It was another strong year for markets in 2025, as continued investor enthusiasm for artificial intelligence, more Fed rate cuts, and stable economic growth offset higher tariff rates and overall economic volatility.
The S&P 500 rose to an all-time high in the fourth quarter as new economic data showed 4.3% year-over-year GDP growth, the Fed enacted an additional 25-basis interest rate cut at its final meeting of the year, and massive investment in AI infrastructure continued to encourage expectations for continued economic and corporate earnings growth into this year. The S&P 500 logged an annual return of close to 20%, continuing a strong three-year run.
At the same time, strong headwinds cast a pessimistic cloud over consumer sentiment, including a softening in the labor market, uncertainty arising from varying and sometimes confusing trade decisions, and an inflation uptick. Forecasts were further hampered by the longest government shutdown in US history from October into November.
Strong Holiday Season
For the 2025 holiday season (November–December), the National Retail Federation projected total retail sales to surpass $1 trillion for the first time. That expectation proved correct, driven by strong consumer spending despite potential tariff impacts. Early sales data in January showed growth of 4.1% for the period.
The $1 trillion mark was a milestone for holiday retail and defied ongoing mixed messages in surveys revealing gloomy consumer sentiment. The strong showing revealed consumers prioritized spending on loved ones, supported by solid employment and wage growth. Increased online sales were a significant driver.
Highwater marks in the stock market and strong end-of-year sales numbers ushered in a cautious optimism to the start of 2026. Major economic analysts announced modest growth expectations for the year and slowing in the second half of 2026.
Reserved Optimism
Predictions of GDP growth for this year currently range from a modest 1.8%–2.25%. Many analysts predict restrained growth from further weakening in the labor market. Still, “resilient” is the word many economists still use when focusing on spending and sales forecasts.
Some predict spending will benefit from greater disposable income due to tax relief and additional tax credits for certain consumer groups such as older Americans, who will enjoy larger standard deductions for three years, starting with the 2025 filing season.
Some investing firms still see the current strong performance of stocks as the result of high valuations. Many also worry about whether AI investment will continue to grow or be checked by concerns about AI product rollouts and return on investments. The leading AI developers remain competitive and eager to benefit from the prestige of AI innovation; they predict continued strong interest and investment as new advances are announced.
Most experts expect another year of gains for the stock market in 2026. But they also say volatility could remain elevated as concerns about AI persist. A resilient US economy, as well as accommodative fiscal and monetary policy, are expected to support corporate profit growth. But further softening in the labor market poses risks and suggest ongoing market volatility.
Headwinds
The Federal Reserve is expected to continue cutting interest rates but has already telegraphed that there may be less enthusiasm for them and a slower schedule as long as the economy remains relatively stable.
Chairman Jerome Powell is expected to step down from his post this year but ongoing feuds with the current administration and demands for more and faster rate cuts have fueled worries – not only about the immediate future but also the longer-term mission of the Fed.
Other potential economic land mines may also surface throughout the first and second quarters of the year. The funding of the federal government will expire again at the end of January. Pressing foreign interest concerns in Iran, Venezuela, an uneasy truce in Gaza, and the ongoing war in Ukraine could also take center stage and rattle the markets.
Sluggish job growth and lingering inflation are likely factors affecting future predictions and policy decisions. Possible Supreme Court decisions on tariffs will also play a role.
But one strong booster of optimism should be major celebrations planned everywhere leading up to the 250th Anniversary of our country and beyond. If the economy remains on solid ground, these sentiments should help foster a sense of pride and unity.
Our team at Lesko Financial Services remains committed to helping you effectively navigate whatever lies ahead for 2026. It’s critical for you to stay invested, remain patient, and stick to a plan based on your unique financial position, risk tolerance, and investment timeline.