2025 Was a Surprising Year for Stocks, What to Expect in 2026?
At the start of 2025, expectations for the stock market were modest. After two straight years of big gains, many experts thought share price appreciation would slow with apparent weakening of the economy. But the opposite happened. Stocks have continued to rise despite the economic weakness, extending the best three-year stock market performance since 2018.
The principal reason for the market’s strength has been steady company earnings. Many large businesses, especially in technology and consumer sectors, have continued to report better-than-expected profits. Companies have managed costs carefully, boosted efficiency, and certainly the massive investment in artificial intelligence technologies has propelled corporate profits.
Despite considerable negative sentiment, the broader economy has held up better than many feared. Employment data has declined from its post-pandemic highs, but remains positive by historical standards, and consumer spending is still healthy. Inflation, while not fully back to the Federal Reserve’s target of 2%, has at least moderated, although many economists still anticipate increased costs due to tariffs. That mix – stable employment and stable prices – has reduced fears of a major slowdown resulting in strong corporate earnings and another year of stock market gains.
Interest rates remain a key question shaping the market’s next chapter. The Federal Reserve raised rates sharply over the past few years to fight inflation, making loans, mortgages, and credit more expensive. Higher rates have had a significant impact on property values and reduced business investment. With the weakening employment picture, rates have come down. In our view, stubborn inflationary pressure is likely to keep rates higher than many anticipate in 2026 despite additional cuts by the Federal Reserve.
For investors, this environment calls for a balanced approach. The rapid market gains of the past three years were driven by optimism and expanding stock valuations. From here, future returns will depend on real earnings growth — on which companies can keep delivering solid results rather than just exciting stories.
While artificial intelligence remains a major opportunity for investment gains, investors shouldn’t limit allocating capital solely to the AI opportunity. Valuations of leading companies outside the U.S. look attractive relative to the price of many U.S. stocks. Additionally, the recent weakness in the dollar, compared to other global currencies, is likely to continue due to our high government spending deficits, trade imbalances and falling interest rates. A weak dollar is a tailwind for both international stock investment as well as commodities, such as gold.
Non-U.S. stocks and emerging markets are having some of the best performance since the Global Financial Crisis. Our firm has been steadily increasing investment in foreign equities this year.
And after years of low yields, bonds and other fixed-income investments once again offer meaningful income and stability. Fixed income securities- corporate bonds and mortgage-backed securities yielding more than 5% are a great way to balance more aggressive technology stock investments.
The big takeaway from last year is that the stock market has proved more resilient than expected. While the economy has slowed, investment in companies with growing earnings has been rewarded. It’s important to remember that the stock market is not the economy and stocks are valued based on future earnings growth more than any other factor. This formula will continue to work into 2026.
