US equities were broadly higher in 2025, with market indices notching their third consecutive year of annual gains; the S&P, Nasdaq, and Russell each saw their seventh double-digit rise of the past nine years. There was (again) a note of gains concentrated around many of the large-cap tech names, with the AI theme a major market driver this year as AI chipmakers and AI infrastructure firms were among the market’s best-performing areas. However, the momentum for all technology stocks was far less than the dominance seen in the previous two years, with divergence between perceived winners and losers and valuation concerns impacting stock performance. Outside of technology, U.S. equities overall were supported, particularly in the fourth quarter, by accommodative Fed policy, with risk assets, including small-cap, heavily shorted, and speculative (non-earners) performing well.
While U.S. equities had another year of strong performance, the international equity market was the big winner for the year. International markets benefited from a convergence of factors including fundamental improvement in growth, deep valuation discounts to U.S. equity markets, a weaker U.S. dollar, and a flow of capital to diversify from U.S. exposure. Another attribute for international markets during 2025 was consistency of returns (positive in all four quarters) and lower volatility in the face of headwinds precipitated by trade policy and AI skepticism that rippled through U.S. markets.
With the Federal Reserve easing monetary policy during 2025, fixed income delivered respectable returns, especially for intermediate bonds and investment-grade credit. Higher starting yields at the beginning of the year improved expected returns for bonds compared to recent years and rate cuts by the Fed added to support. Continued strength in the economy and expectations for further stimulus reduced credit concerns, given a lower probability for recession, although concerns about the potential for higher structural inflation and rising government spending, adding to an already record deficit, saw the yield curve steepen and limited the appeal of long-duration investments.
Outside of traditional public assets, markets also performed well as a whole. Private assets, including private equity, private credit, real estate, and infrastructure, put up consistent returns in line with their long-term targets. Albeit with another strong year in the public markets, private investments’ chief virtue in 2025 was their lower volatility. Private equity returns were primarily driven by portfolio company growth as slow deal activity and lower distributions weigh on exits. Private credit remained appealing for income and diversification in a relatively higher-rate and credit-stress environment, although concerns about lending discipline amid the high rate of industry asset growth exist. Infrastructure and real estate perception and returns improved, although real estate performance varied with data center, industrial and logistics gaining while sectors like office and increasingly multifamily faced headwinds. Infrastructure realized better tail winds, particularly in energy infrastructure and electric generation.
The standout investment for the year was metals, with gold and silver seeing their best performance in 45 years, helped in part by a move towards perceived safe-haven assets and away from U.S. treasuries. The performance of gold/silver was particularly notable as bitcoin futures were down for the year and remained a highly volatile asset.
Outlook
2025 saw investment market performance broaden beyond U.S. equities and technology. We expect that 2026 will see this trend continue. As with 2025, we believe investment portfolios should have a core position in the major theme of AI but also be positioned to take advantage of diversification opportunities. Other opportunities include increased exposure to acceleration of business earnings outside of AI, international equities, attractive yields in securitized and credit-oriented fixed income, and private investments.
For U.S. equity, we expect 2026 to bring opportunity linked to strong expected earnings growth. However, as occurred in the fourth quarter, more frequent bouts of volatility driven by investor anxiety around AI spending, stretched valuations, labor-market softening, and ongoing uncertainty around inflation and policy may occur. Despite the setup for volatility, the powerful tailwind of earnings growth and global central banks in easing mode should support the equity markets with the contribution beyond the mega caps and technology, providing an increasing share of returns.
Beyond earnings growth, we don’t expect valuation expansion to meaningfully contribute to returns in 2026. The strong returns in the U.S. market in 2023 and 2024 were predominantly driven by valuation multiple expansion. 2025 saw the contribution from multiple expansion contract to less than 20% of the market’s rise. We expect that without outsized positive revisions to future year earnings expectations, 2026 will see U.S. equity markets’ growth capped at earnings momentum, with the risk of multiple contraction. Consensus expectations for U.S. markets look for a positive return year in 2026, ranging up 8% to 17% for the year, versus the consensus expectation of 15% growth in earnings for the S&P 500, supporting the view that earnings growth will be the key determinant going forward for U.S. equity returns.
For U.S. equities, the upside case for 2026 and beyond is largely driven by the evolution of an AI productivity boom that lifts both AI and a broader cohort of companies that can capitalize on AI and associated opportunities, such as robotics, to raise margins and productivity. The positive ancillary effect of productivity gains might be lower inflation, supporting lower interest rates and higher valuations. However, negative impacts on labor (consumer spending) and businesses unable to make the capital investment necessary to leverage AI might contribute to a divergence of winners and losers. With so much of the market performance and expectations riding on the success of AI, the risk is elevated that expected economic benefits are not achieved. The pullback in markets in November is evidence of this concern as strong results by AI companies were greeted with skepticism. The outperformance of other sectors and styles within the U.S. market (value and small cap in particular) as well as international equities during this period illustrate the benefit of diversification of equity exposure.
International equities are also expected to remain strong in 2026, with particular emphasis on emerging markets for growth and developed markets for valuation. In contrast to the U.S. market, the drivers in international markets include sector diversification, accelerating growth, valuations at a discount to U.S. comparables, and the potential benefit from further weakening of the U.S. dollar. On a relative basis, international markets appear positioned for better performance versus U.S. equities absent further outperformance in a concentrated cohort of U.S. technology companies.
For fixed income, with a stable economy and the Federal Reserve poised for rate cuts, conditions remain favorable for the investment category. Attractive yields offering steady income have been largely responsible for progress since the 2022 selloff, rather than gains from capital appreciation. Within fixed income, we recommend maintaining exposure to intermediate duration with some credit and securitized exposure. Continued Fed rate cuts toward a neutral target range of 3.00%–3.25% are likely due to an expected dovish Fed and pressures on the job market. Long-term interest rates are expected to remain range-bound with lower short-term rates offset by a steeper yield curve due to inflation and deficit concerns over the longer term. Credit Spreads are expected to stay range-bound with occasional periods of widening. Currently near the lower end of their range, spreads call for caution, but with a positive view of economic growth, the risk appears low for a meaningful widening.
Money market assets remain near record levels, representing a massive potential source of demand for stocks and fixed income, particularly as falling cash rates incentivize a shift out of money markets. Rising geopolitical risks and potential market volatility further support the case for greater bond exposure as a substitute for cash.
Our outlook for other investment options, namely private markets, remains constructive, with private equity incrementally more attractive as public market valuations remain elevated and capital markets activity aiding investment exits is expected to further improve in 2026. Traditionally, private equity experiences superior prospective relative returns versus public equities following periods of strong public equity performance and elevated valuation, as has been experienced over the past three years.
Private credit has seen significant asset growth over the last few years and enjoyed a benign credit environment and attractive base rates. While still attractive for yield and diversification, a slight moderation in returns compared to the last few years is expected with lower base rates, tight credit spreads, and competition.
Real asset investment, including real estate and infrastructure appear attractive for moderate income and long-term capital appreciation. Forecasts show infrastructure returns firming, backed by growing capital expenditures, energy transition priorities, and resilient long-term demand. Core real estate is expected to maintain solid returns, supported by limited supply and economic expansion, but focus should be on assets with the opportunity for top-line growth driven by rising rental rates.
Outlook Summary and Actions
While the fundamental backdrop for markets is constructive, elevated expectations seen in historically high valuations raise the risk of volatility and the potential for a lower level of returns looking forward. With the outlook still uncertain, investors should consider rebalancing their portfolios and ensuring that they are properly diversified to weather any storms that may arise.
Key investment considerations should include:
- Diversify U.S. equity exposure beyond the market’s structural concentration in technology and the AI theme to include broader sector and style exposure.
- Utilize international equity exposure as an alternative to U.S. exposure, with target allocation in line with the benchmark of 35% of total equity exposure.
- Utilize moderate duration fixed income as a buffer to potential equity volatility and lean into credit and securitized exposure, including private credit for longer term-oriented portfolios.
- Private assets should be well-positioned to provide enhanced returns relative to the public market equivalents over the medium to longer term following several years of strong public market performance. However, liquidity may remain limited and require longer time frames for the return of capital.
