The S&P 500 Index delivered another strong year in 2025, achieving a 17.88% total return and extending a multi-year stretch of gains. Along the way, markets navigated volatility driven by tariff uncertainty, geopolitical tensions, a government shutdown, and shifting expectations around Federal Reserve policy. Despite an 18.9% decline following the "Liberation Day" tariff announcement, U.S. equities ultimately finished the year near record levels, supported by solid corporate earnings, enthusiasm around artificial intelligence, and declining interest rates.
Tariffs and expectations for lower interest rates contributed to periods of U.S. dollar weakness during 2025. That environment helped developed international and emerging-market equities outperform U.S. stocks for the year. However, over the past three years, U.S. large-cap stocks have still produced stronger cumulative returns. At Virtue Asset Management, we continue to view U.S. equities as more attractive than foreign and emerging markets over the long term, supported by stronger corporate earnings, innovation, and generally lower levels of regulation and taxation.
One historical pattern worth monitoring is the presidential election cycle. Historically, the second year of a presidential term has experienced the largest stock market decline, with the S&P 500 falling by 19.4% on average. After three strong years and valuations near all-time highs, the probability of a market pullback in 2026 increases. Importantly, these declines have often turned into compelling opportunities, with the market historically averaging roughly a 31% return in the year following a correction. With that in mind, we recommend investors maintain approximately twelve months of spending needs in cash, so they are not forced to sell during a downturn.
Artificial intelligence remained one of the dominant themes of 2025. AI has the potential to meaningfully boost productivity over time : allowing our economy to produce more with fewer resources. If those gains materialize broadly, they could help keep inflation in check by lowering labor and operating costs across many industries. Large technology companies continued to invest heavily : an estimated $300–$400 billion : in AI infrastructure and software, and current trends suggest this spending will likely continue into 2026. Investors are increasingly focused on how companies fund that investment, with firms relying on internal cash flow generally in stronger positions than those dependent on debt. A key question going forward is whether AI becomes more commoditized, potentially pressuring profit margins for companies that cannot meaningfully differentiate their products or services. We continue to favor businesses that can finance growth with cash flow and develop high-margin software and AI solutions with durable competitive advantages.
Interest rates also played a major role in 2025. The year began with the 10-year Treasury at 4.57% and the 1-year Treasury at 4.17%. Rates peaked early and then moved lower as expectations for Federal Reserve cuts increased. The Fed ultimately lowered the federal funds rate by 0.25% in September, October, and December, bringing the target range to 3.50%–3.75%. The 10-year ended the year at 4.17% and the 1-year finished at 3.52%. This decline in yields produced a 7.30% total return for the Bloomberg U.S. Aggregate Bond Index : the strongest bond performance since 2020.
Looking ahead, markets expect two to three additional 0.25% rate cuts, which would place the federal funds rate in the 2.75%–3.25% range by the end of 2026. Another important dynamic is leadership at the Federal Reserve. The current Chair's term expires in 2026, and markets broadly expect President Trump to nominate a Chair perceived as more inclined to cut rates more aggressively. However, the Chair does not set policy alone. Decisions require majority approval from the Federal Open Market Committee, which includes other governors and regional bank presidents focused on inflation, financial stability, and long-term credibility. Any push toward faster rate reductions will still require broad support.
We are watching the 10-year Treasury closely, because long-term rates do not always move in step with Fed policy. Increased federal spending or a Supreme Court decision invalidating most tariffs could push yields higher. If the 10-year Treasury yield were to move above 4.5%, we believe that would likely become a headwind for equities and could contribute to a market pullback.
Policy developments may also influence the economic outlook. Potential adjustments to financial regulations : particularly capital surcharge requirements for large banks : could release capital back into the system and lower financing costs. In addition, several tax incentives scheduled to begin in 2026 may support corporate capital investment and consumer spending. The economy could also benefit from major national events, including the country's 250th anniversary celebrations and international sporting events hosted in the U.S., such as the World Cup.
| Index | 2025 Return |
|---|---|
| S&P 500 | 17.88% |
| S&P 500 Growth | 22.08% |
| S&P 500 Value | 13.17% |
| S&P Mid Cap 400 | 7.50% |
| S&P SmallCap 600 | 10.36% |
| International Equities | |
| MSCI EAFE | 31.22% |
| MSCI Emerging Markets | 33.98% |
| MSCI China | 26.50% |
| MSCI India | 2.68% |
| Fixed Income | |
| Bloomberg US Agg Bond | 7.30% |
| TIPS Bond | 6.77% |
| iShares iBoxx $ High Yield Corp | 8.05% |
Analysts currently expect S&P 500 earnings to grow by 18% in 2026 compared to 2025, creating a constructive backdrop for equities. Today, the S&P 500 trades at approximately 22 times estimated 2026 earnings, slightly above the 10-year average of 21.76. Because valuations are elevated, we do not expect multiple expansion to be the primary driver of returns. Instead, we believe market gains will need to come from earnings growth and from taking advantage of opportunities that arise during periods of volatility.
Historically, the second year of a presidential term has often included meaningful pullbacks : but when fundamentals remain solid, those periods have also created attractive entry points. We expect volatility in 2026, but we also expect the S&P 500 to ultimately finish the year with positive returns. For that reason, we continue to recommend that investors maintain roughly twelve months of expenses in cash equivalents, so portfolios are positioned to benefit from volatility rather than be disrupted by it.
Strategic Positioning for 2026
As we enter 2026, our investment management services remain focused on helping clients navigate different market cycles through disciplined investment planning. Whether you’re working with a financial advisor in Chicago or seeking guidance in surrounding communities such as Barrington, Glenview, or Oak Park, maintaining a long-term, consistent approach is especially important during periods of uncertainty.
Our team continues to emphasize the importance of working with a fiduciary financial advisor who is legally obligated to act in clients’ best interests when providing advisory services. This is particularly critical during volatile markets, when emotion-driven decisions can distract from well-constructed financial plans and long-term objectives.
For individuals and families seeking comprehensive wealth management solutions, 2026 presents both challenges and opportunities. Elevated market valuations, potential policy changes, and the continued integration of artificial intelligence across industries highlight the need for thoughtful portfolio construction and ongoing monitoring.
As we navigate the year ahead, our commitment remains unchanged: providing transparent, fee-only advisory services designed to prioritize long-term financial objectives over short-term market noise.
Investing involves risk, including the possible loss of principal and fluctuation of value. Past performance is no guarantee of future results.
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