December didn’t develop a Santa Claus rally. The S&P 500, NASDAQ and Russell 2000 finished in the red. The DOW turned in a positive print for the month. Markets finished positively, with double-digit gains, for a third straight year. This has only happened six times since the 1940s.
AI enthusiasm drove the 2025 positive market narrative. Interest rate cuts from the Fed, as well as more anticipated cuts to come, supported equities. Corporate earnings through Q3 were excellent, solidifying the “risk on” mantra.
Financials (+3.23%), Materials (+2.14%) and Industrials (+1.31%) were December’s sector winners. Bringing up the rear were Utilities (-6.33%), Real Estate (-2.86%) and Consumer Staples (-2.02%).
S&P 500: Dec -0.05% 2025 +16.39%
DOW: Dec +0.73% 2025 +12.97%
NASDAQ: Dec -0.53% 2025 +20.36%
Russell 2000: Dec -0.74% 2025 +11.29%
Sector Performance 2025:
Communication Services +32.41%
Consumer Discretionary +5.31%
Consumer Staples +1.32%
Energy +4.96%
Financials +13.32%
Healthcare +12.53%
Industrials +17.70%
Technology +23.31%
Materials +8.43%
Real Estate -0.35%
Utilities +12.69%
Current U.S. Treasury Yields:
6 Month Bill 3.57%
2 Year Note 3.47%
5 Year Note 3.70%
10 Year Note 4.17%
30 Year Note 4.86%
The Economy and the Fed:
Private payrolls added 41,000 jobs in December, below the 48,000 estimate. This is viewed as a positive for the labor market. The unemployment rate is expected to print at 4.5%, down from 4.6%. Another encouraging data point.
The U.S. economy is expected to grow at least 2% in 2026. GDP estimates for Q4 2025 are at 3%. This indicates a strong economy with continuing momentum.
A new Fed Chair is on the horizon. The market believes that bodes well for perhaps more rate cuts than forecast. Street estimates are for two quarter point rate cuts for 2026. However, should unemployment rise unexpectedly, that would dampen the outlook.
There are two problems that could materialize for market investors in January. 1.) A government shutdown. This would be impactful and not only to markets. We believe cooler heads will prevail. 2.) The Supreme Court rules against the Trump administration’s tariffs. We doubt such a ruling would be an immediate action item. Most likely we would see the issue head to congress for moderation or approval.
Looking Ahead:
Market analysts project the S&P 500 to finish 2026 in a range from 7,100 (+3.71%) to 8,100 (+18.32%). Quite the range! Estimated Q4 earnings are expected to hit an 8.3% growth rate year-over-year. Analysts estimate the 2026 growth rate to be 15%. We believe these projections to be on the high side. The S&P 500 is currently trading at a 21.8x forward P/E multiple.
We judge 2026 will be another positive performance year. Rates will continue to head lower. Corporate capex will remain robust. The market should further broaden out, particularly into Energy, Healthcare and Materials. Financials stay strong. Consumer Discretionary remains resilient with a strong consumer.
Expect market volatility in 2026. Mid-term elections, tariff disposition and perhaps new global macro issues will require adjustment. Our view is that equities remain in the driver’s seat. We maintain a strategy for portfolios that is long in large-cap U.S. equities, both value and growth. Strong corporate results and increased earnings will support.