Markets At A Glance
U.S. equity markets closed out 2025 with continued momentum, with double-digit returns for the eighth time in the past 10 calendar years. Large-cap stocks, particularly technology and AI-related companies, remained the primary drivers of returns, while small-cap stocks showed intermittent strength but lagged overall. International equities benefited from improving economic conditions abroad and rotation from U.S. equities, along with tailwinds from a declining U.S. dollar. The bond market reacted positively to three quarter-point rate cuts in 2025, supported by easing inflation pressures and slowing job growth.
Economic Backdrop
Economic growth moderated but remained resilient as 2025 came to a close. Consumer spending slowed from the robust pace earlier in the year, reflecting higher borrowing costs and lingering inflation pressures, yet households continued to spend on services and travel. Business investment remained constructive, particularly in technology, infrastructure, and automation, helping offset weakness in more interest-rate-sensitive areas such as housing.
The labor market continued to cool. Job growth slowed compared to earlier in the year, and wage growth normalized, while unemployment remained relatively low.
Inflation and Interest Rates
Inflation continued to trend lower in the fourth quarter, though progress remained uneven. Core inflation stayed above the Federal Reserve’s long-term target, reinforcing the Fed’s cautious, data-dependent approach. After initiating rate cuts earlier in 2025, policymakers emphasized balancing inflation risks with signs of slowing economic growth.
Market expectations currently reflect additional, measured rate cuts in 2026, assuming inflation continues to ease and economic growth softens modestly.
Market Valuations
The Shiller CAPE (Cyclically Adjusted P/E) ratio is flashing warning signs. It uses inflation-adjusted earnings per share (EPS) averaged over 10 years to adjust for economic cycles. It is currently just over 39. The only time it was higher was in 1999, when it was near 44, right before the tech bubble. History may not always repeat itself, but it does rhyme.
Policy and Global Considerations
Policy developments and geopolitical risks remain a source of uncertainty. Greenland and Venezuela are taking the spotlight, but Ukraine and the Middle East are not nearing clear resolutions either. Some trade-related concerns eased in 2025. However, the ever-changing implementation of tariffs as to their timing and amounts, and their longer-term impact on inflation and global growth, remains an important variable. Internationally, growth stabilized across parts of Europe and emerging markets, contributing to improved performance outside the U.S.
New Year, Same Perspective
Diversification remains essential as we head into the New Year. While U.S. equities delivered strong returns in 2025, international stocks and high-quality bonds continue to play an important role in managing risk and smoothing volatility. As conditions evolve, we will continue to rebalance portfolios, manage risk thoughtfully, and pursue opportunities aligned with long-term goals.
As always, we are here for you. Please do not hesitate to reach out with any questions about the markets or your portfolio.
Wishing you all a very Happy New Year!
Your team at Platt Wealth Management