U.S. stocks finished the year on a strong note, rebounding impressively after the volatility triggered by the announcement of new tariff rates on Liberation Day. While artificial intelligence dominated headlines, market gains were broad-based. All 11 sectors of the S&P 500 posted positive returns, supported by solid earnings growth across the market.
Earnings momentum is expected to continue as companies expand investments in AI. According to an IBM CEO study, 52% of the 2,000 CEOs surveyed globally report that their organizations are already realizing value from generative AI beyond simple cost savings. Looking ahead, 85% expect their scaled AI investments to deliver positive returns by 2027.
Importantly, the impact of AI extends well beyond the technology sector. AI development requires significant physical infrastructure and energy. Bloomberg Intelligence estimates that energy demand related to AI could increase fourfold by 2032. As a result, opportunities are emerging across a wide range of industries. Construction of data centers needed to process data, mining of the precious metals needed to build semiconductors, manufacturing of heavy equipment to build infrastructure, and developing next-generation power sources, such as modular nuclear reactors, are just a few opportunities as a result.
Investors who avoided home-country bias were rewarded in 2025. After nearly a decade of U.S. market leadership, both developed and emerging international markets outperformed the U.S.¹ This marked the first time since 2017 that both developed and emerging market equities outpaced the S&P 500 in the same year.
Historically, international leadership has been more common. During the 2000s, international markets outperformed U.S. stocks in seven out of ten years. Looking forward, the international markets have some strong tailwinds that can keep their growth going. While diversification can’t ensure outperformance in every market environment, it remains the most reliable way to manage risk and preserve capital amid uncertainty.
Bonds delivered strong results in 2025, supported by high starting yields and price appreciation as interest rates declined. As we look at 2026, bonds remain well positioned, though returns are likely to be more modest. With yields lower than a year ago, and less room for further rate cuts, most bond returns are expected to come from income rather than price appreciation.
Since the post-COVID recovery began in 2021, inflation has been the Federal Reserve’s primary focus. The rate-cutting cycle that began in September 2024 continued through 2025, with three quarter-point cuts. Inflation ended the year around 2.7%. While this is still above the Fed’s 2% target, policymakers are increasingly turning their attention to the labor market.
Labor conditions softened in 2025, with unemployment rising from 4.0% to 4.4%. While still low by historical standards, the underlying details are worth watching. Job growth has been heavily concentrated in healthcare. Excluding healthcare, the total job market has shrunk over the last three months. The Fed currently expects unemployment to remain stable in 2026 but has indicated that further labor market weakness could prompt additional rate cuts beyond the one or two cuts they expect to do in 2026.
We expect the yield curve to continue steepening (normal) as the Fed continues their rate cutting cycle. Longer-term yields are likely to remain elevated due to persistent inflation pressures and continued Treasury issuance driven by large federal deficits. As a result, the Fed may have limited ability to push long-term rates (including mortgage rates) significantly lower, even as policy rates decline.
As central banks cut rates, money-market yields are declining, reducing the appeal of cash. Yields have fallen from a peak of 5.33% in September 2024 to 3.64% as of January 2026. When money market and high yield accounts had rates on par with longer dated bonds, maintaining large bank balances made a lot of sense. However, as rates on cash have fallen faster than rates on longer dated bonds, the opportunity cost of maintaining high cash balances has become meaningful. This trend is likely to continue in 2026 making income generation a greater priority, especially for retirees.
Each year presents its own challenges to the market and economy. How will the Supreme Court rule on the legality of Trump’s presidential power to impose global tariffs? Will we see any resolution in the Ukraine-Russia conflict? Who will replace Jerome Powell as Chair of the Federal Reserve? Though the outcomes might not be known, markets tend to manage the outcomes of known challenges fairly well. Inevitably, challenges will emerge that catches the market off guard. Confidence in investing comes from preparation, not prediction. Having a Personalized Road Map to guide you on your financial journey provides you the framework to maintain discipline and alignment of your goals, regardless of the environment.
1. The MSCI Emerging Markets Index captures large and mid cap representation across 23 Emerging Markets countries. The MSCI EAFE Index is an equity index which captures large and mid cap representation across 21 Developed Market countries around the world, excluding the US and Canada.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing. Any economic forecasts set forth may not develop as predicted and are subject to change. All indices are unmanaged and may not be invested directly. Past performance is no guarantee of future results. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market fund. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Bonds are subject to availability, change in price, call features and credit risk. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets The S&P 500 is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance.