Both the equity and bond markets delivered solid gains in 2025, marking three consecutive years of positive gains. 

2025 was marked by heightened anxiety throughout the year.  However, that anxiety proved mostly unwarranted as markets around the globe saw steady gains after the first quarter.  The most significant change from one year ago was the leadership change in Washington.  From day one of his inauguration, the most disruptive President in decades has ushered in a whirlwind of activity.  From DOGE, to closing the border, to navigating geopolitical turmoil and perhaps most unsettling, Trump’s tariff war, everyone has been on edge.   

The initial reaction to Trump’s “liberation day” tariff announcement was a dramatic downdraft.  Since then, the market has shrugged off his topsy turvy approach and assumed that in the end we would land someplace in the middle.  And as predictions of economic turmoil and exploding inflation never materialized, the markets reacted logically.  They went up.   

The driver of most gains in 2025 was the speculative artificial intelligence trade.  Every potential beneficiary of the AI craze shot higher as investor enthusiasm escalated with each passing month.  Software, semiconductors, data centers, utility companies, and alternative energy sources experienced attention far beyond what their fundamentals could justify.  Though valuations have reached new heights, the appetite for these stocks has not diminished yet.  Sometimes investors eat until they explode.  That may happen yet, but it’s likely too early to make that prediction as major stock market bubbles persist well beyond all expectations.   

International equities had their best year in over a decade.  The tariff war may have inadvertently unleashed pent up investor interest in both developed and emerging markets.  The weak dollar and attractive valuations (compared to U.S. equities) proved too hard to resist for market participants.  We’ll see if that strength can persist in 2026.   

Throughout the year, the economy advanced on solid, albeit softening footing.  An expected slowdown and slowing job growth eventually shifted the attitude of the Federal Reserve.  The Fed turned somewhat dovish and reduced the Fed Funds rate by 50 basis points in recent months and is expected to do more in the coming year.   That alone could provide the tailwind for continued gains in the new year as the adage “never fight the fed” should be at the top of mind for investors.     

Though valuations are at their outer limits for some industry groups (technology, in particular artificial intelligence), there are plenty of reasonably valued sectors and industry groups that could benefit if we see a reset in those highly valued areas.  Most notably, health care, consumer discretionary, and consumer staples will likely emerge from depressed conditions should a shift in leadership take place.   

Ideally, an orderly transition into broad market themes will evolve in the coming year.  Until then, equity markets will likely remain driven by the trajectory of inflation and interest rate policy, and the durability of corporate earnings.   As we enter year four of this impressive bull market, our research remains constructive but as always, we will be on the lookout for any evidence to the contrary.