Markets and the Economy: A Look Back at 2025

The past year delivered a blend of steady economic progress and notable market strength, even as headlines frequently pointed to uncertainty. Below is a recap of the major forces that shaped markets and the broader economy in 2025, along with themes that may continue into 2026.

Tech Leadership and Equity Momentum

U.S. equities ended 2025 with broad gains, marking a third straight year of strong performance for large-cap stocks. Market leadership remained concentrated, with technology and AI‑focused companies driving much of the advance and helping major indices move toward record levels. Corporate earnings growth played a central role, particularly among mega‑cap tech and financial firms. International stocks also posted solid results, reflecting a strong year for global equities.

Shifting Rate Policy and a Mixed Housing Picture

The Federal Reserve’s three quarter‑point cuts signaled movement from a “higher for longer” stance to a more measured easing cycle. Treasury yields drifted lower, offering welcome relief for bond investors as high‑quality fixed income returned to positive total returns. Core bond funds once again provided diversification benefits, though we continue to monitor lower‑quality segments where higher borrowing costs and a softer labor market may present challenges.

In housing, falling mortgage rates did little to thaw activity. Home prices reached a new median high, showing that elevated rates can slow movement without necessarily creating affordability. Borrowers considering transitions may find that thoughtful timing and creative financing strategies remain important.

Policy Shifts and Global Tensions

Tariffs and evolving technology adoption shaped portions of the economic landscape throughout 2025, supporting areas such as AI, automation, and domestic manufacturing while pressuring trade‑dependent industries. Geopolitical developments added persistent background risk, driven by ongoing conflicts, supply‑chain fragility, and emerging discussions around cyber threats and AI oversight. In this environment, preparing portfolios for multiple scenarios proved more practical than trying to anticipate specific outcomes.

Economic Themes and Market Drivers

The U.S. economy expanded at a steady 2% pace last year, though growth remained uneven. Research indicates that AI‑related activity accounted for a significant share of GDP expansion, with large technology companies benefiting while manufacturing lagged. Inflation moved closer to the Federal Reserve’s target range despite fluctuations tied to tariffs and housing costs. The Fed’s rate cuts reflected progress but also emphasized a cautious, data‑dependent approach. Market performance continued to hinge on a handful of major companies, especially those tied to digital transformation.

Entering 2026 with Balance and Perspective

Last year demonstrated that markets can advance even amid policy debates, labor‑market cooling, and political crosscurrents. As we head into 2026, we see both opportunity and areas that call for discipline. The combination of rising tariffs, substantial federal spending, and a maturing AI investment cycle underscores the value of maintaining diversification and focusing on companies with strong fundamentals and dependable cash flows.

If you have questions about how these developments relate to your financial strategy, we encourage you to reach out to our financial team for personalized guidance and support.