Update on the Markets:

Index	4th Quarter 2025	Full Year 2025
S & P 500 (Large US Stocks)	2.71%	17.88%
Russell 2000 (Small US Stocks)	2.20%	12.81%
FTSE All-World ex-US (International Stocks)	5.21%	31.85%
Barclays US Aggregate (Bonds)	0.97%	7.19%

January 2026

Happy New Year!

Key takeaways

► Third year of double-digit returns for stocks
► Most fears did not play out
► A.I. dominated again
► Fed cut three times
► Stock rally broadening out
► Staying the course in 2026

Stocks climb a wall of worry

The party keeps going. Equity investors enjoyed a third consecutive year of double-digit returns. After a horrible 2022, when soaring inflation caused the S&P 500 to lose 18.2%, the index delivered double-digit gains over the last three years: 26.3% in 2023, 24.8% in 2024, and 17.9% in 2025. Not missing out, the tech-heavy Nasdaq climbed 19% in 2025, and the Dow Jones Industrial Average closed up 13%.

The S&P 500 in 2025

Most of the market worries never materialized or were much smaller than anticipated. At the start, investors worried that President Trump’s tariffs would ignite inflation. On “Liberation Day,” April 2, Trump announced an expansive array of tariffs on dozens of countries, sending stock markets plunging. The deepest single-day percentage loss for the S&P 500 in 2025 occurred on April 4, when the index fell by 5.97%. This was the second consecutive day of major losses, following a 4.84% drop on April 3. Over these two days, the S&P 500 lost 10%, marking the worst two-day period in 2025. The arbitrary imposition of the tariffs, along with concerns that they would fuel inflation, damage corporate profits, and hurt consumers, unsettled investors.

Soaring bond yields pushed the administration to backpedal quickly.

The tariff delays, the Fed’s interest rate cuts, and the rally in technology stocks pushed the S&P 500 past previous record highs through the end of the year.

The rally overlooked the slashing of the federal workforce, Trump’s threats to curtail the Fed’s independence, rising government debt, widespread deportations, and challenges to the judiciary and the balance of power between the branches of government.

Themes for 2026

A.I. boom or bust? In 2025, the artificial intelligence trade powered the market just as it did in 2023 and 2024. The A.I. trade is based on the belief that artificial intelligence is a revolution in how we use technology in our work and play. Investing in A.I. is not only about chips and software but also all of the infrastructure needed to power A.I. Think: data centers, electricity, water.

According to Joe Rennison of The New York Times, by one measure, more than 90 percent of economic growth in the first half of 2025 came from investments in computer equipment and software, which economists chalk up to projects linked to the rush to build data centers and remain in the A.I. race.

But late in 2025, investors began to worry that all of this capital spending on artificial intelligence may have gotten ahead of itself. We are still waiting to see a return on investment. That has been cause for concern for some investors, who see a parallel between this moment and the dot-com bubble of the late 1990s and early 2000s.

Tech may still power the stock market in 2026. There’s more to tech than just A. I. These are big, highly profitable companies with dominant business plans. At the very least, a breather on tech is allowing other sectors of the stock market (financials, industrials, materials) to participate in this bull market – a very healthy thing!

Will the US economy hold up? The US labor market isn’t falling off a cliff, but it looks a bit shaky. Unemployment rose to 4.5% in November from 4% at the start of 2025. How will this “low-hire, low-fire” labor market affect the consumer? The wallets of low- and middle-income Americans (and even high-income Americans, according to Walmart) are already stretched. According to McKinsey & Company, US consumers are navigating a complex economic landscape. Inflation remains high, and unemployment has ticked up recently, leading consumers to feel more pessimistic at year’s end than they did at the beginning of the year.

The “lipstick effect,” or the tendency for consumers to indulge in small luxuries or affordable treats during periods of economic uncertainty, has expanded beyond the beauty aisle. Even as 75 percent of consumers reported trading down in at least one category, 39 percent expressed intent to splurge across a range of categories. The average consumer may stay cautious in 2026, while high-end consumers, enjoying a surge in wealth from stocks and home prices, will continue to spend. The top 10% of Americans typically account for half of spending. A larger tax refund from the One Big Beautiful Bill may help low-end consumers.

Inflation, tariffs, and the Fed – all related. Though remarkable progress has been made, inflation remains sticky. After Core CPI hit a 40-year high of 6.6% year-over-year in September 2022, it has declined to 2.6% in November 2025.

US Core Inflation Rate

Will the slide continue, stagnate, or even reverse? A lot depends on Trump’s tariff war and who may be the next Chairman of the Federal Reserve. After cutting rates three times in 2025, the consensus is that no more cuts will occur early in 2026. Fed Chairman Jerome Powell’s term ends in May 2026, and President Trump has been mulling over his successor. Expect Trump to pressure the new Chairman to lower rates to stoke the economy before the midterm elections. The fear is that a Trump appointee won’t be as vigilant regarding fighting inflation, and the Fed may therefore lose some credibility. In addition, stimulus from the One Big Beautiful Bill, the loss of migrant workers, particularly in healthcare, child care, and food processing, and the rise in health insurance premiums may contribute to inflation in 2026.

Messy midterms. Provocative headlines! Insults! Noise!Expect an all-out dog fight in the mid-term elections in November. Congressional redistricting, retirements, and slim margins in both houses may lead to nasty fights, even violence. Will the losing candidate accept defeat in a close race? Will the results be contested in the courts for months? Who will sit in Congress in the meantime? Another government shutdown may be upon us as soon as January 30. All of this leads to uncertainty, which is often the greatest hindrance for equity investors. Historically, the party in the White House loses one or both houses of Congress in mid-term elections due to displeasure with the ruling party. Hence, the second and third quarters in a midterm election year see declines in the stock market. Political uncertainty is a greater danger this year than most.

What to do

This year, more than most, it’s imperative to sit tight and stick to your plan. Many investors are bullish on stocks this year, but estimates for the S&P 500 range widely (from 7100 to 8100, or gains of around 4% to 18%), reflecting differences in opinion on artificial intelligence, the economy, corporate earnings, inflation, the Fed, and the midterms.

After three years of double-digit returns for stocks, it’s a great time to review your asset allocation and risk tolerance and perhaps move some money into bonds. Bonds are paying a decent yield. Rebalancing reduces risk. I’m emphasizing US large-value stocks, as many of the companies here may benefit from A.I. efficiencies. A further decline in the US dollar will make international stocks solid contributors as well.

Stick to your investment strategy. Don’t try to time the market. Remain focused on your long-term financial goals.

Thank you for your trust and confidence. Please let me know if you have any questions or comments.

Sincerely, 
Henry 

Henry Gorecki, CFP® 
HG Wealth Management LLC 
401 N Michigan Ave, Suite 1200
Chicago, IL  60611
312-723-5116