For the third consecutive year – and sixth among the past seven – the S&P 500 tallied double-digit gains – a remarkable run. As the index climbed 16.39% for the year, it also recorded 38 new record highs.
“We expect technology tailwinds to continue into the new year but would caution against investor complacency, as volatility may increase,” Raymond James Chief Investment Officer Larry Adam said. “Earnings will take over from multiple expansion as the engine powering equities in 2026. That means returns may go from double digits to mid-single digits, but the growth environment is still strong.”
Along with a plethora of data releases once the government reopened, December saw markets navigate the Federal Reserve’s (Fed) third consecutive interest rate cut of 2025. The Fed acted to support a cooling labor market amid persistently elevated inflation, while noting that the recent government shutdown left policymakers working with incomplete data. Division remains within the Fed as some policymakers prioritize addressing labor market softness while others caution against reigniting inflation.
The November employment report showed just 64,000 new jobs, leading to the unemployment rate rising to 4.6% – the highest since 2021 – with the Bureau of Labor Statistics emphasizing uncertainty amid shutdown-related distortions. Inflation data and third-quarter gross domestic product (GDP), released later than usual, offered some relief. The November Consumer Price Index (CPI) rose 2.7% year-over-year, and core CPI rose 2.6%, both cooler than expected. A gross domestic product report showing 4.3% growth was much higher than expected.
We’ll dive into more details below but first let’s look at the numbers to close 2025.
Market fills in as tech takes a breather
The S&P 500 has been moving sideways just below its October highs. Recently, big tech and AI stocks have seen some pullbacks, which is normal as investors take profits after strong gains. Demand is still strong and fundamentals remain solid. Other parts of the market, like banks, industrials and small caps, are hitting new highs.
Investors have been watching AI spending with increasing scrutiny while also weighing softer economic data and Fed expectations. The recent government shutdown muddied some economic reports, but strong holiday shopping and upbeat corporate updates suggest the economy is still healthy.
Bond market signals confidence
In December, the Treasury yield curve steepened as short-term rates fell and long-term rates edged up. For the year, the spread between the 3-month and the 30-year widened by 70 basis points. Stronger than expected economic growth, sticky inflation and anticipated Fed rate cuts contributed to the widening.
Corporate bond spreads stayed near historic lows, showing strong confidence in company fundamentals, though any widening could pressure returns. Municipal bonds also saw tight spreads, with a steeper curve offering opportunities for investors willing to lock in longer maturities.
Bank rules ease; housing and infrastructure in focus
Lawmakers advanced a major bipartisan housing affordability package, with a focus on manufactured and multifamily housing. Negotiations between the House and Senate will continue in the new year, and President Donald Trump is considering an executive order to address housing early in 2026.
The House also passed the SPEED Act, designed to speed up approvals for energy, infrastructure and mining projects by streamlining environmental reviews. This sets the stage for broader permitting reform talks as 2026 gets underway.
On the financial front, regulators eased rules for large banks by lowering capital requirements, which is expected to free up an estimated $1.1 trillion for Treasury purchases and boost market liquidity. Combined with efforts to reduce “reputational risk” oversight, these changes point to a more bank-friendly environment heading into 2026.
Fed eases rates as inflation cools
The Fed delivered another small rate cut in December, lowering its benchmark rate to 3.50% – 3.75% from 3.75% – 4.00%, and signaled it anticipates just one more cut next year. November’s headline inflation came in at 2.7%, and core inflation was even lower at 2.6%, getting closer to the Fed’s long-term target.
Consumer sentiment is improving slightly, with the University of Michigan survey showing optimism about personal finances up 13%. Inflation expectations have dropped back to early-year levels, suggesting people feel less worried about rising prices. However, confidence overall remains mixed. The Consumer Confidence Index fell for the fifth straight month, with concerns about jobs and prices still lingering.
A wild year for commodities
Commodities had a rollercoaster year in 2025. The Bloomberg Commodity Index rose about 10%, but that average hides a wide divergence between products. Precious and industrial metals stole the spotlight – platinum, silver and cobalt all more than doubled while gold jumped nearly 70%. On the flip side, some everyday essentials got cheaper: Egg prices plunged 80% from last winter’s highs, cocoa fell by half and oil declined to four-year lows, keeping US gas prices under $3 a gallon.
Diverging rate moves abroad
Across non-US developed markets, central banks continued to navigate complex dynamics in their domestic economies, leading to a mixed bag of monetary policy decisions. Japan raised interest rates, the UK lowered them and Europe held steady. Meanwhile, as peace negotiations in the Russia-Ukraine war pick up pace, EU leadership signed off on a €90 billion loan to Ukraine and indicated that the country’s inclusion in the EU is key to a final peace deal.
Financial markets remain focused on prospects for a substantial fiscal stimulus aimed at addressing profound structural issues facing the Chinese economy.
The bottom line
As we head into 2026, the outlook is positive but not without challenges. Cooling inflation and tech tailwinds offer reason for optimism, while a softer job market and policy uncertainty may bring some volatility. After several years of exceptional gains, returns could slow, but steady growth and healthy companies suggest the foundation remains solid.
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Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the Raymond James Chief Investment Officer and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. Diversification does not guarantee a profit nor protect against loss. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australasia and Far East) index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small-cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. An investment cannot be made in these indexes. The performance mentioned does not include fees and charges, which would reduce an investor’s returns. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. A credit rating of a security is not a recommendation to buy, sell or hold the security and may be subject to review, revision, suspension, reduction or withdrawal at any time by the assigning Rating Agency. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Income from municipal bonds is not subject to federal income taxation; however, it may be subject to state and local taxes and, for certain investors, to the alternative minimum tax. Income from taxable municipal bonds is subject to federal income taxation, and it may be subject to state and local taxes. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. The Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Studies. The Leading Economic Index (LEI) provides an early indication of significant turning points in the business cycle and where the economy is heading in the near term. Investing in small-cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks. The ISM Services Index is an economic index based on surveys of more than 400 non-manufacturing (or services) firms' purchasing and supply executives. The ISM Manufacturing Index, also known as the purchasing managers' index (PMI), is a monthly indicator of U.S. economic activity based on a survey of purchasing managers at more than 300 manufacturing firms. Material created by Raymond James for use by its advisors
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