As we reflect on 2025, it’s clear the year rewarded disciplined, diversified investors—but the journey was anything but smooth. After a solid start, US equities faced meaningful headwinds in early spring, as tariff-related uncertainty weighed on investor sentiment and sparked a sharp pullback, with the market falling nearly 19% from its February peak by April 8—pushing stocks into correction territory and uncomfortably close to a bear market. Yet the market once again demonstrated resilience, rebounding sharply, and gaining roughly 38% from the April lows. Along the way, stocks reached new all-time highs on 39 separate occasions, making 2025 one of the more remarkable years for record highs and leaving annual returns well above historical averages. The takeaway is a familiar one: strong long-term outcomes often require investors to endure short-term discomfort, and those who stayed the course through volatility were ultimately rewarded.
What made 2025 even more notable is that it came on the heels of two impressive years in 2023 and 2024. US equities have now generated returns above 15% in four of the last five years, with 2022 the lone exception, when markets fell 19%. The bigger lesson is that markets rarely deliver “average” results in any given year. Returns tend to swing between extremes, and investors who can stay focused on the long term—rather than reacting to headlines—often come out ahead.
MARKET RECAP
Despite persistent negative headlines—including the longest US government shutdown in history, a spike in job cuts, and consumer sentiment hovering near record lows—markets continued to climb higher in the fourth quarter. By year-end, US and international equities delivered fourth quarter gains of approximately 2% and 5%, respectively. For the full year, the S&P 500 returned 17.88%, supported by several constructive forces including ongoing enthusiasm around AI and innovation, steady spending from higher-income households, and an economic backdrop that held up better than many expected. In many ways, 2025 reinforced how markets can remain resilient even when the headlines suggest otherwise.
Importantly, the rally broadened later in the year, with more sectors and stocks starting to move higher. During the fourth quarter, large-cap value stocks (+3.81%) outperformed more tech-focused large-cap growth stocks (+1.12%), suggesting leadership began to expand beyond the most crowded areas of the market.
Diversification Paid Off in 2025
While US technology stocks continued to thrive in 2025, the year was also defined by a rotation toward international markets and commodities. The US dollar posted its steepest annual decline since 2017, helping drive strong returns for international developed equities (+31.22%) and emerging markets (+33.57%). In fact, non-US stocks outperformed US equities by the widest margin since 2009. Precious metals also surged with gold posting its best year since 1979 (+67.41%), as investors sought hedges against macro uncertainty and a weaker dollar.
Finally, investors who maintained elevated cash balances experienced more modest returns relative to most major asset classes. Bonds also delivered a solid year, with the Bloomberg US Aggregate Bond Index gaining 7.30% in 2025.
The “Magnificent 7” Drive ~50% of S&P 500 Returns
AI remained a dominant market driver in 2025, but it also contributed to historic levels of market concentration. The technology sector’s weighting in the S&P 500 climbed to a record 36%, surpassing the previous peak set in 2000 during the Dot-Com bubble. With their increasingly large index weights, the “Magnificent 7”—led by Alphabet (+65.21%) and Nvidia (+38.91%)—accounted for nearly half of the S&P 500’s return for the year.
Another underappreciated story of 2025 was the extent to which investors embraced riskier, more speculative areas of the market relative to steadier, more defensive companies. For example, the S&P 500 Low-Volatility Index—home to many traditionally “steady” names like Procter & Gamble, Coca-Cola, and Johnson & Johnson—returned +4.4%, compared to +33.2% for the S&P 500 High-Beta Index, as higher-risk segments led performance through October. Similarly, the Goldman Sachs Nonprofitable Tech Index gained +46.7%, highlighting how enthusiasm around the AI wave extended beyond established winners and into more speculative corners of the market. Periods of rapid wealth creation often attract this type of momentum-driven behavior, but they can also increase the risk of sharp reversals and heightened volatility.
The key implication is that market performance has become more dependent on a narrow group of companies with high expectations already baked into stock prices. If leadership continues to broaden, it could create a healthier and more balanced backdrop for long-term investors. However, if concentration persists, it reinforces the importance of staying prudent, cautious, and well-diversified—by looking beyond the largest stocks and maintaining exposure across a broader mix of sectors, styles, and global markets.
Key Market Risks to Watch in 2026
While the economic backdrop remains generally constructive, several risks could create periodic volatility in 2026. Trade policy uncertainty and lingering effects from tariff actions may continue to influence business costs and pricing trends. Geopolitical risks have also resurfaced as a factor for markets to monitor—most recently developments in Venezuela, where political and military actions have intensified questions around oil market dynamics and broader regional stability, underscoring how geopolitical shifts can ripple through markets and investor sentiment.
We continue to see evidence of a “K-shaped” economy, with higher-income households and asset owners in relatively strong positions while lower- and middle-income consumers face ongoing pressure from elevated prices, borrowing costs, and reduced savings buffers. This uneven experience matters because consumer spending remains a major driver of US growth, and disparities across income segments can lead to a more mixed economic backdrop that weighs on certain sectors even as others advance.
Weakening Labor Market
During the summer months, there was little question that the labor market had cooled meaningfully. However, more recent data has pointed to a somewhat mixed picture and a unique “no fire, no hire” environment—where employers have become more cautious about adding new workers but are still reluctant to lay off existing staff. This is consistent with the chart below, which shows the US economy has barely added jobs since April, while the unemployment rate has drifted higher (to 4.6% from 4.1% in June).
Looking ahead, we continue to watch weekly jobless claims as a key leading indicator, and claims remain relatively low compared to levels that have historically preceded recessions. The implication is that the job market may be softening without breaking—supporting a slower-growth outlook but not necessarily signaling an immediate downturn.
A “K-Shaped” Economy for Consumers
One of the clearest signals that we’re in a “K-shaped” economy is what we’re seeing across income levels. The chart below highlights a notable shift in wage growth over the past few years: after low-income workers (orange line in the chart below) saw the strongest gains coming out of the pandemic, that trend has reversed more recently, with higher-income earners (green line) now experiencing relatively stronger wage growth.
This dynamic is also showing up in day-to-day consumer behavior. As Albertsons Companies CEO Susan Morris recently noted, “Consistent with what you’ve heard from others, the environment remains mixed and continues to reflect pressure across income segments. At the low end, shoppers are clearly stretched, putting fewer items in the basket each trip and prioritizing essentials while visiting more frequently as they manage their cash flow. Middle-income households, which have been relatively resilient, are showing some signs of softening, with increased price sensitivity and trade-down behavior emerging in certain categories.”
We’ve seen this “K-shaped” consumer backdrop reflected in market performance as well. Chipotle is one example—despite being a high-quality brand with strong long-term fundamentals, the stock fell -38.64% in 2025 as consumers became more selective and price-sensitive in discretionary categories. The implication is that while overall economic growth may remain positive, a more divided consumer environment can create pockets of weakness—particularly in areas tied to discretionary spending—while higher-income-driven segments of the economy remain more resilient.
Economic Conditions Vary Widely Across US States
Another sign of a K-shaped economy is that economic conditions are not only varying by income level, but also by geography. The chart below highlights how widely conditions differ across the country, with some states still in expansion while others are effectively treading water—or even slipping into recession. This uneven backdrop helps explain why the overall US economy can appear resilient in aggregate, even as certain regions and industries experience a more challenging environment.
ROEHL & YI’S FINAL THOUGHTS
After another strong stretch for markets, the outlook for 2026 appears constructive—but increasingly uneven. Leadership remains concentrated, valuations are elevated, and the economy continues to show K-shaped dynamics, with strength in some areas and pressure in others. In this environment, we believe a balanced approach—focused on discipline, diversification, and risk management—remains the best way to navigate whatever comes next.
Consider these four steps as we head into 2026:
- Stay cautious and manage risk thoughtfully.
- Stock market valuations remain elevated, and geopolitical and economic risks could drive renewed volatility. We recommend staying disciplined, avoiding highly valued or speculative areas of the market, and focusing on a well-diversified portfolio.
- Defend with high-quality bonds for stability and income.
- High-quality bonds can help preserve capital while still generating attractive income—and have often provided valuable diversification when stock markets experience volatility or drawdowns.
- Expect bumps along the way.
- Investing is rarely a smooth ride. Pullbacks are normal, and long-term success often comes from staying patient and sticking with a well-diversified plan.
- Revisit your financial goals and priorities for 2026.
- After a strong multi-year bull run, it’s a good time to reassess your goals, timeline, and risk tolerance to ensure your portfolio still fits your needs.
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Disclaimer: This material is intended for general informational purposes only, and should not be construed as legal, tax, investment, financial, or other advice. It does not consider the specific investment objectives, tax and financial condition or needs of any specific person. An investor should consult with their financial professional before making any investment decisions. While information in this content comes from reliable sources, no guarantee of accuracy or completeness is provided.