Often quoted in major national media, Adam is a Chartered Financial Analyst (CFA®), a CERTIFIED FINANCIAL PLANNER™ (CFP®), and has been included on the Forbes NextGen Best-in-State Wealth Advisors 2019 list. He is a member of the CFA Society of Los Angeles and the CFA Institute. Adam helps establish asset allocation strategy as a member of the EP Wealth Investment Committee, which supports all EP Wealth Advisors and their clients. The Committee’s top-down approach to portfolio construction begins with an outlook on the economy’s likely direction, followed by the implications for different economic sectors and asset classes. This culminates in strategic selection of the individual stocks, bonds, mutual funds or other investments deemed most appropriate for each individual client’s portfolio.
Market Update: Wrapping Up a Strong 2025 and Looking Ahead to 2026
As 2025 comes to a close, it has been an exceptionally strong year for investors across both stocks and bonds. Diversification and discipline were rewarded, and markets delivered solid results across asset classes. As we head into 2026, it’s worth reflecting on what drove returns this year and the key themes shaping the outlook ahead.
2025 Market Performance: A Year of Broad-Based Strength
U.S. equities delivered another strong year, with the S&P 500 up approximately 18% as of late December. This performance follows back-to-back years of 20%+ returns in 2023 and 2024 — making three consecutive years of 15%+ gains an extremely rare historical occurrence. Since the index’s inception in 1928, this has happened only three times.
International stocks outpaced U.S. markets in 2025, rising roughly 30% across both developed and emerging markets. A major contributor to this outperformance was a weaker U.S. dollar, which declined about 10% against major global currencies. This served as an important reminder of the value of maintaining global diversification, particularly after years of international underperformance relative to U.S. equities.
Fixed income also played its role. High-quality bonds, as measured by the Bloomberg U.S. Aggregate Bond Index, gained approximately 7% for the year — a strong showing that reinforced the benefits of balanced portfolio construction.
Valuations and Expectations Heading Into 2026
As we enter 2026, equity valuations remain elevated. The forward price-to-earnings ratio for the market sits around 23 times expected earnings, well above historical averages. While valuation alone is not a market-timing tool, it does matter for setting long-term return expectations.
One reason markets have held up despite higher valuations is strong corporate earnings growth. Earnings exceeded expectations throughout 2025, posting double-digit growth, and forecasts currently call for approximately 14% year-over-year earnings growth in 2026. If realized, this could support continued market gains. However, any disappointment relative to these expectations could introduce volatility.
A recent Bloomberg survey of 21 major market forecasters showed that all expect positive returns in 2026, with the average projection calling for roughly a 9% gain in the S&P 500. While encouraging, this also signals elevated expectations — and markets can be more vulnerable when optimism is widespread.
Key Themes to Watch in the Year Ahead
Several factors will be closely monitored as 2026 unfolds:
Staying Focused on the Long Term
After several strong years in a row, it’s important to acknowledge that markets rarely move in a straight line. Elevated valuations and high expectations can increase sensitivity to surprises. As always, maintaining a long-term perspective, staying diversified, and avoiding emotional reactions to short-term volatility remain key to successful investing.
We’ll continue to monitor these themes closely and are here to help guide you through whatever 2026 brings. Wishing you a Happy New Year, and we look forward to staying connected in the year ahead.
EP Wealth Advisors offers a comprehensive range of services to help you invest with greater insight, as well as develop a holistic wealth management strategy. To discuss your finances and investment goals, we invite you to contact one of our advisors.
Disclosures:
Video Summary:
Adam Phillips:
Well, I can't believe it, but the end of the year is nearly upon us. We are wrapping up 2025 here, and it's been a great year for investors, whether you're focused on stocks or bonds. So first in, in this in this last update of the year, I want to go through some performance figures, but I also want to spend some time at the end to talk about some of the themes that we're watching.
And, looking to play out here over the course of the next several months as we head into 2026. So starting with performance, 2025 was a year, as I said, in which both it, it was a good year for both stock and bond investors, and it was a year in which diversification and discipline were rewarded.
If we start with the large-cap stocks as represented by the S&P 500. We see a, a market that is up about 18% so far on the year, and that's through today. That's, that's through December 29th when we're recording. And so it's been a really good year for stock investors, but not to be outdone.
International stocks are up about 30%, and that's what you're focusing on. In developed markets or emerging markets outside of the us and so, it's been a really good year. We've talked about some of these catalysts, what has been, what's been driving that return that outperformance overseas. But one of the main catalysts is the decline in the dollar, the dollar off, about 10%.
Against other major currencies around the world. And so that's provided a nice boost to international investments. And that's one of the reasons that we continue to diversify this is, this comes after years of underperformance of international stocks versus the US. And so it's one of those reasons that you don't, you don't want to give up on diversification.
You always want to maintain that overseas exposure. And so this is one of those years in which we're certainly glad that we have it. Staying on that theme of diversification, let's look at fixed income. So high-grade, high-quality, fixed income or bonds, as represented by the Bloomberg Aggregate bond index in the US, have shown performance of about 7% through today, and so it's been a really strong year for fixed income and equity investors alike.
We're certainly happy about this. If we just go back to the performance of the S&P 500, that large-cap benchmark, I do want to acknowledge. That, as I said, is about 18% re return so far through today on the year, this comes following two years of 20% plus returns in both 2023 and 2024. And so I want to highlight the fact that three consecutive years of 15% plus returns in the S&P 500 is incredibly rare.
Going back to the inception of the index back in 1928. We see that this has only occurred three times, this being the third one, so it occurred during the late nineties and what ultimately concluded with that.com, a bubble bursting, and then it happened a few years ago, coming out of the COVID Pandemic, and so this is extraordinarily rare.
We know there are reasons for this, the performance of the stock market, but I, I mention that because it's also important to set our expectations that these things don't go on forever. So with that, let's talk a little bit about our outlook heading into 2026 and some of those themes that we're keeping an eye on.
So, just like the start of this year, 2025, we're going to be starting 2026 with valuations as measured by the forward price to earnings ratio. At fairly elevated levels at around 23, 24 times next year's earnings, or what we call forward earnings, and that is quite a bit higher than average. We always say that valuation alone is not a timing tool, but it's important to know.
Where you are and really understand your backdrop, your environment, because it does help to inform long-term return expectations. And so valuations are high. And because of that, we are really focused on a, on a, a couple of themes here to continue moving stocks higher, one of them being earnings growth.
One of the reasons that returns have held in so well here. Over the last year, despite elevated valuations is because earnings have really outperformed expectations, with double-digit earnings growth, and it looks like the market is expecting the same, looking in in 2026.
And I mentioned all that to help set our own expectations as we head into 2026.
I saw a recent Bloomberg article that looked at numerous forecasters. , across the world, across these major firms, and every single one of them, I believe the number was 21 forecasters. Each one of them actually expects the gains to continue in 2026. In fact, the average gain among them would be about a 9% return on the S&P 500 in 2026.
If you look at where their ending value is for next year. So I think that's positive. That's a great thing. But it also tells me that expectations are high, and that means that the market will be vulnerable to disappointment, perhaps more so than usual. And so what, what could end up disappointing investors here over the next several months, and over the course of 2026?
Well, one of them is corporate earnings. One of the reasons that the market has outperformed expectations in 2025 is that. Corporate earnings have grown well beyond expectations. They continue to beat expectations in spite of some of the headwinds that we've seen around inflation, around tariff concerns.
Corporate earnings have been very, very strong, and they're expected to continue to be strong in 2026. In fact. The current expectations are for year-over-year earnings growth in 2026 to be about 14%. If that comes to fruition, that will certainly help to justify the next leg higher in equity returns. But if it falls short of expectations, if we start to see analysts and companies start to ratchet, bad expect back expectations for future earnings growth, that could cause a little bit of a sell-off, or concern among equity investors.
So something to keep an eye on. Some other things that we're keeping an eye on heading into 2026 are one of the things that's top of mind for me is the fact that Jerome Powell's. The term as Fed chair will be coming to an end in May. And so we are waiting for an announcement from the Trump administration to hear about who will be nominated to replace him.
Currently, the odds are pointing to either Kevin Hassett or Kevin Walsh as well-known economists, and certainly.
It wouldn't surprise me to see the market continue to respond as we get updates on who might be the next leader at the Fed, because ultimately that has an impact on expectations for monetary policy in the future of short-term interest rates. Which then impacts inflation expectations.
So a lot of this is related at the same time. Just taking a step back and looking at the broad economy, we know that inflation is still a concern, but perhaps more so, there are concerns around the jobs market. We've seen the job market soften in recent months. The unemployment rate has risen to 4.6%, so still.
Not too high, but it's drifting in the wrong direction. And so there will continue to be questions about the, the softening labor market and what impact that could have on the outlook for the consumer. For now, we do expect the economy to continue growing in 2026. We believe that the odds of a recession are very, very low, and part of that is supported by.
Not just the fact that we've seen a few rate cuts by the Federal Reserve, but we're also going to see some meaningful fiscal stimulus in 2026 that comes to us through the OBBB, which is the, the one big beautiful bill act, which will go into effect next year. So there are some positive headwinds here.
The last issue that we're keeping an eye on. Are tariffs. This is something that we've been talking about for what seems like forever. It's certainly gone back since April of this year, and it's likely to remain top of mind for many of us. Right now. We're all waiting for a ruling from the Supreme Court on the Trump administration's use of IEPA.
These are the emergency powers that he exercised to put these tariffs in place several months ago. And so the question is, was this. Was this actually a, a breach of his authority? Will they look to roll these back? In which case, we might see tariff uncertainty come back into the picture at least for a little bit.
We expect a ruling in late January, perhaps early February. And at that time, if these are scaled back and if the Supreme Court does rule against him, then these tariffs would likely be replaced, um, by other tariffs. Let's remember that President Trump and presidents in general do have.
Unilateral authority when it comes to trade policy. They have a lot of discretion there, and so he would likely look to replace these tariffs fairly quickly, but at least in the interim, it would throw a lot of uncertainty into the picture, and the market might respond to that.
I do think it's important to highlight the fact that it's a midterm election year. Year, because midterm election years do tend to be more volatile.
This is important, especially coming off very strong. Years in the market, we see that valuations are now, again, at quite elevated levels, and so vulnerable to surprises, vulnerable to disappointment. Going back in history, we've actually seen that the average entry year decline in the midterm election year is about 19%.
In years one, three, and four of a presidential term, the average annual decline on the S&P 500 is 12%. And that just tells you there's a little bit more volatility in midterm election years. That's not to suggest that the market's going to be down next year. It just means that, look, we've had some really strong years in the market, let's just acknowledge that and know that it's not always smooth sailing.
Um, so next year, just like this year, it's going to be really important to stick to your long-term discipline. Try not to deviate. If you are if you do encounter vol volatility, stick to that long-term plan, and we'll certainly be there to help you along the way. If that does happen, I'll leave it there for right now.
I'll look forward to seeing you again in 2026. Happy New Year.