Newsletter
Dear Client,
U.S. financial markets were marked by an impressive but uneven performance in 2025, shaped by a combination of domestic policy shifts, global trade tensions, and a moderating labor market. U.S. equities delivered double-digit gains for the third consecutive year with the S&P 500 gaining 17.9%. The year witnessed extraordinary performance gaps; market concentration remained elevated, with the “Magnificent Seven” stocks contributing to roughly 42% of the S&P 500’s gains, and represented over 34% of its market cap at year-end. The Barclays Bond Index rose 7.3%, its strongest return since 2020, thanks in large part to Federal Reserve rate cuts and moderating inflation. Broadly speaking, the U.S. economy showed exceptional resilience in 2025, effectively navigating geopolitical uncertainty and tariff shocks.
Volatility was pervasive early in 2025. First, the tech sector was shaken in January when DeepSeek, a Chinese artificial intelligence firm, released an open-source large language model far cheaper than its American counterparts. This raised concerns about the competitive advantage of U.S. technology firms, the sustainability of their multi-billion dollar AI capital expenditure investments, and the endurance of equity premiums as a whole. Then, on April 2nd, President Trump announced his “Liberation Day” trade policy, declaring it a rebirth of American industry. The plan imposed a baseline 10% tariff on all U.S. imports starting April 5th, with additional retaliatory tariffs of up to 50% on goods from roughly 60 countries. This sweeping measure, far broader and steeper than many investors anticipated, was aimed to address perceived trade imbalances; it immediately sparked fears of global trade wars, supply chain disruptions, inflation, and reduced economic growth. Market reaction was severe, with the volatility index (VIX) piercing 60, and the S&P 500 falling over 12% in the week following the announcement. Sentiment shifted dramatically on April 9th, when President Trump announced a 90-day pause on reciprocal tariffs for “non-retaliating” countries. This partial walk-back sparked a historic relief rally, with the S&P 500 exploding 9.5% higher on April 9th, its largest daily gain since 2008. By early May the market had fully recouped its tariff-related losses, with the uncertainty giving way to the realization that tariffs were being used more as a negotiating tool than permanent policy. Largely, the period emphasized the market’s susceptibility to abrupt policy shifts. The story in the second half of the year, however, was markedly different with S&P 500 climbing on the back of robust corporate earnings, fiscal stimulus, and Fed easing.
The Federal Reserve had a tough task in 2025 as they had to navigate a backdrop of persistent inflation above the 2% target, waning job growth, and meaningful policy uncertainty. They maintained a cautious approach in the first half of the year, with no interest rate changes as they evaluated the impacts of the trade policy shifts. Then, in response to downside risks to the labor market in the second half of the year, they began a series of rate cuts to support employment. Overall, the Fed cut its benchmark rate three times in 2025, totaling a 0.75% reduction, while also modifying its balance sheet strategy and updating economic projections. Fed Chair Jerome Powell faced repeated public scrutiny from President Trump, who was urging the Fed to lower rates more meaningfully.
Looking ahead, 2026 is a midterm election year, which historically tends to be volatile. S&P earnings are expected to grow by approximately 14% in 2026. Profit margins are expanding, and technology companies are expected to spend a record $515 billion on capital expenditures to build out artificial intelligence infrastructures. While one can argue that a lot of optimism has been pulled forward, we are in a market environment that is supported by powerful forces of easing monetary policy, gargantuan AI investment, and expansionary fiscal policy. However, this favorable framework is not without risk. The labor market is softening, and inflation is still running above the Fed’s target. A Fed that is forced to get more hawkish in the face of rising prices is a potential pressure point that would send asset prices lower, and could possibly deflate the AI exuberance as well. In fixed income, we continue to favor high quality. Credit spreads remain tight, and if core inflation remains stubbornly above-target, it will be difficult for the Fed to continue to ease without increasing borrowing costs at the long end of the yield curve. The impact of recent rate cuts will likely flow through into the economy in 2026, with cyclical, rate-sensitive areas of the economy benefiting.
We thank you for your continued support and wish you all a healthy and productive new year.
Regards,
Edge Wealth Management
Past performance does not guarantee future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product directly or indirectly referenced will be profitable, equal any corresponding indicated historical performance level, or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. This content does not serve as the receipt of, or as a substitute for, personalized investment advice from Edge Wealth Management, LLC. If you have any questions about the applicability of any content to your individual situation, we encourage you to consult with the professional advisor of your choosing. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request or by selecting “Part 2 Brochures” here.