Fourth Quarter 2025 Quarterly Market Recap & 2026 Outlook

The fourth quarter of 2025 capped off a resilient year for U.S. equities, with major indices posting positive returns amid moderating economic growth, persistent inflation pressures, and a cautious Federal Reserve. The S&P 500 advanced approximately 2.7% in Q4, contributing to a full-year gain of around 18%, driven largely by technology, AI, and communication services sectors. This represents the third consecutive year of double-digit gains.

Despite headwinds from policy uncertainty and a projected economic slowdown, markets climbed a "wall of worry," with investors rebalancing portfolios and corporate optimism supporting rallies. Key risks heading into 2026 include potential policy shifts, below-trend GDP growth, and inflation drifting above the Fed's target.

As we enter 2026, we believe the global economy should transition to a period of improved economic stability as the path of global trade become clearer. We believe the US equity market should experience measured progress amid a resilient yet evolving economic landscape. In 2026, US equity returns should be driven by fundamentals, particularly earnings growth, rather than further valuation multiple expansion, as current multiples are already above long-term averages. Importantly, corporate profit margins are set to improve in 2026, as companies benefit from operational efficiencies, AI productivity gains (albeit on low adoption rates), and moderating input costs. Additionally, financial conditions are expected to become easier than in early 2025 (see charts below).

Inflation is forecasted to continue its downward path in 2026, easing from elevated levels in 2025 toward the Federal Reserve's 2% target, though it may remain sticky due to wage pressures and tariff effects. The largest component of the US CPI Index: shelter, which comprises about 40% of the index and includes owners’ equivalent rent, is expected to decline in 2026 (see chart below).

This downward trajectory should allow the Federal Reserve to continue its gradual rate cuts, potentially bringing the target range towards 3.25% by mid-year, allowing for a more accommodative environment for risk assets. The US labor market is expected to weaken modestly in 2026, with unemployment rising and hiring slowing, reflecting a cooling from the tight conditions of prior years.

US economic growth is expected to remain solid in 2026, reflecting a resilient economy that avoids recession despite headwinds from tariffs and fiscal policy adjustments. Additionally, economic growth in 2026 is anticipated to broaden beyond the technology and AI-driven sectors, with increased contributions from cyclical areas such as manufacturing, materials, energy, and industrials, buoyed by infrastructure spending and easing monetary policy. This broadening should reduce market concentration risks (i.e., Information Technology) and support more diversified equity performance, including small and mid-cap cyclical sectors of the economy.

As 2026 unfolds, we remain focused on identifying businesses that are trading below their intrinsic value and offer compelling investment opportunities in the long run. At Oliver Luxxe, we believe our “Private Equity in the Public Marketplace” investment framework allows us to identify businesses that have strong balance sheets, sustainable cash flow generation and compelling reinvestment opportunities. We will seek to utilize market volatility and uncertainty to improve the quality of our clients’ portfolios over the next three to five years.