Market Commentary - January 2026

January 2026

Q4 | 2025 Market Review:

Discipline, Diversification, and Resilience Reward Investors

After a year marked by policy uncertainty, tariff-driven volatility, and shifting interest rate expectations, 2025 ultimately delivered strong returns across nearly all major asset classes. Investors who stayed disciplined through the spring tariff-driven turmoil—and who maintained diversified portfolios—were well rewarded, particularly those with exposure beyond U.S. borders. Market momentum surged after April 8, as reciprocal tariffs were reduced and subsequently extended with the passage of the One Big Beautiful Bill. Despite ongoing concerns about the legislation’s implications for U.S. debt, Wall Street and investor sentiment was buoyed by enthusiasm for tax cuts and deregulation.

U.S. equities finished the year on solid footing despite a choppy path. Stocks surged to multiple new highs throughout 2025, even as a modest November and a late-December pullback tempered year-end enthusiasm. Still, the S&P 500 posted its third consecutive year of double-digit gains, a rare feat achieved only three times since 1952. The S&P 500 set 38 all-time highs in 2025, while the Dow Jones Industrial Average closed above 48,000 for the first time, underscoring the market’s longer-term momentum.

While the Dow led U.S. indexes in the fourth quarter with a 3.6% gain, it was the technology-heavy Nasdaq that outpaced all U.S. benchmarks for the year, rising 20.4%, as artificial intelligence remained a dominant investment theme. Importantly, market leadership broadened meaningfully beyond the “Magnificent Seven,” an encouraging sign that reflected a resilient economy and improving participation across sectors and market capitalization. Corporate earnings growth for 2025 is expected to land in the 10%–12% range, helping support elevated equity valuations.

International markets were the standout performers of the year. Overseas equities broadly outpaced U.S. stocks, posting their strongest gains since 2019. A 9.4% decline in the U.S. dollar provided a meaningful tailwind, accounting for roughly one-third of international equity returns. The MSCI EAFE Index gained 27.9%, while the MSCI Emerging Markets Index surged 30.6%, leading all major equity benchmarks—even though currency effects were less pronounced in emerging markets. Notably, according to JPMorgan, 2025 marked the first time in 20 years that the S&P 500 was the worst-performing major equity market, highlighting the value of global diversification.

Volatility played a central role in the year’s narrative. Markets experienced their sharpest spike in volatility since the early days of COVID during the April tariff sell-off. Conditions stabilized as reciprocal tariffs were reduced and equities rebounded, though uncertainty resurfaced later in the year amid a 43-day government shutdown that delayed key economic data releases.

Fixed income also delivered a welcome turnaround. The Federal Reserve cut policy rates three times in 2025, totaling 0.75%, less than investors initially anticipated at the start of the year. Inflation expectations moderated—though remained above target—and the labor market cooled appreciably. As interest rates declined across the yield curve, bonds posted their best performance since 2020. The Bloomberg U.S. Aggregate Bond Index gained 7.3%, while the 10-year Treasury yield fell to 4.18%. Meanwhile, gold and silver reached historic highs, reflecting ongoing demand for diversification, rising US debt, and inflation hedges.

In hindsight, 2025 reinforced several timeless investment lessons: markets reward patience, diversification matters—especially globally—and periods of volatility often create opportunity for disciplined long-term investors. Despite an eventful and sometimes unsettling year, those who stayed the course were ultimately rewarded across stocks, bonds, and real assets alike.

The Outlook

After three consecutive years of double-digit market gains, forecasts for 2026 from leading strategists remain broadly constructive, with expected returns in the high single-digit to low double-digit range. U.S. corporate earnings growth is still projected to be double-digit, a backdrop that would support continued elevated equity valuations.

That said, history suggests that while markets can continue to advance after a strong run, achieving a fourth straight year of double-digit returns is relatively rare. As a result, while we remain cautiously optimistic about another positive year for equities, we are tempering expectations toward mid-single-digit returns.

The U.S. economy continues to show resilience, with 2026 GDP growth expectations moderating to around 2% by most forecasts. Consumer spending and AI remain key drivers, even as job growth shows signs of slowing, while tax cut stimulus may counter. Recession risk is low for 2026, though growing concerns over the ‘K-shaped’ economy remain.

Inflation, however, remains sticky and above the Federal Reserve’s target, limiting the scope for additional policy easing. Regardless of who ultimately succeeds Chair Jay Powell, expectations for further rate cuts remain modest—likely one to two at most. More importantly, maintaining Fed independence is critical. Additionally, with interest rates having normalized over the past two years, higher yields now provide a meaningful buffer against equity volatility.

International markets also present attractive opportunities, supported by more compelling valuations, fiscal stimulus, improving economic and earnings growth prospects, and the benefits of diversification. Modest further weakness in the US dollar is anticipated in 2026, and thus look for more of a slight tailwind rather than the gale force in 2025.

Looking more broadly, geopolitical tensions and rising domestic unrest continue to pose risks, and market volatility remains a key feature of the outlook for 2026. As a midterm election year, history also suggests volatility may run above average.

In this environment, we encourage investors to remain committed to disciplined investing, broad diversification, and thoughtful risk management aligned with personal objectives and tolerances. We remain focused on the long term and look forward to the opportunities 2026 may present.

Call your Nelson Advisor today at 800-345-7593 to discuss your portfolio and any concerns.

~ Your Nelson Securities Team

*Past Performance is No Guarantee for Future Results; This article is for informational purposes only and does not constitute investment advice.