2025 Financial Year in Review and The 2026 Market Outlook

Fed Easing Should Continue 

The Federal Reserve has been cutting interest rates since September 2024 and is widely expected to continue its easing cycle into 2026. The Fed has a tough job, with two mandates--full employment and low inflation—which have been moving in opposite directions. The job market has softened, and there are growing concerns that artificial intelligence will result in many more job cuts in the future.  However, inflation has remained elevated for longer than expected. 

The recent government shutdown has further complicated the Fed’s job. Government-tracked economic data stopped being produced during the shutdown, forcing Fed officials to make decisions in a vacuum.  Much of that data still won’t be available when the Fed meets in early December. Also, government workers were furloughed during the shutdown, which will muddy the picture by temporarily inflating the unemployment numbers for October and November. 

About a month ago, markets had priced in an interest rate cut by the Fed in December. Those odds have come down sharply in recent days and weeks to roughly 50/50. If the Federal Reserve doesn't reduce rates in December, it likely will do so early in the new year, which should prove supportive for stocks. Much will depend on the economic data coming in over the next few weeks.

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Earnings Provide Support

One of the bright spots of 2025 has been the strong earnings growth reported by S&P 500 corporations. Companies in the index have just about finished reporting Q3 results and earnings appear to have grown roughly 13% y/y. That's far better than the 8% analysts expected. Solid earnings growth should continue, with analysts forecasting Q4 earnings growth of 7.7% followed by14% earnings growth in 2026. 

The technology sector continues to produce the strongest earnings growth. Over the next 12 months, the sector’s earnings are expected to grow by 21%, well above the earnings growth forecast for other S&P 500 sectors and higher than the 12.8% earnings growth forecast for the S&P 500. While volatility has certainly picked up in recent days and weeks, we continue to maintain our long-term thesis that high-quality tech companies will outperform over the long run due in part to their earnings growth potential. 

Technology stocks account for more than a third of the S&P 500’s market capitalization. Concentration risk can be minimized by investing in diverse, actively-managed, high-quality funds and rebalancing portfolios periodically. 

Looking Abroad for Diversification

Lofty US stock valuations have also been on our radar. The forward PE of the S&P 500 is north of 22, a level often followed by a market pullback. Once again, technology stocks are often to blame. The seven largest technology stocks in the S&P 500—often called the Magnificent 7—have a collective  P/E of about 28x while the 493 remaining stocks in the S&P 500 sport a much more reasonable valuation of 16x. 

One way to diversify portfolios is to invest in international stocks.  Stocks in China, emerging markets, the European Union, and Japan have lower price-to-earnings multiples, ranging from 13.6 to 16.2, than US stocks have. Yet they’ve outperformed US stocks, with Chinese stocks up 29.9% so far this year, followed by emerging market stocks, 25.6%, EU shares, 15.9%, and Japan’s stocks, 18.4%, based on MSCI local-currency indexes.

Government Should Provide a Tailwind

For much of Q4, investors were concerned about the government shutdown.  Now that the government has reopened, investors can again focus on some of the benefits that President Trump's One Big Beautiful Bill Act should confer upon Americans. Lower taxes and additional fiscal spending should support consumer spending and economic growth as 2026 begins. Perhaps it will improve consumer sentiment, which has been downright gloomy as the negative impact of inflation appears to have offset the benefit of stocks near record levels.

We’d be happy to discuss our thoughts on the economy and the markets in greater detail. Contact us for a complimentary consultation at whzwealth.com or call (860) 928-2341. Let's create a plan that provides "Absolute Confidence. Unwavering Partnership. For Life." 

Authored by WHZ Strategic Wealth Advisors Senior Partner & Chief Investment Officer Laurence Hale, AAMS®, CRPS® and Senior Partner, Chief Strategist James Zahansky, AWMA®. AI may have been used in the research and initial drafting of this piece. All indices are unmanaged, and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.

Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. 697 Pomfret Street, Pomfret Center, CT 06259 and 392-A Merrow Road, Tolland, CT 06084, 860.928.2341. http://www.whzwealth.com. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your financial advisor. WHZ Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice.