Reflect on the 2025 Market and What Investors Should Expect in 2026

As we approach the end of the year and reflect on 2025, our CIO Kieran Osborne shares his thoughts on the market, the economy, and our outlook moving into 2026 and beyond.

Key Takeaways

• With an improved economic backdrop and a lower interest rate environment, we believe our broadly diversified portfolios may continue to produce attractive risk-adjusted returns over the long term.
• Since bottoming in April, markets have subsequently rebounded as the economy has performed better than feared, business fundamentals have improved, company earnings have been broadly strong, and in anticipation of the Fed cutting rates.
• Economic growth estimates have been consistently revised higher during the back half of the year, and the U.S. economy is expected to grow by 1.9% in 2025.
• While the labor market is weakening, consumer spending has held up, and we have seen a recent uptick in capital market activity and business investment, which may bode well for future growth potential heading into 2026.
• The Fed is likely to maintain a lower interest rate bias, though we anticipate the Fed may be slower to adjust rates going forward.

Read previous market and investment articles here.

2025 Market in Review

Stocks have produced positive returns so far this year, though there were certainly some bumps along the way. Stocks experienced an uptick in volatility in 2025, marked by a -19% intra-year sell-off for the S&P 500 when trade policy uncertainty came to the fore in April. For context, that’s larger than the long-term average intra-year decline of -14%, underscoring the importance of maintaining well-diversified portfolios.

Since bottoming in April, markets have subsequently rebounded, as the economy has performed better than feared, business fundamentals have improved, company earnings have been broadly strong, and in anticipation of the Fed cutting rates at three consecutive FOMC meetings. Speaking of the Fed, changes in expectations for Fed rate cuts had a direct impact on market sentiment, driving a lot of the market’s recent movement, as indicated below. 

More recently, concerns around stretched valuations and market concentration have led to some bumpiness, and we believe this continues to highlight why broad diversification is critical.  

Tax-Loss Harvesting: The Silver Lining of a Down Market

During the market sell-off in April, and where appropriate, we took the opportunity to tax-loss harvest across clients’ taxable accounts. While no one likes a market sell-off, a silver lining is the ability to tax-loss harvest, which allows us to enhance the after-tax returns for our clients. To learn more about how tax-loss harvesting works and how it can benefit your portfolio, read our article.

Improved Economy

Economic growth estimates have been revised higher during the back half of the year, and the U.S. economy is expected to grow by 1.9% in 2025. While headline labor market data has been weakening as evidenced by an uptick in the unemployment rate, consumer spending has been resilient, and economic data, in aggregate, has exceeded expectations. In particular, we have seen a recent uptick in capital market activity and business investment as uncertainty surrounding trade policy has largely abated, which may bode well for future growth potential. 

…But Below Long-Term Trend

With that said, and while the economy has broadly been stronger than anticipated, it is still running slightly below the long-term trend growth rate of 2% and is expected to remain below 2% for the foreseeable future.

At the same time, the labor market is clearly moderating, with the unemployment rate now at 4.6%. We believe the weakening labor market is at the heart of the Fed’s decision to cut rates three times (0.75% in total) between October and December.  

Fed: Lower, but Slower

The Fed is very attentive to a weakening labor market, as any weakness in the labor market could cause a slowdown in consumer spending, and consumer spending is the single most important economic input, making up approximately 70% of U.S. GDP. At the same time, the Fed believes the inflationary impact of tariffs are likely to be short-lived and result in a one-time reset in the price level, while it also views the current interest rate policy as still restrictive. Said another way, we believe the Fed is more attentive to its employment mandate than its inflation mandate. As a result, the Fed is likely to maintain a lower interest rate bias with respect to future rate cuts, though we anticipate the Fed may be slower to adjust rates going forward. 

Investment Outlook

With an improved economic backdrop and a lower interest rate environment, we are constructive on the outlook for stocks and bonds and believe our broadly diversified portfolios may continue to produce attractive risk-adjusted returns over the long term.

• Despite the favorable backdrop, we have some concerns around stock market concentration and valuations. We believe this is likely to lead to positive, but more moderate, stock market returns and the potential for additional bumps along the road. 
• We maintain dedicated allocations to international stocks within our broadly diversified portfolios. International stocks have done particularly well this year, still trade at a discount to U.S. stocks, and may be supported by fiscal policies abroad and intra-regional trade dynamics. 
• We are constructive on bonds, with many of our preferred bond funds offering mid- to high-single digit yields. Bond prices may also be supported by the economic backdrop and the Fed’s lower interest rate bias. 
• We also have high conviction in alternative asset classes like private equity, real assets, and direct credit. We believe these asset classes may produce attractive risk-adjusted returns with limited correlation to the broad public markets, helping underpin the long-term performance of our broadly diversified portfolios.   

Mission Wealth clients, if you have any questions, please don’t hesitate to contact your Wealth Advisor.

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