Stock Investors Enjoy Another Banner Year

For the third year in a row, stock investors had reason for a celebratory year-end toast. The year started strong with the S&P 500 jumping 2.7% in January on strong earnings reports and anticipation of a more business-friendly administration. However, stocks spiraled lower in March and April on concerns that the President’s tariff policies would slow the economy and push inflation higher. Stocks bottomed out in early April, down nearly 19% from their peak in February. But strong corporate earnings, interest-rate cuts, and lower-than-feared inflation helped stocks recover lost ground and post seven consecutive monthly gains. Overall, the S&P 500 returned nearly 18% for the year. And gains were widespread, with banks, utilities, industrials, and technology stocks all posting strong returns.

Bond investors also had reason to cheer. Bonds had struggled to generate much return since pandemic-driven rate cuts pushed prices higher and bond yields to near zero in 2020. Subsequent rate hikes kept pressure on bond returns but normalized bond yields. Entering 2025, the 10-year Treasury yield sat at 4.6%. That yield provided a nice base return, while soft job reports, steady inflation, and three rate cuts helped bond prices edge higher. For the year, the Bloomberg Aggregate Bond Index returned 7.3%. Specific actively-managed funds fared even better. Notably, PIMCO Income returned 11.0% and Eaton Vance Strategic Income returned 12.5%.

Stock and bond prices enter 2026 a bit off their peak. The S&P 500 hit a record close December 24ᵗʰ but ended the year on a four-day losing streak. Aggressive tax-loss selling and gain harvesting weighed on prices. Meanwhile, the release of the Federal Reserve’s December meeting minutes failed to excite. The minutes showed a divided Fed and suggested the Fed’s next interest-rate cut may not come until spring.⁶ Indeed, CME’s FedWatch tool shows the odds of a rate cut don’t get over 50% until the April 29ᵗʰ Fed meeting. That said, any number of economic reports between now and then could push the Fed to lower rates sooner than later.

As with every year, we’ll start this one with more questions than answers. Will the Supreme Court rule in favor of the President’s tariffs? Who will take over as Chair of the Federal Reserve? Will SpaceX be the biggest IPO of all time? Will the AI boom continue? Will out-of-favor sectors like staples and real estate remain out of favor? Will overseas stocks continue to outperform domestic stocks? The answers to those questions and many more will come, some sooner than later. But for now, we’ll celebrate what was a winning year for both stock and bond investors. Cheers!