INSIGHTS

  • Market Outlook

Fourth Quarter 2025

The economy will have broad-based stimulus to start the year with Fed cuts and fiscal support including outsized tax refunds and favorable tax treatment for capital investments.

Investment Summary

The Fed lowered interest rates three times in the fourth quarter, spurring equity markets to a strong finish. Returns were broadly positive, with the S&P 500 closing the year up 17.86% to produce annualized returns of 22.9% over three years and 14.5% over five years as of 12/31/25.

The Health Care and Communication Services sectors gained the most in the quarter, while Real Estate and Utilities were the only sectors to lose ground. Throughout the year, market leadership was similar to 2023 and 2024 with large-growth the top performing style and size category and Communication Services and Technology the top performing sectors. International stocks performed well aided by central bank action and a weak dollar, which fell 8.1%.

Bonds were supported by monetary policy as rates fell across most maturities. The 10-year Treasury fell 0.40% throughout the year to land at 4.17%, while the average fixed-rate 30-year mortgage fell by more than 1% down to 6.26%. The market is expecting two to three more 0.25% cuts in 2026.

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Economy and Markets

The Fed switched their focus from inflation to the slowing labor market by resuming their easing cycle in the fourth quarter. Since September of 2024, the Fed has reduced the short-term Federal Funds Rate six times for a total reduction of 1.75%. The unemployment rate is expected to drift higher, not spike, allowing the Fed to move methodically, putting a cap on inflation and the 10-yr yield.

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The economy will have broad-based stimulus to start the year with Fed cuts and fiscal support including outsized tax refunds and favorable tax treatment for capital investments. Tariff uncertainty has narrowed, allowing companies to better plan their capital investments. Enterprise adoption of AI is expected to lead to productivity growth that can help grind down inflation. Finally, deregulation is expected to aid profits for struggling small and medium-sized companies.

The AI investment theme has led to exceptional returns from the Technology and Communication Services sectors over the past three years. A year into the easing cycle, a sustained rotation towards broader stock leadership could be driven by improving housing, manufacturing PMIS, and earnings revisions. The fundamental profit outlook is good. The S&P 500 is expected to grow earnings by 15% following a 10% jump in 2025. While relative valuation is historically high, most sectors are expected to contribute positively. Additionally, small and medium-sized companies are also expected to grow earnings after three lean years, while international companies provide investors with attractive valuation and diversification opportunities outside of the US.

Tariff uncertainty and rapidly shifting policy changes significantly impacted investor sentiment throughout 2025, and at times during the first half of the year, markets briefly approached bear market territory. Yet both stocks and bonds finished the year with strong results, supported by accommodative monetary policy and targeted fiscal measures. In a year marked by volatility and competing narratives, the experience underscored the importance of diversification, discipline, and staying invested in the pursuit of long-term objectives. Looking ahead to 2026, markets are entering the year with improving economic fundamentals, more balanced leadership, and a supportive policy backdrop.

Disclosures

Tandem Wealth Advisors LLC (“Tandem”) is an SEC-registered investment adviser. The information published herein is provided for informational purposes only and does not constitute an offer of investment advisory services. All information is subject to change without notice. Nothing contained herein constitutes financial, legal, tax, or other advice. No investment process is free of risk, and investors may lose all their investments. Past performance is not indicative of current or future performance and is not a guarantee. The opinions expressed in this document may not fit your risk and return preferences. The information provided is obtained from sources believed to be reliable, but we cannot attest to its accuracy. Past performance is not necessarily indicative of future returns. Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations or comparable terminology. Due to various risks and uncertainties, actual events, results, or performance may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained herein may be relied upon as a guarantee, promise, assurance, or a representation of future events or conditions. Additional copies of Tandem’s ADV Part 2A and/or Privacy Policy are available upon request by phone at 602-297-8600 or by email at [email protected].

Index Definitions

The S&P 500 Index measures the performance of the large-cap segment of the U.S. equity market. The S&P MidCap 400 Index measures the performance of the mid-cap segment of the U.S. equity market. The S&P SmallCap 600 Index measures the performance of the small-cap segment of the U.S. equity market. The Nasdaq 100 is a basket of the 100 largest, most actively traded U.S. companies listed on the Nasdaq stock exchange. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity market. The MSCI World Ex USA Index captures large- and mid-cap representation across 22 of 23 developed market countries, excluding the U.S. The MSCI Emerging Markets Index captures more than 1,400 large- and mid-cap securities in 24 countries spanning five regions. The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market. The Bloomberg Barclays Investment Grade Corporates Index measures the investment-grade, fixed-rate, taxable corporate bond market. The Bloomberg Barclays Corporate High Yield Index measures the U.S. dollar-denominated, high-yield, fixed-rate corporate bond market. The Bloomberg Barclays Investment Grade U.S. Convertibles Index tracks the performance of investment-grade, U.S. dollar-denominated convertible securities. S&P 500 Sectors measure segments of the U.S. stock market as defined by GICS®. All index performance data sourced from Bloomberg.

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