2025’s economy closed out on a strong note….
Despite the steady drumbeat of concerning geopolitical and national emergencies, the U.S. economy demonstrated notable resilience as the year progressed. Real GDP continued to expand with growth accelerating meaningfully as the year closed with 4th quarter growth estimated to have exceeded 5.0%. As a result, and despite starting the year with an economic contraction, full-year economic growth will likely be in excess of 2.5%, appreciably surpassing prior expectations. Driving the economy upward has been sustained investment in artificial intelligence infrastructure and continued spending among higher-income consumers.
The country’s economic resilience, however, has come with some sharp trade-offs. Fiscal deficits remain at historically high levels of $1.8 trillion, or almost 6% of GDP – a sharp outlier outside of recessionary or wartime periods. Meanwhile, government borrowing continues to rise at a pace that warrants immediate attention. While current net federal debt now equals 100% of GDP, this figure is projected to increase, according to the Congressional Budget Office, to at least 116% of GDP by 2034. Given the sharp expansion of government entitlement outlays for Social Security and Medicare in coming years, action needs to be taken promptly. However, Congress and the Administration are likely to await for a true debt crisis before taking needed action.
If early market behavior is any guide to the remainder of the year, 2026 is likely to be characterized by continued volatility and elevated uncertainty. The new year began with a geopolitical shock following the capture of Venezuelan president Nicolás Maduro, an event that reverberated across global markets. Domestic political risks also remain elevated. The current Administration has increasingly relied on executive authority to advance its policy initiatives, frequently running rough shod over traditional boundaries of judicial and congressional oversight and/or control. As global tensions rise and domestic governance norms remain strained, markets may increasingly be forced to price in American political risk as a more durable feature rather than a transitory headline.
One of our most critical areas of concern is the Administration’s continued sharp demands for the Federal Reserve to acquiesce to appreciably lower interest rates. In late 2025, the central bank reduced overnight interest rates at three consecutive meetings for a total of 0.75% percentage points. However, this appreciable rate reduction was far less than that sought by the White House. The Department of Justice doubled down on the Administration’s disagreement with the Fed by recently opening a criminal investigation against the central bank and its Chair, Jerome Powell.
The growing threats to the Federal Reserve’s independence puts at severe risk longer-term U.S. interest rates. To put the situation in better perspective, the central banks of less developed countries, which are typically subordinate to the executive branch, nearly always have sharply higher interest rates. In these states, investors demand more return, i.e., higher interest rates, to compensate for the respective nation’s increased political risk. The last time a president bent a Fed Chair to his will, the nation suffered dreadfully. When President Nixon pressured then Fed Chair Arthur Burns to keep interest rates arbitrarily low, it directly led to the 1970’s economic stagnation which culminated with inflation hitting 15% and unemployment striking 8%.
As or more important, the loss of the Federal Reserve’s independence could spell the demise of the U.S. dollar as the globe’s safe haven currency. The loss of safe haven status would not cause an immediate American economic collapse, but rather it would permanently raise U.S. inflation rates, interest rates, and fiscal constraints while reducing the country’s global influence. Such a move would represent an enormous structural shift for the U.S., not a less important cyclical event. Business reaction to this potentiality has been severely negative with strong and unanimous support for an independent Fed with key public supporters including many major American business leaders, all living prior Fed Chairs, and all living prior U.S. Treasury secretaries. We can only hope that the White House is unsuccessful in its efforts to gain control over the Fed as the consequences would be devastating long-term for the nation.
Meanwhile, the Federal Reserve’s focus has remained squarely on its dual mandate, albeit with greater recent focus on labor market conditions. Inflation appears to be stabilizing, if not continuing to appreciably decline. The most recent reading showed prices rising 2.7% year-over-year period, remaining appreciably above the Fed’s 2.0% target. To date, tariffs have contributed more modestly to pricing pressures than anticipated. Many analysts expect further price tariff related pressures as 2026 progresses. That said, uneven and unpredictable policy implementation continues to weigh heavily on business confidence and longer-term investment planning.
In short, 2026 appears to be off to a solid start. Consensus forecasts predict continued economic growth, largely being fueled by extremely heavy A.I. and A.I.-centric spending while being further bolstered by enormous Federal deficit spending. The longer-term hazards associated with both economic drivers are substantial, but few appear to be sufficiently concerned. We can only hope that Congress, the White House, and a still independent Federal Reserve can safely navigate these looming economic shoals.
….as Wall Street marches on
Financial markets closed 2025 on a high note with stocks and bonds providing strong gains across most major indices. However, for the first time in 8 years, international developed equities led the way with returns exceeding 20% while U.S. stock markets delivered solid mid-teen gains. American bonds, meanwhile, provided solid returns of in excess of 7% for the year.
Stock valuations, however, remain extended, with the Shiller cyclically adjusted price-to-earnings ratio (CAPE) approaching levels last seen during the dot-com era. Measures such as the CAPE suggest that the stock market has embraced strongly optimistic assumptions about future growth and earnings durability. While high valuations alone are not a timing tool, they do tend to imply more modest long-term return expectations along with heightened sensitivity to adverse surprises. At the same time, volatility measures have remained subdued — indicating a strong degree of investor complacency.
A defining feature of recent market performance has been the continued dominance of a relatively small group of mega-cap technology companies. These so-called “Magnificent Seven” once again accounted for a disproportionate share of stock market returns in 2025, reflecting both their earnings power and investor enthusiasm for artificial intelligence-related growth. Encouragingly, these companies’ contributions to overall market performance declined modestly compared with prior years, suggesting early signs of broader market participation.
Corporate earnings have, to date, largely validated the market’s optimism. Analysts expect high-single-digit earnings growth for the just started 4Q2025 earnings season, extending a multi-quarter streak of year-over-year gains. Most sectors are projected to post positive growth, though consumer-oriented segments face greater pressure as higher borrowing costs and persistent price pressures weigh on demand.
Fixed income has also reasserted its role within diversified portfolios. Despite rate cuts at the short end of the curve, longer-term yields have remained above 4%, reflecting a combination of resilient growth, elevated issuance, and changing demand dynamics. While interest rates may have peaked, structural factors — including continued ongoing large U.S fiscal deficits and reduced foreign demand for U.S. debt — implying that intermediate to longer-term yields are likely to remain near current levels absent a meaningful economic slowdown. In this environment, bonds may once again provide both investor income and portfolio stability.
As 2026 unfolds, investors face an environment marked by competing narratives. Economic growth has proven more durable than many expected, supported by technological investment and strong corporate balance sheets. At the same time, elevated stock valuations, Federal fiscal imbalances, and political uncertainty have introduced meaningful risks to ongoing market advances. History suggests that periods such as this tend to reward discipline over prediction.
In summary, many of the dynamics that shaped 2025 are likely to carry into 2026. Growth should persist, though unevenly. Progress on lowering inflation may continue, albeit incrementally. Maintaining diversification and sticking to your long-term investment strategy remains crucial in times such as these. We encourage you to reach out to us with any questions or issues regarding your individual circumstance that we may assist you with. Wishing you all a healthy and happy New Year!
Despite the steady drumbeat of concerning geopolitical and national emergencies, the U.S. economy demonstrated notable resilience as the year progressed. Real GDP continued to expand with growth accelerating meaningfully as the year closed with 4th quarter growth estimated to have exceeded 5.0%. As a result, and despite starting the year with an economic contraction, full-year economic growth will likely be in excess of 2.5%, appreciably surpassing prior expectations. Driving the economy upward has been sustained investment in artificial intelligence infrastructure and continued spending among higher-income consumers.
The country’s economic resilience, however, has come with some sharp trade-offs. Fiscal deficits remain at historically high levels of $1.8 trillion, or almost 6% of GDP – a sharp outlier outside of recessionary or wartime periods. Meanwhile, government borrowing continues to rise at a pace that warrants immediate attention. While current net federal debt now equals 100% of GDP, this figure is projected to increase, according to the Congressional Budget Office, to at least 116% of GDP by 2034. Given the sharp expansion of government entitlement outlays for Social Security and Medicare in coming years, action needs to be taken promptly. However, Congress and the Administration are likely to await for a true debt crisis before taking needed action.
If early market behavior is any guide to the remainder of the year, 2026 is likely to be characterized by continued volatility and elevated uncertainty. The new year began with a geopolitical shock following the capture of Venezuelan president Nicolás Maduro, an event that reverberated across global markets. Domestic political risks also remain elevated. The current Administration has increasingly relied on executive authority to advance its policy initiatives, frequently running rough shod over traditional boundaries of judicial and congressional oversight and/or control. As global tensions rise and domestic governance norms remain strained, markets may increasingly be forced to price in American political risk as a more durable feature rather than a transitory headline.
One of our most critical areas of concern is the Administration’s continued sharp demands for the Federal Reserve to acquiesce to appreciably lower interest rates. In late 2025, the central bank reduced overnight interest rates at three consecutive meetings for a total of 0.75% percentage points. However, this appreciable rate reduction was far less than that sought by the White House. The Department of Justice doubled down on the Administration’s disagreement with the Fed by recently opening a criminal investigation against the central bank and its Chair, Jerome Powell.
The growing threats to the Federal Reserve’s independence puts at severe risk longer-term U.S. interest rates. To put the situation in better perspective, the central banks of less developed countries, which are typically subordinate to the executive branch, nearly always have sharply higher interest rates. In these states, investors demand more return, i.e., higher interest rates, to compensate for the respective nation’s increased political risk. The last time a president bent a Fed Chair to his will, the nation suffered dreadfully. When President Nixon pressured then Fed Chair Arthur Burns to keep interest rates arbitrarily low, it directly led to the 1970’s economic stagnation which culminated with inflation hitting 15% and unemployment striking 8%.
As or more important, the loss of the Federal Reserve’s independence could spell the demise of the U.S. dollar as the globe’s safe haven currency. The loss of safe haven status would not cause an immediate American economic collapse, but rather it would permanently raise U.S. inflation rates, interest rates, and fiscal constraints while reducing the country’s global influence. Such a move would represent an enormous structural shift for the U.S., not a less important cyclical event. Business reaction to this potentiality has been severely negative with strong and unanimous support for an independent Fed with key public supporters including many major American business leaders, all living prior Fed Chairs, and all living prior U.S. Treasury secretaries. We can only hope that the White House is unsuccessful in its efforts to gain control over the Fed as the consequences would be devastating long-term for the nation.
Meanwhile, the Federal Reserve’s focus has remained squarely on its dual mandate, albeit with greater recent focus on labor market conditions. Inflation appears to be stabilizing, if not continuing to appreciably decline. The most recent reading showed prices rising 2.7% year-over-year period, remaining appreciably above the Fed’s 2.0% target. To date, tariffs have contributed more modestly to pricing pressures than anticipated. Many analysts expect further price tariff related pressures as 2026 progresses. That said, uneven and unpredictable policy implementation continues to weigh heavily on business confidence and longer-term investment planning.
In short, 2026 appears to be off to a solid start. Consensus forecasts predict continued economic growth, largely being fueled by extremely heavy A.I. and A.I.-centric spending while being further bolstered by enormous Federal deficit spending. The longer-term hazards associated with both economic drivers are substantial, but few appear to be sufficiently concerned. We can only hope that Congress, the White House, and a still independent Federal Reserve can safely navigate these looming economic shoals.
….as Wall Street marches on
Financial markets closed 2025 on a high note with stocks and bonds providing strong gains across most major indices. However, for the first time in 8 years, international developed equities led the way with returns exceeding 20% while U.S. stock markets delivered solid mid-teen gains. American bonds, meanwhile, provided solid returns of in excess of 7% for the year.
Stock valuations, however, remain extended, with the Shiller cyclically adjusted price-to-earnings ratio (CAPE) approaching levels last seen during the dot-com era. Measures such as the CAPE suggest that the stock market has embraced strongly optimistic assumptions about future growth and earnings durability. While high valuations alone are not a timing tool, they do tend to imply more modest long-term return expectations along with heightened sensitivity to adverse surprises. At the same time, volatility measures have remained subdued — indicating a strong degree of investor complacency.
A defining feature of recent market performance has been the continued dominance of a relatively small group of mega-cap technology companies. These so-called “Magnificent Seven” once again accounted for a disproportionate share of stock market returns in 2025, reflecting both their earnings power and investor enthusiasm for artificial intelligence-related growth. Encouragingly, these companies’ contributions to overall market performance declined modestly compared with prior years, suggesting early signs of broader market participation.
Corporate earnings have, to date, largely validated the market’s optimism. Analysts expect high-single-digit earnings growth for the just started 4Q2025 earnings season, extending a multi-quarter streak of year-over-year gains. Most sectors are projected to post positive growth, though consumer-oriented segments face greater pressure as higher borrowing costs and persistent price pressures weigh on demand.
Fixed income has also reasserted its role within diversified portfolios. Despite rate cuts at the short end of the curve, longer-term yields have remained above 4%, reflecting a combination of resilient growth, elevated issuance, and changing demand dynamics. While interest rates may have peaked, structural factors — including continued ongoing large U.S fiscal deficits and reduced foreign demand for U.S. debt — implying that intermediate to longer-term yields are likely to remain near current levels absent a meaningful economic slowdown. In this environment, bonds may once again provide both investor income and portfolio stability.
As 2026 unfolds, investors face an environment marked by competing narratives. Economic growth has proven more durable than many expected, supported by technological investment and strong corporate balance sheets. At the same time, elevated stock valuations, Federal fiscal imbalances, and political uncertainty have introduced meaningful risks to ongoing market advances. History suggests that periods such as this tend to reward discipline over prediction.
In summary, many of the dynamics that shaped 2025 are likely to carry into 2026. Growth should persist, though unevenly. Progress on lowering inflation may continue, albeit incrementally. Maintaining diversification and sticking to your long-term investment strategy remains crucial in times such as these. We encourage you to reach out to us with any questions or issues regarding your individual circumstance that we may assist you with. Wishing you all a healthy and happy New Year!
