2025 Market Recap: A Year of “Risk-On-Measured” Gains and Easing Financial Conditions

The investment landscape in 2025 was characterized by a “risk-on-measured” profile, where robust equity performance was balanced by positive, real returns in fixed income. A significant theme was the shift in monetary policy, as cooler inflation trends and a softening labor market prompted the Federal Reserve to implement rate cuts starting in September and to conclude its Quantitative Tightening (QT) program. These actions effectively steadied funding markets, trimmed interest rate volatility, and provided a supportive backdrop for both stock and bond markets.

U.S. Stock Market:Strong Gains and Shifting Breadth

Source: Bloomberg

The S&P 500 delivered a robust performance, with total returns reaching 17.9%¹ for the year, reaching new all-time highs. While early gains were largely concentrated in a handful of mega-cap technology names, market breadth improved notably in the latter part of the year as mid-cap & small-cap stocks joined the advance.

International Stocks:A Strong Comeback and Diversification Opportunities

In a compelling reversal from recent trends, international equities outperformed their U.S. counterparts in 2025, offering valuable diversification benefits to global portfolios. Non-U.S. developed markets, as measured by the MSCI ACWI Ex. USA, returned approximately 33.2%¹ year-to-date, driven by sectors like information technology, financials, materials, and industrials. Emerging markets also demonstrated strong momentum, with the MSCI EM Index gaining around 34.3%¹, benefiting from a combination of a weaker U.S. dollar and positive momentum in AI-related exports across Asia.

U.S. Bond Market:Positive Returns and Sector Strength

2025 was a strong year for the U.S. bond market, aided by attractive starting yields and the Federal Reserve’s easing cycle. The Bloomberg U.S. Aggregate Bond Index posted solid returns of around 7%¹.

Rising Concentration and Valuation Risks

The S&P 500 performance, while significant, was largely uneven, powered by a handful of mega-cap technology names, often referred to as the “Magnificent Seven”.

These dynamics highlight rising concentration risk in the S&P 500. The top ten holdings now account for a significantly higher percentage of the index’s overall weight compared to a decade ago, with the “Magnificent Seven” alone representing around 35%¹ of the S&P 500’s weighting. While this concentration has fueled strong returns during the tech sector’s outperformance, it also exposes the broader index to heightened vulnerability should these few companies falter or if market leadership rotates.

Furthermore, valuation risks are becoming more apparent. The forward 12-month price-to-earnings (P/E) ratio—a metric that measures a company’s current share price relative to its estimated earnings per share over the next year—for the S&P 500 stands at approximately 22.1¹, which is above both the five-year average (20.0¹) and the ten-year average (18.9¹). Meanwhile, the “Magnificent Seven” are trading at even higher multiples. While strong earnings growth is expected to support some of these valuations, high P/E ratios in a concentrated market suggest investors should temper return expectations and be mindful of potential volatility.

¹ Source: Bloomberg

We continue to emphasize the importance of maintaining a diversified portfolio across various sectors and asset classes to help mitigate the impacts of these risks and align with long-term financial plans.

2026 Outlook:A Year of Normalization, Opportunity, and Discipline

As we enter 2026, investors find themselves in a very different environment than the one that dominated headlines earlier in the decade. The extraordinary shocks of inflation surges, rapid interest-rate hikes, and pandemic-era distortions have largely passed. In its place we are experiencing a return toward economic normalcy. This means that investors can once again rely on fundamentals, discipline, and long-term planning.

The Economy:Slow and Steady

The U.S. economy enters 2026 on relatively solid footing. Growth has moderated but remains positive. Consumers are still spending, employment remains healthy, and corporate balance sheets are relatively strong.

Inflation, which dominated investor concerns for several years, has continued to cool. While prices are not returning to pre-2020 levels, the rate of increase has slowed meaningfully. This easing has given policymakers more flexibility and has reduced pressure on both households and businesses.

The most important shift is that economic growth is becoming less stimulus-driven and more organic. Productivity gains, investment in technology, and re-shoring of critical supply chains are playing a larger role in sustaining expansion.

Interest Rates:Higher Than the Past, Lower Than the Fear

Interest rates are still higher than what many investors grew accustomed to in the 2010s, but importantly, they appear stable. After an aggressive tightening cycle, the Federal Reserve has shifted its focus from fighting inflation at all costs to maintaining balance between growth, employment, and price stability.

For investors, this matters greatly:

• Savers can now earn meaningful yields on cash and high-quality bonds.
• Fixed income once again plays a true diversification role in portfolios.
• Borrowing costs are predictable, allowing businesses to plan and invest.

Rather than viewing rates as a threat, 2026 reframes them as a source of opportunity, especially for diversified portfolios that include income-producing assets.

The Stock Market:Less Hype, More Fundamentals

Equity markets are entering 2026 with higher valuations. Going forward, earnings growth is once again the primary driver of returns.

Key Market Trends for 2026

• Broader market leadership beyond a handful of mega-cap stocks.
• Continued strength in companies tied to infrastructure, energy, healthcare, and defense.
• More realistic expectations for technology and AI, moving from excitement to execution.

This environment favors selectivity over speculation. Companies with strong cash flow, durable competitive advantages, and disciplined management are better positioned than those relying solely on optimistic projections.

Bonds and Income:Back in the Spotlight

One of the most significant changes for investors in 2026 is the renewed relevance of bonds. Higher bond yields mean investors can build portfolios that seek growth and income without taking excessive risk.

Tools for Capital Preservation

High-quality bonds, municipals, and dividend-paying equities are valuable tools for:

• Generating consistent income.
• Potentially reducing portfolio volatility.
• Supporting retirees and pre-retirees with predictable cash flow.

This shift is particularly important for households focused on financial independence, retirement planning, and capital preservation.

What to Watch Without Overreacting

While the outlook is constructive, risks remain. Geopolitical tensions, election-year uncertainty, fiscal deficits, and global trade realignments can all create short-term market volatility. However, history consistently shows that reacting emotionally to headlines often does more harm than good.

In 2026, risk management is less about predicting the next crisis and more about being prepared for uncertainty through diversification, thoughtful asset allocation, and regular portfolio reviews.

What This Means for Investors

The defining characteristic of 2026 is balance.

• Not boom or bust.
• Not crisis or euphoria.
• But a market that rewards patience, discipline, and planning.

For long-term investors, this is a healthy environment. Returns may be more moderate than the strongest years of the past, but they are also more sustainable and often achieved with less risk.

The Bottom Line

The year ahead is not about chasing the hottest trend or timing the market perfectly. It’s about building resilient portfolios aligned with personal goals, supported by diversified investments, and guided by a long-term strategy.

In a world that finally feels more “normal”, the fundamentals once again matter. For investors who stay disciplined, 2026 offers a meaningful opportunity to make steady progress toward financial confidence and security.

At Trajan Wealth, we’re here to guide you through all of it with transparency, research-driven strategies, and advice that always puts you first.

Next Steps for Your Portfolio:Consult Your Advisor

If you’d like to review your portfolio, update your strategy, or simply talk about what 2026 may mean for you, we’re ready.