28 Jan 2025 Market Review: How Last Year Prepares Us for 2026

One of the most valuable exercises we do each year is stepping back and reviewing what actually happened in the markets.

A thoughtful 2025 market review helps separate signal from noise and gives context for the decisions ahead. Understanding what drove returns, how portfolios behaved, and how outcomes compared to expectations allows us to make more proactive portfolio adjustments as we move into 2026, rather than reacting to headlines.

2025 Rewarded Diversification in a Rare Way

The best part about being diversified is that you always have something doing well. The downside is that you usually have something doing poorly at the same time. That wasn’t necessarily the case in 2025.

From a market perspective, portfolio diversification was rewarded more broadly than usual. Global equities surged across the board. Developed U.S. markets performed well, developed international markets performed even better, and emerging markets were among the strongest-performing asset classes of the year. What stood out most was the consistency. Strength began early in Q1 and continued throughout the year.

Looking at the major benchmarks we track:

• The S&P 500 finished up roughly 17.9%
• Developed international markets (MSCI EAFE) gained about 31%
• Emerging markets rose approximately 33.5%
• U.S. core bonds posted a positive return of around 7.3%

Out of everything, the bond result may matter the most. Core fixed income delivering positive returns for the year hasn’t happened in some time. Seeing bonds contribute again was an important shift coming out of prior years.

Federal Reserve Policy Was a Key Driver in 2025

A central theme in any 2025 market review is monetary policy. The Federal Reserve cut interest rates three times, in September, October, and December. Those cuts supported growth across asset classes and helped reset parts of the market that had been under pressure. 

Bond performance, in particular, reflected that change. As rates moved lower, bond prices responded, allowing fixed income to behave more like a stabilizer within portfolios.

Inflation remained a moving target, but the data stayed relatively steady. CPI hovered around 2.7% year over year. While day-to-day expenses may feel higher, the broader trend showed stability rather than a renewed spike.

From a strategy standpoint, this environment allowed multiple asset classes to work at the same time, which is not something investors should expect every year.

Market Leadership Looked More Durable Than Past Cycles

A common comparison that comes up during market reviews is today versus the late 1990s or early 2000s.

There’s an important distinction.

The companies leading the market today, often referred to as the Magnificent Seven, are profitable. They are generating earnings. During the tech bubble era, many of the companies pushing markets higher were still trying to figure out how to make money. The current AI-driven push is real, but it’s being led by businesses with scale, cash flow, and established balance sheets. That difference matters when evaluating sustainability and thinking about portfolio positioning going into 2026.

Looking ahead, continued leadership from innovation-driven areas, along with financials and cyclicals, makes sense if rate cuts continue. International markets also remain closely tied to currency dynamics. Historically, a weaker dollar has supported stronger international performance, and that relationship remains part of our macro outlook.

Bonds and Rebalancing Did Their Job

One of the quieter successes of 2025 was how portfolios behaved from a risk management standpoint.

With equities broadly strong and bonds posting positive returns, diversification worked the way it’s designed to work. Portfolios didn’t rely on a single asset class to carry results. That balance becomes especially important as we think about 2026 portfolio adjustments.

We continue to rebalance portfolios systematically over time. That discipline doesn’t change based on short-term market moves or headlines. It’s designed to keep risk aligned with long-term plans and life goals, not to chase what worked last year.

What This Means for 2026 Portfolio Adjustments

As we move from a 2025 market analysis into planning for 2026, the focus shifts from results to structure.

Key questions we’re watching include:

• How quickly the Fed continues to move on rates
• How durable corporate earnings remain, both domestically and internationally
• Whether bonds continue to provide support if rates move lower again

It’s unlikely that every asset class will deliver strong returns at the same time again. That’s normal. What matters is that portfolios coming out of 2025 are positioned from a place of strength. Equities proved resilient. Fixed income regained its role. Diversification did what it was supposed to do.

Those factors inform how we think about portfolio adjustments heading into 2026, with an emphasis on maintaining balance rather than overreacting to a strong year.

Let’s Review Your Performance and Talk Through What’s Next

If you haven’t scheduled a planning review yet, now is a good time to do it. We’re already having conversations around:

• Portfolio performance and positioning after 2025
• Required Minimum Distributions and how to spread them out
• Tax planning as documents become available later in Q1
• Modeling tax liabilities with a bit of proactive planning

If you have questions about building your portfolio, your tax situation, or how last year’s market results impact your 2026 strategy, reach out. We’re happy to review where you are, discuss potential portfolio adjustments, and outline what comes next for the year ahead.

Thanks for continuing to trust us. If there’s anything you’d like to dig into further, let us know.