The 2025 economic landscape was heavily influenced by the new administration’s fiscal, trade, and immigration policies. However, a resilient U.S. economy not only avoided recession, it also proved to be stronger than anticipated. It recovered nicely from a contraction in the first quarter, growing at a rate of 3.8% in the second quarter. While the government shutdown has delayed the third-quarter data, growth of 3.9% is estimated. Full-year 2025 Gross Domestic Product (GDP) is now being estimated at 1.8%–2.4%.
Increased concerns over the softening of the labor market and the health of the U.S. economy led the Federal Reserve (Fed) to begin cutting interest rates in the latter part of the year. A third consecutive 25 basis-point reduction was announced in December, along with guidance that another rate cut is likely during 2026. The labor markets and inflation remain a key concern, while inflation continues to stubbornly hold above 2%. The unemployment rate, while historically low, is now around 4.6%, up from 3.5% at the start of the year.
Uncertainty surrounding the broad new tariff policy and potential trade wars affected the stock landscape throughout much of the first half of the year. This resulted in increased volatility and declines in the market in February and again in April. Ongoing negotiations and a pause in many of the announced tariffs quickly led to a rebound in stock prices and to the S&P 500 Index reaching new highs by early July.
The rebound, along with a backdrop of strong corporate earnings, continued AI exuberance, and a stronger-than-anticipated economy paved the way for growth in stocks throughout the second half of the year. As we approach year-end, the S&P 500 Index is up slightly more than 15%, marking the third consecutive year of gains, following returns of 21% in both 2024 and 2023.
S&P 500 companies are expected to report double-digit earnings growth for the second-straight year, with an estimated year-over-year growth rate of 12%. The “Magnificent 7” technology companies (Alphabet, Amazon, Apple, Meta, Microsoft, Netflix, and Nvidia) continued to be a significant driver of overall index performance, with expected earnings growth of 22%.
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I hope everyone enjoyed a wonderful holiday season and wish you a happy, healthy, and prosperous 2026.