Stocks Extend the Bull Market Run in 2025

The S&P 500 opened the fourth quarter by reaching a new all-time high in early October. However, market volatility increased later in the month amid renewed trade tensions between the United States and China. After several weeks of tit-for-tat trade restrictions and fee increases, President Trump escalated the dispute by threatening 100% tariffs on Chinese goods, triggering a brief but sharp pullback in U.S. stocks.¹

Fortunately, the volatility proved short-lived, supported by a strong third-quarter earnings season, growing expectations for a Fed rate cut, and more conciliatory trade rhetoric from President Trump. Those expectations were realized in late October when the Fed lowered rates by another 25 basis points and President Trump and Chinese President Xi reached a new trade agreement that eased tensions and reduced tariffs on Chinese imports.² As a result, the S&P 500 climbed to another record high in the final days of October and closed the month with solid gains.³

Volatility returned more decisively in November as uncertainty grew around the path of future Fed rate cuts and optimism around artificial intelligence (AI) investment moderated. Stocks declined early in the month as investors digested the Fed's October decision, which delivered a cut but raised doubts about whether another cut would follow in December.⁴ At the same time, a series of headlines and corporate updates challenged assumptions about returns on large-scale AI infrastructure investments. Weaker-than-expected earnings from AI bellwether Nvidia added further pressure.⁵ Collectively, these forces led to a pullback of nearly 5% in the S&P 500 by mid-month.

Markets stabilized around Thanksgiving after comments from New York Fed President John Williams—widely viewed as one of the most influential Fed officials—suggested he anticipated another rate cut in December. Williams' remarks, combined with the end of the longest U.S. government shutdown on record, helped boost sentiment and supported a recovery that allowed stocks to finish the month with a modest gain.⁶

Volatility remained elevated in early December, driven by the same forces that weighed on markets in November—uncertainty around Fed policy and mixed developments related to artificial intelligence. At its December meeting, the Fed cut interest rates for a third time in 2025 but also signaled a potential pause in early 2026. That mixed message was not disruptive enough to derail markets. However, investors continued to anticipate additional rate cuts ahead, particularly with a new Fed chair expected in 2026.

Within the AI space, corporate results remained mixed. Underwhelming earnings from Oracle and Broadcom were offset by strong results from memory-chip maker Micron. With no major negative surprises and year-end seasonality providing support, momentum pushed the S&P 500 to new all-time highs in late December.⁷

Outlook Entering 2026

Markets begin the new year riding an impressive three-year winning streak, powered by Fed rate cuts, solid economic growth, and strong investor enthusiasm for artificial intelligence. All three of those positive factors remain in place as we begin 2026.

Despite major shifts in global trade policy and the longest government shutdown in U.S. history, the economy enters the new year on solid footing. Key economic indicators—including consumer spending, service sector demand, business investment and employment—continue to show healthy growth, providing a solid foundation for stocks in 2026.⁸

While uncertainty remains around the pace of additional interest rate cuts in 2026, investors broadly expect a supportive policy stance from the Fed. Current projections still point to at least one rate cut in the coming year. In addition, a new Fed chair—expected to be appointed soon and to assume office in May—is widely viewed as more inclined toward easing than current Chair Powell.⁹

Investor enthusiasm for the productivity and profit-enhancing potential of artificial intelligence also remains intact. Major U.S. tech companies continue to commit hundreds of billions of dollars to AI infrastructure investment, which should support broader economic growth and earnings expansion across the tech sector.¹⁰

Risks to Monitor

The factors that fueled this three-year bull market remain largely in place as we begin the new year, suggesting a positive outlook for markets and risk assets. However, this positive outlook should not be confused with a risk-free environment. While conditions remain favorable, it is fair to say that markets enter 2026 with weaker tailwinds than in prior years.

Although most economic metrics point to continued growth and few currently signal an imminent slowdown, the labor market has been losing momentum throughout much of 2025. The unemployment rate reached a four-year high late last year, and broadly speaking, the labor market is in "No Hire/No Fire" state.¹¹ If layoffs begin to rise meaningfully in 2026, it would represent a significant negative shift in the economic outlook and a new headwind for the market.

Additionally, while many expect the Fed to continue cutting rates in 2026, the reality is that the Fed are more divided than they have been in years. Fed members appear split between further easing and holding rates steady. While the new Fed chair is expected to support additional cuts, they will still represent only one vote on the committee.¹² A more forceful signal that rate cuts are complete would be a negative surprise for markets.

Enthusiasm for AI-related stocks and the tech sector remains generally high, but skepticism around the scale and pace of AI infrastructure investment is growing—a dynamic reflected in the mixed performance of tech stocks during the fourth quarter.¹³ If investor sentiment toward AI were to sour in 2026, it would remove an important tailwind for both the tech sector and the broader market, a risk that we will continue to closely monitor.

Finally, continued geopolitical tensions and trade policy volatility were notable surprises in 2025 for what they didn't do: derail markets. However, both remain potential sources of risk. An expansion of Russia's war with Ukraine, a military confrontation between the U.S. and Venezuela, or a Supreme Court decision invalidating the 2025 tariffs are among several geopolitical and policy developments that could introduce unexpected volatility in 2026.

In Closing

While we are prepared for the positive outcome currently expected by investors, we remain equally focused on balancing risk and return. As 2025 once again demonstrated, a well-constructed, long-term, and diversified financial plan can withstand virtually any market surprise or period of heightened volatility.

Our entire team remains dedicated to helping you navigate this evolving market environment and keeping your financial plan on track. Please do not hesitate to contact us with any questions, comments, or to schedule a portfolio review.