A Quick Programming Note
Happy New Year! We’re adjusting the format of our newsletter to deliver more focused, relevant content. Each month, we’ll begin with a market and investment-related commentary, followed by separate articles and blog posts during the month focused on financial planning, taxes, estate planning, and other topics relevant to your overall financial picture.
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Month (and Year) in Review
2025 closed as a broadly positive year for financial markets, with every major asset class posting gains. This marks the first calendar year since the pandemic that we can say that.
Leadership came from outside the U.S. Foreign developed market equities were the top-performing major asset class, gaining 35%, roughly double the gain of U.S. equities. Foreign emerging market stocks followed, rising nearly 26%, while foreign real estate returned more than 21% for the year.
At the other end of the spectrum, U.S. real estate investment trusts were the weakest major asset class, posting a modest 3.3% gain in 2025. That return trailed cash equivalents, which are still benefiting from elevated short-term interest rates and returned approximately 4.2% for the year.
It wasn’t all sunshine and rainbows, though. The first few months of the year saw increasing volatility tied to trade policy, inflation data, and shifting monetary policy expectations. Following the Liberation Day tariff announcements, market volatility spiked sharply, with the Volatility Index (VIX) rising from 17 to above 50. Equity markets, as measured by the S&P 500, declined approximately 21% from peak to trough, bottoming on April 7th before a sharp recovery, rallying 30% to new highs by July 3rd.
From that point forward, risk assets rallied through much of the remainder of the year. Developed and emerging market equities not only participated in the advance but ultimately outperformed U.S. stocks after an extended period of U.S. leadership.
Fixed income returns were more modest but strong, particularly later in the year as yields trended lower. Core bonds and credit sectors benefited as rate volatility subsided, while cash and cash equivalents continued to offer attractive yields, though those returns moderated as the Federal Reserve continued to cut interest rates.
While near- to medium-term inflation concerns remain elevated, fears of a tariff-driven price surge similar to 2022 have, so far, failed to materialize. That allowed central banks to continue the gradual normalization of interest rates, helping set the stage for a more balanced market environment heading into 2026.
Market Narratives
Earnings Growth
Equity returns in 2025 were driven primarily by rising earnings expectations rather than valuation expansion. Per Carson Research’s estimates, of the S&P 500’s 17.9% gain, 14.3% came from forward earnings growth, 2.1% from multiple expansion, and 1.5% from dividends.
Earnings growth reflected both revenue gains (+8.8%) and profit margin expansion (+5.5%). Despite policy uncertainty and higher costs, corporate margins improved as companies raised prices selectively, controlled expenses, and increased productivity.
Looking ahead, industry analysts’ consensus earnings estimates for the S&P 500 are $272 for 2025, $312 for 2026, and $358 for 2027, implying mid-teens earnings growth over the next two years.
Although the Magnificent 7 continued to post strong earnings growth in 2025, earnings growth also improved across the broader market. U.S. equity leadership remains concentrated, but increasing competition and investment in artificial intelligence suggest that Mag-7 exposure alone may not guarantee continued growth or outperformance going forward.
International Equities Catch a Currency Tailwind
As we noted earlier, international equities delivered a strong comeback in 2025 as developed and emerging market stocks both outperformed U.S. equities by a good margin.
A key contributor was the decline in the U.S. dollar, which acts as a tailwind for foreign equity returns when translated back into U.S. dollars. A weaker dollar increases the value of overseas earnings and assets for U.S.-based investors, amplifying market gains in local currencies. As measured by the ICE U.S. Dollar Index (DXY), the U.S. dollar fell 9.4% against other currencies.
The dollar’s weakness reflected several factors, including Federal Reserve rate cuts, policy uncertainty, and shifting global capital flows. At the same time, international markets benefited from more attractive relative valuations and investor demand for diversification beyond U.S. mega-cap stocks.
Whether these trends continue remains uncertain, but 2025 served as a reminder that currency cycles matter and that diversification beyond U.S. borders can meaningfully influence outcomes over full market cycles.
The Yield Curve’s Return Toward Normal
The bond market reflected a gradual normalization in 2025 as the Treasury yield curve moved away from inversion, a condition that has historically forecasted economic recessions. The curve began to steepen as the Federal Reserve cut the federal funds rate by a cumulative 1.75% since late 2024. Despite that easing, longer-term yields remained relatively firm. The 10-year Treasury yield ended the year at 4.18%, down from 4.58% a year earlier, but still elevated compared to recent history.
Short-term yields declined more sharply as policy rates were reduced, with the three-month Treasury yield falling about 0.70%, compared with roughly a 0.40% decline for the 10-year. Much of the decline in intermediate yields occurred before rate cuts were fully priced in, suggesting policy conditions were already viewed as restrictive even as economic growth remained resilient.
The Fed’s easing appeared driven less by inflation, which remained near 3% and above its 2% target, and more by concerns around slowing job growth. Measures of labor market confidence weakened over the year, even as GDP growth and productivity remained strong. That combination helped keep longer-term yields anchored.
By year-end, the yield curve no longer implied the same level of economic stress seen earlier in the cycle. Instead, it reflected continued growth, moderating but persistent inflation, and policy adjustments aimed at balancing those forces. This reinforced the broader normalization theme across markets in 2025.
Closing Thoughts
2025 was another good year for investors, following similar environments in 2024 and 2023. Much of 2025 was defined by what didn’t happen. A widely anticipated recession failed to materialize, earnings held up despite policy uncertainty and tariffs, and international markets outperformed in the face of U.S. exceptionalism.
That said, the market wasn’t complacent. We saw a near bear-market drawdown following tariff announcements, and technology stocks were knocked back multiple times throughout the year as enthusiasm around artificial intelligence was tested by headlines (circular deals), competition (DeepSeek), and questions around spending and financing (Oracle). Volatility showed up, but it didn’t derail the broader trend.
Looking ahead to 2026, the base case is to continue much of the same themes and positive market uptrends.
On the positive side of the ledger, earnings expectations remain constructive, productivity has improved (and should improve at a greater rate with AI technologies), and monetary policy is no longer as restrictive as it was earlier in the cycle.
At the same time, valuations are not cheap, inflation hasn’t settled back to target, and the labor market has cooled down. Growth has held up better than expected, but longer-term interest rates remain elevated compared to recent history.
That mix points to a market environment where results may depend less on stock valuation multiple expansion (i.e., bulls’ enthusiasm) and more on execution, earnings delivery, and relative fundamentals.
Thanks again for reading, and we hope everyone has a prosperous New Year!
