January 2026
US Economy: Depends on your address.
The US economic picture continues to look mostly healthy but perception is largely dependent on consumer income. The most recent annualized estimate for Q3 real GDP growth (+4.3%) marked an acceleration whereas the Fed’s GDPNow forecast for Q4 (+3.0%) remains robust. Still, for lower income brackets, inflation is a headwind (+2.7% CPI Dec.), mortgage applications are declining (-3.8% Dec.), unemployment is ticking up (4.6% Dec.) and wage growth is cooling more rapidly.
US Stocks: Rising interest rate margin benefits banks.
US large cap stocks posted a modest but positive return in December reaching new record highs and capping off a third consecutive calendar year in the double digits. Financials were among the strongest performers (+3.7%), driven by continued yield curve normalization, attractive valuations and the worst-case economic outcomes appearing to be off the table. The Magnificent 7 also performed well in total but driven largely by Nvidia (+6.7%) which received China chip sales clearance.
Foreign Stocks: Most impressive year since ‘09.
Both emerging and non-US developed stocks well outpaced US stocks in December giving international markets the best calendar year performance relative to US stocks in more than a decade. After rebounding through much of the fall, the US dollar finished the year down more than 9% which was a factor contributing to the outperformance but not the sole reason. That said, investor sentiment and capital flows generally favored overseas assets over the course of 2025.
Fixed Income: Treasury yields rise in early December.
While the 10-year US Treasury yield rose to 4.2% at the end of December alongside somewhat rosier economic growth and inflation expectations for 2026, shorter maturity yields fell, pricing in a bit more accommodative policy from the Fed. US bonds posted some of their best returns since 2020 with rates falling during the year. With fewer Fed rate cuts projected in the months ahead and inflation still elevated above target, returns are less likely to be as robust in 2026.
Real Assets: Gold remains the champ.
Real assets results were generally muted in December with one notable exception. Precious metals continued a strong run with gold (+3.5%) maintaining a substantial advantage over other investments in the category, benefiting from US dollar weakness and policy uncertainty. Elsewhere, infrastructure equities, including both traditional and renewable energy, struggled as investors rotated away from more defensive positions in favor of riskier assets.
Alternatives: Crypto winter.
Many hedge fund strategies posted modest results during the year that featured returns somewhere in the bond like spectrum (as expected during a year with strong equity performance), or as in the case of private equity, showed incremental improvements in valuations with the support of better transaction activity. However, crypto and digital assets were volatile and performed poorly with greater financial market uncertainty providing less support than other perceived stores of value such as gold.
Source of data: Bloomberg
Equities Total Return
| DEC | 3 MO | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | 0.1% | 2.7% | 17.9% |
| U.S. Small Cap | (0.6%) | 2.2% | 12.8% |
| U.S. Growth | (0.6%) | 1.1% | 18.1% |
| U.S. Value | 0.7% | 3.8% | 15.7% |
| Int’l Developed | 3.0% | 4.9% | 31.2% |
| Emerging Markets | 3.0% | 4.7% | 33.6% |
Fixed Income Total Return
| DEC | 3 MO | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | (0.1%) | 1.1% | 7.3% |
| TIPS | (0.4%) | 0.1% | 7.0% |
| U.S. High Yield | 0.7% | 1.4% | 8.5% |
| Int’l Developed | (0.8%) | (0.3%) | (1.1%) |
| Emerging Markets | 0.0% | 0.6% | 4.2% |
| Tax-Exempt | |||
| Intermediate Munis | 0.3% | 0.5% | 5.1% |
| Munis Broad Mkt | 0.1% | 1.4% | 3.9% |
Non-Traditional Assets Total Return
| DEC | 3 MO | 1 YR | |
|---|---|---|---|
| Commodities | (0.3%) | 5.8% | 15.8% |
| REITs | (2.1%) | (2.1%) | 2.3% |
| Infrastructure | (0.7%) | 2.4% | 22.6% |
| Hedge Funds | |||
| Absolute Return | 0.5% | 1.3% | 5.6% |
| Overall HF Market | 0.6% | 1.3% | 7.1% |
| Managed Futures | 1.2% | 2.7% | (0.1%) |
Economic Indicators
| DEC-25 | SEPT-25 | DEC-24 | |
|---|---|---|---|
| Equity Volatility | 15.0 | 16.3 | 17.4 |
| Implied Inflation | 2.2% | 2.4% | 2.3% |
| Gold Spot $/OZ | 4319.4 | $3859.0 | $2624.5 |
| Oil ($/BBL) | $60.9 | $67.0 | $74.6 |
| U.S. Dollar Index | 119.9 | 120.6 | 129.5 |
Our Take
We’ve reached the end of another year with US equity markets again just off all-time highs. As we turn the page to 2026, the market consensus seems to support the perfect ”stick-the-landing” scenario we posited in 2025. Still, beneath the surface, policy, geopolitics, and late-cycle dynamics are clear challenges. Looking forward, the question is not whether the landing will be perfect, but how portfolios can be positioned in a world where even a minor shift in sentiment could have outsized consequences.
In our Q1 2026 Economic Commentary, due out January 15th, we lay out our expected themes that will be the driving factors for financial markets and the economy in 2026 as well as what could go right and what could go wrong. In the meantime, here are a few developments that have our careful attention:
- Policy Shifts: Leadership changes at the Fed, a pivotal Supreme Court ruling on tariff authority, and the U.S. midterms could all influence market sentiment and the shape of the yield curve.
- Multipolar World & Rotation: Geopolitical shifts, valuation gaps, and currency dynamics could be creating additional risks and opportunities outside the U.S., with non-U.S. markets increasingly competitive.
- Y-Shaped Economy: The divide between super-consumers and AI beneficiaries on one side, and the broader population facing affordability and debt pressures on the other, remains pronounced.
- Housing: The residential construction sector remains in a multi-year recession, with affordability and inventory still headwinds. Recent data suggest some stabilization as mortgage rates ease and shelter inflation decelerates.
- Labor & Immigration: Job creation has slowed, and tighter immigration enforcement is reducing labor supply, seemingly lowering the “breakeven” job growth needed to keep unemployment steady.
- AI Capex & Concentration: Investment in AI remains a powerful tailwind, but there are growing concerns about overbuilding, leverage, and the risk that cracks in the AI story could have broad market implications. The focus is not just on the tech sector, but increasingly on how non-tech industries—the Adopters—are using AI to drive productivity and margin expansion.
- Adopters Matter: We are closely monitoring non-tech industries—the Adopters—for evidence of real productivity and margin expansion from AI, not just the tech sector’s narrative.
- Inflation & Long-term Yields: Tariff pass-through and sticky services inflation are keeping upward pressure on core prices, while term premiums and concerns related to U.S. inexorably rising deficits/debts are supporting higher long yields.
