Author: Davis Finke, CFA
U.S. equities demonstrated resilience into year-end, with the S&P 500 closing 2025 at a 16.39% total return, the third consecutive year of double-digit gains and just short of an all-time high. Performance was led by communication services (+32.41%), information technology (+23.31%), and industrials (+17.7%), reflecting continued momentum in AI investment and evolving government policy as the dominant market narratives of the year.
The final Federal Reserve Open Market Committee meeting of 2025 delivered the third rate cut of the year, lowering the federal funds target range to 3.50%–3.75%. While core inflation remained elevated at 2.6% in November, it marked the lowest reading since March 2021, signaling gradual progress toward the Fed’s 2% objective. Meanwhile, labor market conditions softened, with unemployment rising to 4.6% in November — the highest level since September 2021. The Fed acknowledged moderate economic expansion and solid consumer spending but emphasized that cooling labor market risks now outweigh inflation concerns.
Updated economic projections reinforced this cautious optimism. The Fed expects 2025 real GDP growth of 1.7%, improving to 2.3% in 2026 and stabilizing near 2% in 2027, close to a 1.8% long-term trend. Unemployment is forecast to decline to 4.4% in 2026 and 4.2% in 2027, while core PCE inflation is expected to fall to 2.5% and 2.1%, respectively. Despite a volatile year, these estimates reflect the Fed’s view that conditions are likely to normalize through 2026.
Consensus expectations for 2026 point to continued strength in corporate fundamentals, with analysts projecting S&P 500 earnings growth of approximately 15%, which is well above the trailing 10-year average of 8.6%. All 11 sectors are expected to contribute positive year-over-year earnings expansion, led by information technology (+28.6%), materials (+22%), and industrials (+15.4%). As in 2025, AI infrastructure investment remains the central driver of forecasted growth. Stepping back from the data, 2025 was defined by elevated volatility and recurring bouts of investor fear, yet U.S. equities closed the year resiliently, reinforcing the value of staying invested with a long-term perspective. As we enter 2026, sustained AI-driven capital deployment, moderating inflation and stabilizing growth offer a constructive foundation for another year of positive market returns.
