Looking back on 2025, it’s clear that this year gave investors plenty to stress over. Yet despite widespread worry, markets have proven surprisingly resilient.
In February, stocks were sitting at all-time highs. By April, however, tariff fears had driven the S&P 500 down 19% from its peak. But it only took the market a few months to recover all gains, and the index ended up returning over 17% through November.
In bonds, a similar story played out. Throughout 2025, US fiscal concerns helped drive elevated rate volatility in fixed-income markets. Nonetheless, performance ended up strong, with an index of US investment-grade bonds generating total returns of over 7% through November.
Heading into 2026, there are certainly pockets of concern across the economy. Areas like trade, the labor market, and the Fed’s policy path could all contribute to potential downside risks for investors. Despite such worry, 2025’s track record shows that markets can still generate strong returns even in a complex environment.
As thoughtful investors, it’s important to understand our risk exposure. Given strong equity performance, rebalancing ahead of the new year could make sense. But while some areas of the investment landscape remain notably uncertain, we see little evidence of the type of fundamental disruptions that call for a meaningful strategy shift.
2025 YTD Performance by Asset Class (Total returns as of November 28th close)
- US Stocks: 17.7%
- Global Stocks: 29.3%
- US Bonds: 7.5%
- US Real Estate: 5.7%
- Gold: 60.2%
US Stocks: S&P 500 index; VOO ETF. Global Stocks: MSCI ACWI ex USA Index; ACWX ETF. US Bonds: Bloomberg Aggregate Index; AGG ETF. Real Estate: Dow Jones U.S. Real Estate Capped Index; IYR ETF. Gold: Gold spot; IAUM ETF.
Reviewing 2025: Tariff Worries Fade and AI Optimism Grows
In April, if you’d asked most analysts to predict how markets would look at year-end, the forecasts may not have been encouraging. Tariff fears shook the market in Q2, with the VIX (commonly known as Wall Street’s ‘fear gauge’) closing above 50 on April 8th. That was the highest close for the index outside of the global financial crisis and the COVID market crash.[1]
Yet despite this turmoil, the optimists ultimately won out. Not only did tariffs prove less disruptive than feared, but the Trump administration was more willing to make deals and adjust terms than expected. Throughout the rest of the year, the VIX mostly held below 20.
And as tariff worries faded, AI excitement grew. To be sure, it’s important that investors remain mindful of current valuations in the tech sector. However, naive comparisons to the Dot-Com boom don’t capture the whole story – AI continues to be integrated into the wider economy and industry leaders have demonstrated robust earnings growth.[2]
Although AI and tariffs dominated the narrative in 2025, they were not the only important stories. Notably, concerns over the sustainability of US deficits and the reliability of America as an international partner contributed to ‘de-dollarization.’ Strong performance in both gold and Bitcoin was partially driven by this trend.
Overall, the good ended up outweighing the bad in 2025. And despite areas of uncertainty heading into 2026, that performance is a strong indicator of the market’s potential to continue climbing a wall of worry.
Previewing 2026: Three Key Themes
Looking toward 2026, we expect three key themes to help shape next year. Of course, no investor has a crystal ball. But right now, these elements appear to have the greatest potential to either support or disrupt current bullish trends.
#1: Interest Rates and Inflation
Currently, the Fed is walking a delicate tightrope between growth and inflation. Although price pressures are down from the highs of the post-COVID era, inflation remains stubbornly above the Fed’s 2% target. In September, CPI rose to 3%, with October data unavailable due to the government shutdown.[3]
While the Fed has cut interest rates at several recent meetings, elevated inflation means that further easing may be more limited. Currently, markets view a December cut as highly likely.[4] However, cuts in January, March, and beyond are far from guaranteed.
Although the Fed’s policy path is important in any market environment, this uncertainty raises the stakes for investors. In fact, despite the Fed’s recent cuts, interest rates at the long end of the yield curve have generally remained elevated. The Fed’s decision to end its current round of Quantitative Tightening could help bring long-term rates down, but it’s not clear whether this will be a temporary pause.
#2: Tariffs and Trade Policy
Tariffs and trade will likely continue being a source of uncertainty in 2026. Currently, the legality of many of Trump’s tariffs is being reviewed by the Supreme Court. The justices appear skeptical of the president’s unilateral authority to regulate trade, with a decision to reverse tariffs potentially being reached before the end of the year.[5]
Nonetheless, Trump continues to pursue trade deals. In addition to the latest truce with China, the US has also recently signed comprehensive deals with Japan and South Korea. Whether Trump continues to pursue a tariff agenda – and whether existing levies remain – could impact both economic fundamentals and investor sentiment next year.
#3: Labor Market and Economic Growth
Finally, we continue to keep a close eye on the US labor market heading into 2026. As the unemployment rate ticks up and job growth slows, the labor market appears to be cooling. However, we see little evidence of the type of severe slowdown that would indicate a looming recession.
Evaluating the current state of the labor market is particularly challenging due to the role of AI. Fed chair Jerome Powell has acknowledged that AI advancements may be contributing to weak job creation.[6] However, historical precedent suggests that technological innovation creates as many jobs as it displaces, albeit in different sectors and with different skill requirements.[7]
Conclusion: Preparing For The Year Ahead
The economic path forward is anything but clear, with conflicting signals clouding the outlook. Given such widespread uncertainty heading into 2026, how should investors prepare for the year ahead?
First and foremost, it’s important to remain mindful of your current risk exposure. The ‘Magnificent Seven’ stocks currently make up more than a third of the entire S&P 500 – investors could have greater vulnerability to a tech slowdown than they expect.[8] Given strong equity gains this year, investors may benefit from taking risk off the table by rebalancing.
Proceeds from equity rebalancing can potentially be allocated to investments that provide greater diversification. In terms of fixed-income, now could be a compelling time to capitalize on higher yields at the long end of the curve. Regardless of the Fed’s policy path, holding individual long-dated bonds can allow investors to ‘lock in’ yields at their current elevated rate.
Finally, investors shouldn’t forget about year-end tax issues as the holidays approach. Raising tax concerns proactively can ensure that your advisor has the time to take thoughtful steps, especially around capital gains exposure. Similarly, for those planning on utilizing Qualified Charitable Distributions to offset RMDs, starting the process early can avoid complications.
As Q4 wraps up and 2026 comes into view, it’s worth remembering that markets will always offer something to worry about. For investors, the key is understanding when to act and when to tune out the noise. As this year has shown, markets have a powerful capacity to surprise to the upside, even when uncertainty feels overwhelming.
[1] St. Louis Federal Reserve, CBOE Volatility Index Link
[2] Nasdaq, Macroeconomic Update: AI Driving Earnings and Economic Growth Link
[3] Bureau of Labor Statistics, Consumer Price Index – September 2025 Link
[5] Wall Street Journal, Trump’s Tough Day at Supreme Court Puts Tariffs in Jeopardy Link
[6] Federal Reserve Board, Transcript of Chair Powell’s Press Conference October 29, 2025 Link
[7] McKinsey, Five lessons from history on AI, automation, and employment Link
[8] Wall Street Journal, Here’s How Much the Magnificent Seven Matter to the Market Link
Disclosure:
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this commentary is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain positive risk, and there is no assurance that an investment will provide performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Information obtained from third party sources are believed to be reliable but not guaranteed. Sound View Wealth Advisors Group, LLC makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.