will have, and if interest rates will continue to decline.
There was considerable concern about the sustainability of the AI boom throughout 2025, and yet technology stocks continued their upward trajectory. Concern toward year end turned toward the amount of debt financing being used to support new data centers, and the “circular” nature of the boom, in which Nvidia is investing in firms that are in turn buying its chips. Still, the possibility of massive efficiency improvements continues to drive AI-related stocks upward. Expect volatility in this boom as investors assess how much, and how soon, AI will have broader impact.
As far as global trade, the massive increases in US tariffs have so far not sparked a global trade war. If that continues, tariffs may have less dire impacts than were previously projected. Still, it is not unusual for tariffs to have a delayed impact on inflation, and tariffs are likely to be at least a modestly negative factor for inflation in 2026.
Finally, the direction of interest rates captivated investors in 2025, and will likely continue to do so in 2026. Theadministration will continue to push for lower short-term rates to spur economic growth and to make the high levels of US government debt more affordable, even if it risks higher inflation.
Longer term rates have declined much less than short term rates in the current cycle. For example, over the past two years mortgage rates have declined just 0.5%, while the effective Fed Funds rate has fallen 1.6%. This slower rate of decline is likely to continue as long as bond investors remain concerned about growing government debt and sticky inflation.
Stocks
Foreign stocks outperformed US stocks for both the year and the quarter. The MSCI ACWI ex-US index of foreign stocks (both developed and emerging countries) gained an astounding 32.4%. This was partly due to a declining US dollar early in the year, which helped non-US dollar denominated stocks. However, in the most recent quarter, foreign stocks still added 5.1% in a period where the US dollar was flat.
US stocks also had a good year. Larger company stocks, as measured by the Russell 1000 large cap index, gained 17.4% for the year and 2.4% in the quarter. Smaller company stocks, as measured by the Russell 2000 small cap index, gained 12.8% for the year and 2.2% in the quarter. US stocks gained due to strong earnings. S&P 500 companies grew earnings at 12% in 2025, led by the “Magnificent 7” stocks (a group of dominant US technology companies that include Nvidia, Microsoft, Apple, Tesla and others) which grew earnings by 22%. S&P 500 earnings are expected to grow as much as 15% in 2026.
Communications and technology companies led the S&P 500 returns in 2025, while more defensive stocks (likeProcter and Gamble) and real estate stocks lagged. Not all technology stocks beat the market, though. Apple was up “only” 9.0%, for example. Cloud computing firm Salesforce, which could be impacted negatively by AI, saw its stock decline by over 20%.
Bonds
The Federal Reserve cut the federal funds rate two times in the fourth quarter, down to a target range of 3.50% – 3.75%. Further cuts are expected in 2026. Currently, futures markets are suggesting two more cuts is the most likely scenario for this year.
Interest rates were mostly flat during the quarter, and the Bloomberg US Aggregate Bond index gained 1.1%. the year, the index has benefited from falling rates, and gained 7.3% in 2025.
Commodities
Gold had another strong quarter, driven in part by strong central bank purchases. Gold gained 12.6% for the quarter, and ended the year up 65%. Other precious metals did equally well or better, with silver gaining 142% for the year. Oil prices, on the other hand, generally declined throughout 2025, as supply outstripped demand.
Looking Ahead
Overall, the markets and the economy look strong as we enter 2026. Few commentators are mentioning recession risk anymore these days. Still, it’s reasonable to expect market volatility, especially given the high current stock valuations. As good as 2025 was, we have to remember that the market dropped 19% from its prior peak in April when President Trump announced “Liberation Day” and raised tariffs, before the upswing continued. Nobody can predict the event that will cause the next market drop, but it’s safe to say we can expect a decline of at least 10% within the next 12 months, which is simply the historical average.
On January 1, 2026 Warren Buffet stepped down as CEO from Berkshire Hathway at age 95. Warren shared much advice in his career (though you might not want to copy his retirement plan). He often warned against rapid trading, saying “If you aren’t willing to own a company for 10 years, don’t even think about owning it for 10 minutes.” We certainly agree with his buy-and-hold philosophy, and it’s worth remembering during the volatile times that the stock market goes up and down, but good companies will persist.