Market Commentary January 2026

A tumultuous start to 2025 defined by tariff turmoil and a near bear market, was followed by a remarkable mid-year recovery setting the stage for U.S. and global markets to close the year with impressive gains that defied persistent headwinds. Committed investors who remained disciplined through the volatility were rewarded handsomely, while those who fled during the April selloff missed one of the most powerful rebounds in recent memory.

The S&P 500 delivered a 17.9% total return in 2025 despite experiencing a harrowing -18.7% drawdown in the spring. The Nasdaq Composite posted even stronger gains of 21.1%, while small-cap stocks, as measured by the Russell 2000, gained a more modest 12.8% for the year. The fourth quarter added 2.7% to the S&P 500’s returns, with defensive sectors gaining favor as investors questioned the sustainability of AI-fueled valuations. The equal-weight S&P 500 lagged the market-cap weighted index by approximately 6.5%, underscoring the continued dominance of mega-cap technology stocks.

Perhaps the most significant development of 2025 was the dramatic outperformance of international equities. After years of trailing their U.S. counterparts, developed international stocks (MSCI EAFE) surged 31% for the year, while emerging markets delivered an extraordinary 34% return—nearly double the S&P 500’s performance. This marked the strongest relative performance for international equities versus U.S. stocks in over 30 years.

The bond market delivered its strongest performance since 2020, confounding many who entered the year expecting mediocre returns. The Bloomberg U.S. Aggregate Bond Index returned an impressive 7.3% for 2025, benefiting from three Federal Reserve rate cuts totaling 75 basis points in the second half of the year.  The Federal Reserve’s policy path defined much of the year’s market narrative. After holding rates steady at 5.25-5.50% through the tumultuous first half, the Fed pivoted  in September with its first rate cut, followed by two additional 25 basis point reductions in November and December.

Gold posted its best annual gain since 1979, surging approximately 64% to reach new all-time highs above $4,300 per ounce. Silver dramatically outperformed with a stunning 144% gain for the year, its strongest performance since 1970. The precious metals rally stemmed from multiple converging forces: central bank diversification away from U.S. dollar reserves, fiscal deficit concerns, geopolitical tensions spanning from Ukraine to trade wars, persistent inflation fears despite moderating headline numbers, and robust industrial demand for silver from solar, electric vehicles, and AI data centers.

Inflation proved stickier than many expected. After peaking in Q1 amid the initial tariff shock, inflation moderated through the middle of the year before stabilizing in the 2.8-3.3% range. Core personal consumption expenditures, the Fed’s preferred inflation gauge, remained elevated throughout the year. The tariff policies implemented on “Liberation Day” in April and subsequent modifications created ongoing uncertainty about the inflation outlook. Despite three Fed rate cuts, long-term Treasury yields remained elevated, with the 10-year trading in a 4-4.5% range for much of the year, suggesting bond investors harbored concerns about future inflation pressures and the sustainability of expanding fiscal deficits.

The past year offered valuable reminders that volatility and opportunity often arrive as a package deal. Investors who panicked during the April tariff tantrum and the near -20% drawdown missed the subsequent 38% rally from those lows. Markets reached new all-time highs on 39 separate occasions in 2025, demonstrating that attempting to time entries and exits remains a losing proposition for most investors. For patient investors who maintain appropriate risk exposure and resist the temptation to make dramatic portfolio changes based on headlines, 2026 offers reasonable prospects for positive returns.