Opening the year with a panoramic look at the forces that defined 2025 and identifying the macro themes — inflation persistence, geopolitical uncertainty, and private credit expansion — most likely to drive 2026 returns.
From the original report
Selected passages from the original publication. Historical observations reflect the report's publication date, not current market advice.
1) Where are the jobs? – This is a two-level question, since reported data suggest that not many jobs are being added, while noise from the government shutdown renders the data itself quite murky – casting uncertainty as to whether this reportedly anemic level of job creation is indeed accurate. Reports from Q1 2026 will likely provide a clearer picture and should reveal just how severe the current jobs crisis truly is.
2) What they do vs. what they say – Numerous FOMC member comments, including from outgoing Chair Powell himself, seem to routinely cast doubt on the likelihood of ongoing rate cuts. Yet when the actual FOMC meetings come around, the Committee has delivered rate cut after rate cut, despite these public protestations. If recent, admittedly noisy, data (see above) are to be believed, then further rate cuts will be needed to support an employment market that may be enduring a structural shift due to AI and LLMs.
3) Cheap Energy – Dutifully responding to the POTUS’s expressed wishes, oil prices – which began the year in the $70s – are ending the year in the $50s. Energy costs are an input into essentially every good or service and could provide a further disinflationary pulse next year, if current levels hold, making further interest rate cuts more palatable.
Are equity valuation levels even worse than they were at the beginning of this year? Not really. A significant percentage of this year’s market rise was due to earnings growth rather than to multiple expansion. According to Bloomberg*, trailing 12-month S&P 500 earnings through Q3 2025 are already up almost 14% versus full-year 2024 levels. With Q4’s growth still ahead of us, valuation levels coming into 2026 could, in fact, be quite similar to where they were coming into 2025.
When will markets broaden out beyond the AI and large-cap technology theme? To some extent, they did in 2025: industrials, financials, utilities and health care all saw strong returns. International shares outperformed U.S. shares, and alternative assets such as gold saw prices surge. At the same time, the top four contributors (all of which were tech companies) generated roughly 40% (!!) of index returns* (an astounding level of concentration) and small-cap shares lagged their larger peers. On balance, diversification proved helpful this year, and we expect this to continue as benefits begin to accrue to the users of AI and not just to the providers thereof.
For educational purposes only; not individualized investment, tax, or legal advice. Investing involves risk, including loss of principal.
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