2025 Market Review & 2026 Outlook

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Equity markets delivered a third consecutive year of double-digit returns in 2025. Several crosscurrents shaped 2025 market performance — from earnings strength and AI enthusiasm to shifting Federal Reserve policy and elevated valuations. Below, we review the key drivers and outline our 2026 investment outlook for disciplined long-term investors.

Investment Principles That Guide Our Decisions

I’ll begin by briefly restating the core principles that shape our planning and investment decisions:

• We are long-term, goal-focused investors. Our investment policy is designed to support your objectives through broadly diversified portfolios of high-quality equities and bonds.
• Studies and empirical evidence indicate that the economy cannot be forecast with consistency, nor markets timed with reliability in the short-term. Therefore, to trade profitably, after taxes, on short-term news or market movements is very difficult.
• From this, we conclude that the best way to capture the long-term return premium of equities is to remain invested through their inevitable, uncomfortable, but normally temporary declines (excluding extraordinary periods such as 1929).
• As long as your long-term goals remain unchanged, our investment strategy for achieving them will remain consistent. And as long as the investment strategy remains consistent, so too will your portfolio—aside from disciplined, periodic rebalancing.
• We believe long-term compounding in quality equities, with an appropriate allocation to high-quality bonds, is the most effective way to capture attractive investment returns to support your goals. In that spirit, we remain mindful of Charlie Munger’s reminder that “the first law of compounding is to never interrupt it unnecessarily.”

Economic and Market Backdrop

1. Equity Performance in 2025

In 2025, the broad equity market delivered its third consecutive year of double-digit returns, supported by solid economic growth and meaningful gains in corporate earnings. A broad index of US large cap stocks finished the year up 17.88%.

2. Earnings Growth and AI Expectations

Looking ahead, the general expectation among major financial institutions is that company profits will continue their upward climb, with earnings growth forecasted at nearly 15% for 2026 (source: Yardeni Research). Experts believe this expansion in profits will be fueled by artificial intelligence and a resilient consumer, as detailed in the following earnings per share (EPS) projections:

Select Wall Street 2026 Earnings Per Share (EPS) Forecasts
Institution	2026 EPS Estimate	EPS Growth Forecast	Notable Driver
Morgan Stanley	$317	17%	AI-driven efficiency and tax benefits
JPMorgan	$306 - $314	13% - 15%	AI "supercycle" and resilient economy
Goldman Sachs	$305	12%	Productivity gains from AI adoption
Consensus (FactSet)	$309	14.9%	Average of all major analyst estimates

Remarkably, profit margins have also continued to expand, reaching 13.1% in the third quarter of 2025—the highest level in 15 years (source: FactSet). Many expected rising input costs and consumer resistance to price increases to squeeze margins. To date, those concerns have not materialized.

3. Labor Market and Productivity Trends

The main weak spot in the economy has been employment, which continues to soften. However, even this has a bright spot. The relatively flat employment levels have been offset by strong growth in supply, which has led to higher productivity. Though unemployment has risen slightly to about 4.7%, most workers are producing more per hour, enabling wage growth without reigniting inflation.

4. Federal Reserve Policy and Inflation

After six consecutive rate cuts, Federal Reserve policy is now roughly 175 basis points more accommodative than a year ago, while CPI inflation has remained relatively tame near three percent. It is reasonable to expect the lagged effects of this easing to become more visible in 2026—hopefully through continued economic growth as long as productivity remains high.

5. Fiscal Tailwinds and Tax Policy

This tax season, middle-income households are expected to receive meaningful refunds—estimated at around $150 billion in aggregate, or roughly a half percentage point boost to GDP. Key drivers include a higher standard deduction and the temporary increase of the SALT deduction cap to $40,000 from $10,000, which could provide a near-term economic tailwind.

Unfortunately, much of this positive economic data is often under-reported in the financial news because it does not align with their prevailing narrative, which tends to emphasize negative developments—most notably the softening labor market. The information we receive from financial “news” is often skewed toward pessimism because it sells better.

6. Valuations and Market Concentration

Regardless, the strongly rising equity market may already reflect much of this positive information. As a result, the dominant question of 2025 became whether markets have moved into an AI-driven bubble—supplanting 2024’s concern about rate cuts and 2023’s concern about a recession.

There is no denying that today’s market is more concentrated in a small number of large technology companies than at any point in recent decades, and that valuations for the broad US large-cap stock indexes sit near historical highs.

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Portfolio Implications

Our response to this environment is straightforward:

1. Valuations and Expected Returns: While higher starting valuations have historically pointed towards lower-than-average expected returns over the next 5-10 years, valuations have not been a reliable market-timing tool in the short term.
2. Concentration Risk and Diversification: While higher starting valuations and concentration risk are not ideal, these risks can be addressed through disciplined portfolio construction and systematic rebalancing to provide an attractive investment experience.
3. Long-Term Plans vs. Short-Term Narratives: Generally, long-term plans should not be altered in response to short-term narratives, popular fears, or even higher starting valuations.
4. Asset Allocation Discipline: Pick a stock-to-bond ratio you are comfortable with, and only make changes to the ratio if your circumstances change. Cash and bonds are necessary to help you weather inevitable market declines.

Closing Perspective

History suggests that the next market disruption will likely come from an unexpected source (in the jargon, an unknown unknown, as opposed to a known unknown like higher starting valuations or the national debt). Such events tend to matter little to the plans of long-term stock investors except as opportunities to rebalance and invest at more attractive prices.

Plus, the alternatives of trying to invest in private real estate deals or a private operating business can subject you to even greater costs, risks, and, potentially, a permanent loss of capital as opposed to the normally temporary declines a long-term stock investor may experience.

We continue to follow an approach that has worked over full market cycles in that it has provided the best chance to help investors achieve their most precious financial goals. We do not assume “this time is different,” nor do we adjust strategy to accommodate the fears or fashions of the moment. We avoid abandoning markets during periods of stress, and we avoid overcommitting to any single “new era” narrative—AI included.

We wish you and your family a healthy, happy, and prosperous 2026. As always, we are here to answer questions and discuss your plan at any time. Thank you for the trust you place in us—it is a privilege to serve you.