“Diligence is the mother of good luck”
Benjamin Franklin
Last year turned out to be a surprisingly good year for investors. After a slow start that featured a sharp selloff in reaction to proposed tariffs, the markets rallied back and finished the year with double-digit returns.
The S&P 500, an index of large US companies, returned 17.8%. The Russell 2000, a leading index of smaller US companies, returned 12.81%. The ACIW ex US, an all-country world index excluding the US, returned 32.39%, a performance that was aided in part by weakness in the US dollar. Bond indices rose as well, with intermediate maturities returning about 9%.
While there were many impactful events in 2025 that gave people pause, if one steps back and looks at the numbers, it was a pretty solid year economically. Gross Domestic Product (GDP) is estimated to have grown by 3.1% globally, and 2.3% in the US. One has to be impressed with the resilience of the US economy, which chugged along despite a number of unsettling changes in government policy such as the new tariffs regime.
The strong performance of the economy bore fruit in corporate profits. Analysts expect companies in the S&P 500 to report 8.2% year-over-year earnings growth for the fourth quarter, which would be the tenth quarter of consecutive growth for the index. Should those estimates prove accurate, earnings for the S&P 500 would increase by 11.4% for the year.
The economy also defied forecasts that tariffs would ignite much higher prices. Instead of jumping, the Consumer Price Index (CPI), which measures the average change over time in the prices paid by consumers for a representative basket of consumer goods and services, slowed from 2.9% in December of 2024 to about 2.7% at the end of 2025. Yet while average prices did not show much of an increase, many consumers experienced a high level of anxiety about affordability. The modest increase in prices in 2025 came on top of a 9.1% increase in the CPI in 2022, and today prices remain significantly higher than they were just a few years ago. Moreover, the dramatic increase in the price of certain highly visible food items (e.g., beef, which increased 16.4%) gave many consumers heartburn.
Although the overall economic stats for the US economy are good, a few areas, notably job creation, give further cause for concern. Monthly job growth averaged 49,000 in 2025, down from 168,000 in 2024. This contributed to a rise in unemployment, which climbed to 4.4% in December 2025, up from 4.1% a year earlier.
The combination of lower inflation and slower job growth gave the Federal Reserve leeway to continue to lower interest rates in 2025. In fact, the Fed cut rates three times, down to a target between 3.5% to 3.7%–a three-year low.
Looking ahead to 2026, economists expect the same favorable conditions to persist. A survey of economists conducted by the Wall Street Journal is projecting US GDP to increase by 2.2% in 2026, with corporate earnings expected to grow 14%.
While declining interest rates and healthy growth in corporate earnings should provide a favorable backdrop for stocks in 2026, a lot of the good news is already priced into the market, with valuations now nearing the highs of recent years. The forward P/E (the current stock price divided by the estimated earnings per share over the next 12 months) for the S&P 500 is 22x’s, the upper end of the range for the past 20 years.
It is hard to imagine that stock prices will not continue to be volatile in the months ahead. Almost a year has passed since the last major correction in the stock market, when the S&P 500 declined 18.5% in reaction to the “liberation day” tariff announcement.
Last year turned out to be much better for investors than anyone expected. But the benefits from a strong economy accrued especially to those who had invested in the right companies. It took years of preparation to build the portfolios that enabled us to achieve the good returns you saw in 2025. We plan to continue this diligence as the current year goes forward.
Sincerely,
