Market Commentary – December 2025

The year 2025 was extraordinary for the economy and the markets. Sweeping tariffs, a cooling labor market, rising consumer prices, a prolonged U.S. federal government shutdown, turmoil in the Middle East, and the ongoing Russia/Ukraine war were some of the many factors that should have signaled economic contraction and a downturn in the stock market. Yet, the opposite occurred. Gross domestic product expanded, largely driven by strong consumer spending. Each of the major stock market indexes listed here posted solid year-end gains. Corporate profits and earnings grew, despite the unemployment rate increasing to its highest level since September 2021. Throughout the year, there were several major events that impacted the stock market and the economy.

The year began rather benignly until April, when President Trump rolled out a fresh round of tariffs across a wide range of imported goods. Unsuspecting investors were shaken, worried about a possible recession and rising inflation. The immediate response was a major move away from equities, causing a spike in volatility. In addition to a plunge in stock prices, the value of the U.S. dollar fell, while U.S. government Treasuries, normally viewed as a safe haven, also saw a selloff, pulling bond prices lower, while pushing yields higher. Over the course of the next several months, new trade agreements prompted a reduction in some tariff rates on certain imports, helping to calm investors' concerns. Nevertheless, despite geopolitical headwinds and valuation concerns, equities delivered a robust year, largely fueled by the continued artificial intelligence boom and a resilient consumer.

The "Department of Government Efficiency" (DOGE), led by Elon Musk, implemented aggressive spending cuts and federal workforce reductions. While proponents cited long-term savings, the immediate impact included disruptions to government services and a government shutdown in October.

Consumer prices remained stubbornly elevated for much of the year. Inflation, as measured by the Consumer Price Index (CPI), stayed "sticky," hovering around 3.0%-3.1%, well above the Fed's 2.0% target. This persistence was attributed partly to new universal import tariffs and trade disputes that raised costs for goods. In 2025, prices for food rose 2.6%, while shelter prices rose 3.0%. Prices at the wholesale level rose 2.7% for the year, which included a 4.0% rise in prices for food and a 3.8% jump in energy prices.

The economy grew in 2025, despite early-year volatility and aggressive trade policy shifts. Gross domestic product expanded by approximately 1.8% to 2.0% for the full year. Growth was uneven; after a sluggish start in the first quarter, activity accelerated significantly in the third quarter, reaching a robust 4.3% annualized rate of growth before moderating again in quarter four. Consumer spending remained the primary engine of economic growth but became increasingly reliant on higher-income households. Business investment, particularly in artificial intelligence (AI) and software, provided a critical tailwind, offsetting weakness in manufacturing and housing.

According to FactSet, S&P 500 companies were projected to report earnings growth of approximately 12.1%-12.3% for 2025. This performance is well above the 10-year average of 8.6%. Corporate revenues for the year grew by approximately 6.9% to 7.0%, also surpassing the 10-year average of roughly 5.3%. The estimated net profit margin, at 12.9%-13.0%, would mark the highest annual net profit margin since FactSet began tracking the metric in 2008.

The housing sector remained relatively cool for much of the year. While mortgage rates began to recede late in the year due to Fed interest rate cuts, high prices and low inventory kept sale volumes low. Mortgage rates eased in the second half of the year after peaking at just over 7.0% in January, falling to a low of about 6.12% in October before settling at about 6.15% at the end of the year.

A distinct shift in 2025 was the softening of the labor market. The unemployment rate ticked up steadily throughout the year, starting near 4.1% and ending at approximately 4.6% in November, the highest level in four years. The rate of new hires decelerated throughout much of the year. While layoffs remained relatively low historically, the "hiring rate" plummeted. Companies became hesitant to backfill roles due to policy uncertainty and AI integration, making it harder for new entrants and the unemployed to find work. Wage gains moderated to roughly 3.5%, in line with long-term averages but lagging somewhat behind the perceived cost of living for many workers.

Overall industrial production ended the year with a gain of about 2.5%. Mining and utilities bounced up and down throughout the year, while manufacturing fought to keep from contracting, influenced by renewed trade tariffs, policy uncertainty, and the protracted government shutdown.

*Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark the performance of specific investments.

Snapshot 2025

• Equities: Despite early-year volatility driven by trade policy uncertainties, 2025 proved to be a strong year for U.S. equities, with the major indexes (the Dow, the S&P 500, and the NASDAQ) delivering solid annual returns. The market's resilience was supported by solid corporate profitability, a pivot in Federal Reserve monetary policy, and a stabilization of trade relations after a rocky second quarter. Among the major U.S. market indexes, the NASDAQ outperformed, driven by continued strength in AI and tech giants. The S&P 500 notched its eighth straight monthly gain in December, largely influenced by corporate profit growth. The Dow recovered from a deep dive in April to end the year on an upward trend. U.S. small caps, as measured by the Russell 2000, had a decent but choppy year. While a nearly 11.0% annual return was historically solid, it lagged behind the three major U.S. indexes. On the other hand, 2025 was a banner year for global blue chips. After years of U.S. tech dominance, non-U.S. markets (particularly in Europe and parts of Asia) rallied. The Global Dow, which tracks 150 leading companies from around the world, significantly outperformed the major U.S. market indexes. The Global Dow saw consistent growth through Q2 and Q3, accelerating in Q4 to finish 2025 near record highs.
• Bonds: After years of historic volatility, 2025 offered fixed income investors a "solid" year. While bonds did not match the double-digit rallies seen in equities, they fulfilled their traditional role of providing income and stability, with most core indices finishing firmly in the green. The 2025 U.S. Treasury bond market, however, was defined by significant volatility influenced by new economic legislation, persistent inflation, a shift in fiscal policy expectations, and the conclusion of the Federal Reserve's restrictive interest rate cycle. The 10-year Treasury yield, which began the year at 4.57%, ended the year around 4.16%. Meanwhile, the two-year yield fell more aggressively to approximately 3.46%, reflecting the Fed's rate cuts.
• Oil: In 2025, the crude oil market was defined by a steady downward trend, ending the year at some of its lowest levels since the COVID-19 pandemic. Despite temporary surges driven by geopolitical tensions in Ukraine and the Middle East, a combination of record-breaking U.S. crude production and cooling global demand, particularly from China, led to a cumulative price decline of approximately 20.0% over the year.
• Prices at the pump trended higher for the first half of the year, only to decline throughout the remainder of the year. Prices largely responded to changes in global economics, supply and demand, and other extraordinary factors attributable to the unrest in the Middle East. The average retail price for a gallon of regular gasoline was $3.047 at the beginning of the year. By the end of June, the price had risen to $3.213 per gallon, then steadily declined for the remainder of the year, closing with an average price of $2.811 on December 29^th.
• FOMC/interest rates: The Federal Open Market Committee (FOMC) navigated a complex year defined by "stubborn" inflation, a cooling labor market, and significant geopolitical shifts, including the impact of new trade tariffs. After a period of holding rates steady in the first half of the year, the Fed shifted to a series of 25-basis-point rate cuts starting in September through December, which brought the federal funds target rate range down 75 basis points to 3.50%-3.75%. This brought borrowing costs to their lowest level since 2022. The FOMC is entering 2026 with a cautious stance. Their updated projections suggest only one additional 25-basis-point rate cut for the entirety of 2026.
• S. Dollar: The U.S. dollar experienced its most challenging year in decades, ending a long period of dominance with a significant annual decline. After starting the year at historic highs, the U.S. Dollar Index (DXY) fell by more than 9.0% over the course of the year, marking its steepest drop since 2017. The dollar's downturn was driven by a combination of fiscal, political, and technical factors, including broad-based tariffs and fiscal concerns that led to the downgrading of the U.S. long-term sovereign credit rating.
• Gold: Gold enjoyed a record-breaking year, characterized by an unprecedented rally that saw the precious metal surge nearly 70.0%, its strongest annual gain in over 40 years. Prices rose from roughly $2,600 at the start of the year to an all-time high of over $4,500 per ounce before settling at around $4,324.

Eye on the Year Ahead

Looking toward 2026, persistent inflation and a cooling labor market remain key concerns. Potential tax cuts and investment in AI could offer a balance against higher tariffs, rising prices, and a stagnant labor market.