January 3, 2026 Market Update

Market Recap: Stay Calm and Carry On

Stocks finished the holiday-shortened trading week on a calm note as Mr. Market caught his breath after a hectic year.  Trading was lighter than usual, and while there were pockets of traditional profit-taking, selling pressure remained limited. 

In the bond market, prices held onto the gains built earlier in the year.  Yields were little changed, and credit markets remained stable through the end of the week.

Last week’s market activity suggests investors are entering 2026 with cautious optimism.  History, however, offers a reminder that expectations can shift quickly as unexpected developments emerge.  Accordingly, it is important that investors who want to limit downside risk remain diligent as the year unfolds.

 Market Performance

Market Commentary.  Taking Stock of a Strong Year

2025 was very good for stocks, with major market indexes finishing just below record highs, even after the usual bouts of year-end profit-taking.  It was also a positive year for bonds, despite lingering inflation concerns.  As a result, diversified portfolios that manage risk by investing across both stocks and bonds delivered solid gains.

Given the S&P 500 has averaged about 13.6% annually from late 2019 to late 2025 (with even higher returns for the tech-focused Nasdaq), it’s not particularly surprising that Wall Street analysts are overwhelmingly bullish for 2026.  A primary driver of optimism is the expectation for robust corporate earnings, projected to grow around 14.5% to 15.5% for the S&P 500 in 2026, well above the historical average.

History, however, suggests that Wall Street forecasts for the upcoming year should be greeted with skepticism.  A softening labor market, stubborn inflation, trade tensions, affordability pressures, uncertainty around Federal Reserve policy, concerns about an AI-driven investment bubble, and ongoing geopolitical risks all have the potential to disrupt today’s expectations.  Fortunately, diversification and systematic investment strategies remain effective tools for those who wish to participate when stock prices are rising while helping guard against abrupt shifts in direction.

In Case You Missed It:  A Strong Year for Diversified Portfolios.

The S&P 500 returned approximately 18% in 2025, marking its third consecutive year of double-digit gains.  Meanwhile, the Bloomberg U.S. Aggregate Bond Index posted a solid return of about 7%.