January 2026 Newsletter

From everyone here at IMG, we hope you enjoyed your holiday season and that 2026 is off to a great start. 2025 was another impressive year for stocks, marking three straight years of double-digit gains. The S&P 500 finished the year up 17.9%, while the tech-heavy Nasdaq climbed 21.1%. The Dow Jones Industrial Average closed out 2025 up 14.9%. Still, 2025 was not all rainbows and butterflies, as trade tensions, geopolitical uncertainty, high artificial intelligence (AI) company valuations, and a slowdown in employment cast shadows as we start 2026.

2025 At a Glance

Tariffs

Tariff concerns were front and center in the first half of the year, especially when President Trump announced a suite of tariff hikes on major trading partners in April. Not knowing how these tariffs would play out, the S&P 500 plummeted to its lowest point of the year on April 8th on fears that tariffs would send inflation and interest rates up, sap business and consumer confidence, and spark a recession. However, the impact of tariffs on prices has been muted and inflation remains in check, albeit above the Federal Reserve’s (Fed) 2% target. Moreover, gross domestic product (GDP), the value of all goods and services produced across the economy, in the second quarter reached its strongest quarterly growth in nearly two years. Still, that does not mean that tariffs have revitalized American manufacturing, brought back middle-class jobs, and buoyed the economy as the administration contended. The Fed's Beige Book noted that firms are limiting head counts through hiring freezes, attrition and reduced hours, and unemployment is ticking up.

 

Artificial Intelligence (AI)

2025 touted massive investments in artificial intelligence hardware, software, and data centers, as well as a rapid surge in valuations. The result: increased fears of an AI bubble fueled by concerns that (1) the hype and spending in AI may surpass the technology's current intrinsic value and (2) circular financing deals among some of the top mega caps (think Nvidia investing $100 billion in Open AI infrastructure powered by Nvidia chips) may suggest unsustainable capital flows. Many experts see this boom driving essential infrastructure and long-term growth. We believe AI is here to stay and grounded in transformative potential that could reshape industries. Nonetheless, there may be growing pains (aka volatility) along the way.

 

Monetary Policy

After ending 2024 on the heels of two twenty-five basis point cuts in November and December, the Federal Reserve adhered to its wait and see approach for much of 2025. In September, the Fed ultimately cut its benchmark interest rate by 0.25% to a range of 4% to 4.25%, a precautionary move to support hiring. This was followed by two additional quarter point cuts in October and December, taking the range for the benchmark federal funds rate down to 3.5% to 3.75%, the lowest in nearly three years. Notably, key economic data on jobs, inflation, and growth were delayed by the six-week government shutdown, leaving Fed officials with only outdated information at their meeting in December. The Fed voted 9-3 to lower the rate, with dissents on both ends of the policy spectrum, unusual for a committee that typically works by consensus. In other words, Federal Reserve policymakers remain divided on the direction of U.S. interest rates heading into 2026.

 

U.S. Economy

The federal government shutdown from October 1 to November 12, 2025 interrupted the release of key economic data. Government data released after the shutdown offer a snapshot of an economy that looks strong on the surface but fragile underneath. Contrary to expectations, tariffs have not translated into higher prices. The consumer price index (CPI), which measures costs of goods and services across the economy, rose 2.7% in December from a year ago, unchanged from November and down from 3.0% in September. Core inflation, which excludes food and energy, was up 2.6% from a year ago, unchanged from November and down from 3.0% in September. The Bureau of Labor Statistics did not collect survey data for October due to the government shutdown.

The U.S. labor market ended 2025 markedly softer. While companies did not resort to mass layoffs, many did trim head count, especially later in the year. Many also stopped hiring. Fewer employees switched jobs. ADP data showed private-sector payrolls increased by 41,000 in December after declining in November. The median estimate in a Bloomberg survey of economists called for a 50,000 gain. Separately, the Labor Department reported that the U.S. added 50,000 jobs in December, below the 73,000 expected by economists. 2025 marks the worst year for hiring since 2020, when the pandemic brought the global economy to a halt, and the 2009 global financial crisis before that. Job growth in education and health services were pockets of strength in an otherwise weakening job market. The unemployment rate dropped to 4.4% in December, down from 4.6% in November, but up from 4.0% at the start of the year. Younger people particularly are struggling in the current labor market, as many entry-level jobs face disruption from AI. As demand for workers has eased, so too has wage growth. For the Federal Reserve, cooling wage gains are an encouraging sign that inflation remains in check. However, that is little comfort to workers who are trying to stretch their pay after years of high inflation. Households are saving less than they did earlier in the year, suggesting that incomes are not keeping pace with rising costs.

Fears of higher prices and a slowing labor market have weighed on consumers’ outlook. The Conference Board’s confidence index, which measures consumer attitudes on prevailing business conditions and likely developments for the months ahead, fell 3.8 points in December to 89.1 from 92.9 in November. Alternately, the University of Michigan’s consumer sentiment index, which is used to estimate future spending and saving, inched up to 52.9 from 51 in November. Despite some signs of improvement to close out the year, sentiment remains nearly 30% below December 2024.

The U.S. economy grew at an unexpectedly robust pace in the third quarter, with GDP up 4.3%, the fastest pace in two years. Strong consumer spending and exports offset a decline in residential and business investment. Growth picked up from 3.8% in the previous quarter and beat the 3.2% forecast among economists polled by The Wall Street Journal. Consumer spending grew at an annual rate of 3.5% in the third quarter, picking up from 2.5% in the previous quarter. Consumer spending makes up nearly 70% of gross domestic product.

 

Traditional Asset Class Returns Q4 2025

 

U.S. Stock Market

2025 was another outstanding year for stocks. After surging 26.3% in 2023, another 25% in 2024, the S&P 500 climbed 17.9% in 2025. All 11 sectors posted positive returns for the year. Communications (+33.6%) was the standout sector, followed by Technology (+24%). Notably, the breadth of the market widened this year to include Industrials (+19.4%), Utilities (+16%), Financials (+15%) and Healthcare (+14.6).

Growth outperformed value in 2025 for a third consecutive year, which is not surprising given the AI momentum. However, value tightened the gap later in the year. The Russell 1000 Growth index finished the year up 18.6% compared to the Russell 1000 Value index, which was up 15.9%.

 

Fixed Income

With the U.S. Federal Reserve cutting interest rates three times in 2025, the yield curve shifted from being inverted to a more normalized positively sloped curve from one-year all the way to the 30-year maturity. This helped to fuel the best performance for U.S. bonds since 2020. The steepening of the yield curve came as all Treasury rates inside of 20 years experienced a decline throughout the year. The 10-year U.S. Treasury ended the year at 4.17% after starting the year at 4.57%, a decline of 40 basis points (bps). The longer end of the interest rate curve (20+ years) was more anchored, and the 30-year maturity was the only segment that moved slightly higher as it is more closely tied to future interest rate and market expectations.

A theme that will be closely watched in 2026 is the anticipated increase in corporate bond issuance and the impact on credit spreads, particularly from technology companies as they expand infrastructure and data center build out. Municipal bonds ended the year on a positive note as well after starting the year slow. The municipal market remains healthy, and demand continues to outpace supply.

In addition to corporate issuance, the fixed income markets are also starting the new year looking at the impending appointment of a new Federal Reserve Chairman as Jerome Powell’s term expires in May 2026. The markets will analyze each Fed speech as they look to gain insight while the Fed seeks to achieve a neutral interest rate position where their policy does not overly fuel nor dampen the U.S. economy. The Fed governors will also be closely monitoring economic data releases to determine which of their dual mandate, full employment or price stability, should be the primary driver of any future votes. As always, irrespective of interest rate movements, we continue to preach the importance of bonds within a portfolio to achieve your long-term financial goals.

 

Diversifying Asset Classes

Diversification was beneficial in 2025, with foreign and emerging markets surging 31.22% and 33.57%, handily outpacing the S&P 500. Precious metals recorded stellar performance. The price of gold surged nearly 70% in 2025, while silver has more than doubled. The precious metals are typically seen as safe investments when things like inflation, trade tensions or the potential for global conflict create uncertainty.

Fixed income diversification was also effective in 2025, with all sectors posting positive total returns. Emerging market bonds (+13.01%), high yield (+8.62%) and long bonds (+7.44%) all added significant relative value. For both the 4th quarter and the calendar year, the higher performing sectors in fixed income were tied to U.S. credit. The premium (spread) that investors receive for owning credit sensitive securities over U.S. Treasurys remained at historic lows throughout the year as a result of healthy U.S. corporate balance sheets which provided a tailwind to performance. U.S. corporate high yield was up 1.31% for the 4th quarter and 8.62% for the year, while the U.S. government market was up 1.15% and 6.50%, respectively.

 

 

Conclusion

While 2025 delivered formidable performance in both U.S. Equity and Fixed Income markets, recent data signal pockets of weakness in the economy as we begin 2026. Our disciplined approach to investing and asset allocation is designed not only to participate in market upswings but also to mitigate downside risk. As we begin a new year, you can rest assured that our portfolios are positioned to protect you throughout the changing economic landscape, and we encourage you to stay the course.