Holding High Ground

Quick Take:U.S. stocks ended December essentially flat, closing out 2025 near all-time highs after a year that repeatedly shook off pullbacks.

After three years of double-digit growth, stock markets paused for a moment of consolidation in December.[1] The S&P 500 index marginally lost ground, ending the month 0.1% lower, while notching its seventh-best three-year run on record.[2],[3] Stocks still ended 2025 near record highs as the S&P 500 powered to a gain of 16.4% for the year. [4]

To put this year’s gains in perspective, the S&P 500 also rallied 24% in 2023 and 23% in 2024.[5] The last time that the index completed four straight years of gains was the five-year streak from 2003-2007.[6]

Stocks: A Flat Month on Top of a Strong Year

Source: https://www.bloomberg.com/news/articles/2025-12-30/stock-market-today-dow-s-p-live-updates?utm_source=website&utm_medium=share&utm_campaign=copy

In 2025, investors navigated everything from trade shocks to geopolitical headlines and debate over AI enthusiasm. The worst predictions about the economy projected in the wake of April’s tariffs announcement failed to fully materialize, while an AI spending boom powered growth to drive stocks higher.[7] Markets shook off bouts of volatility to attract buyers on selloffs, helping the S&P 500 finish the year up 38% from its lowest close in April.[8] A holiday rally may have come early when stocks rallied for a seventh straight month in November.[9] Gold rose the most in 46 years on the back geopolitical flashpoints, rising U.S. debt, and rate cuts.[10]

Bonds Rose 

The Federal Reserve (Fed) cut interest rates by a quarter point for the third time in a row to a range of 3.5% to 3.75%, taking the benchmark rate to a three-year low.[11] While a rate cut was widely expected, it came with caution over the outlook for further cuts in 2026.[12]

Bond yields fell in 2025 (prices up) but ticked up in December as the prospect of rate cuts in 2026 dimmed.[13] Lower interest rates and downward-trending inflation supported bond prices.[14]

With the Fed maintaining its outlook for just one cut in 2026, Federal Reserve Chairman Powell suggested the three rate cuts in 2025 were enough to support the labor market while leaving rates high enough to fight inflation.[15] Highlighting the division among Fed officials, three members voted against the cut.[16] Softer inflation and employment data may be needed to spur more rate cuts in 2026.

Consumer Powered Economy

Economic growth appeared to surge in the third quarter, with initial estimates of Gross Domestic Product (GDP) expanding at its fastest pace in two years.[17] Projections of growth came in at 4.3%, well above expectations near 3.2% and an acceleration from earlier in the year.[18]

Source: https://www.ft.com/content/fea44f00-6e54-4bd0-b722-6b029ad4411c

The drivers of growth primarily came from increases in consumer spending, government spending, and exports.[19]

A 3.5% increase in third-quarter consumer spending was the fastest in nearly a year and outstripped second-quarter growth of 2.5%.[20] On the other hand, a pullback is quite possible. Consumer confidence is falling while household disposable incomes and savings rates stall.[21]

It’s important to note that the government shutdown delayed or canceled economic data collection in many cases, and as usual, the third-quarter GDP figure could be revised. The effects of the shutdown likely slowed growth in the fourth quarter, though U.S. growth is still on track to top 2% for the full year.[22]

While the economy is still firing on multiple cylinders, wealthy households and large companies continue to account for a significant amount of the growth.[23] Both high-income consumer spending and tech-related capex appear likely to continue to drive the economy in 2026.[24]

Affordability

Affordability for consumers is likely to remain a key issue as midterm elections loom in 2026.[25] The average price of a new car surpassed $50,000 this past fall, while the average monthly payment for consumers rose to $760.[26] As cumulative inflation weighs on consumers struggling to meet monthly payments, car loan terms have increased from the typical 48-to 60-months in favor of 72-months and even past 8 years for large pickups.[27] With unrelenting prices, Americans have had to get more creative and load up on debt for longer.

Meanwhile, increased tariffs on upholstered furniture, kitchen cabinets, and vanities that were supposed to go into effect January 1 were delayed for a year, in the latest effort to bring some price relief to consumers.[28] Import duties on cabinets and vanities were meant to double to 50%, while a 30% tariff was going to be applied to sofas and armchairs. Now these tariffs will remain at 25%.[29]

Looking Ahead

January will see economic data releases return to a normal schedule after the government shutdown delayed or canceled many key reports.[30] Data on employment, manufacturing and services activity, and inflation trends will be closely watched. Fourth-quarter earning season will also kick off, as major banks report mid-January. Even after S&P 500 company earnings climbed 13% in 2025, analysts expect another increase of 15.5% in 2026.[31]  Market valuations are already elevated, and investors will be looking for confirmation that profit growth can keep up.

The pace of headlines is unlikely to slow – the U.S. Supreme Court still must decide on the legality of tariffs and the government currently remains funded through January 30. Congress will need to work together again to avoid another government shutdown.[32] Although a new chapter has opened in Venezuela, the initial market reaction looks fairly muted.[33]

From our experience, uncertainty is a permanent feature of markets. Despite the captivating nature of news flow, we’ve learned to take expected outcomes with a grain of salt. Our focus remains on staying disciplined and grounding our strategy in a long-term view that supports your goals.

Please don’t hesitate to reach out to chat about your questions and priorities – we’re here for you. As always, please let us know if you have had a change in your financial situation. Happy new year to you and your loved ones!

From your friends at JSF