As I mentioned in our Christmas card to clients, the stock market stumbled and wobbled during the fourth quarter, but ultimately regained its footing and finished the year at record highs. The S&P 500 edged higher by 2.2% in Q4. For the full year 2025, the market also experienced significant volatility, overcoming a 20% decline from February through April and a series of subsequent concerns to post a gain of 17%. Overall, the market demonstrated surprising resilience and strength over the course of the year.

Notably, 2025 marked the third consecutive year of double-digit gains for equities. This naturally raises caution among market observers, as historical patterns suggest that the fourth year following such a streak has often been negative. While history does not dictate outcomes, this pattern has held true for much of the past 26 years and bears watching.

Financial markets continue to be heavily influenced by Federal Reserve policy. The President has publicly advocated for lower interest rates, and the Fed has so far responded by easing policy. However, this has created a familiar challenge: while short-term rates have declined, long-term rates have moved higher. This is problematic, as mortgage rates and much of the housing market are tied to long-term interest rates. This dynamic helps explain why the stock market has largely traded sideways since early October.

The Federal Reserve currently appears divided on whether additional rate cuts will occur in early 2026. Fourth-quarter data revealed that softness in the labor market and a modest rise in unemployment have been offset by gains in worker productivity. This combination may give the Fed reason to hold rates steady to avoid reigniting inflation. An extended pause in rate cuts would likely represent a headwind for equities.

Throughout 2025, much of the economy’s growth was driven by massive investment in artificial intelligence. Spending on power generation, infrastructure, and capital equipment has been fueled by the rapid buildout of data centers and related facilities. The central question remains whether these investments will ultimately deliver attractive returns. Skeptics have focused on this issue in particular for the large technology “hyperscalers,” including Alphabet, Amazon, Meta, and Microsoft.

For now, however, strong earnings expectations, a potentially accommodative Federal Reserve, a steady economic backdrop, and relatively mild inflation make it reasonable to expect the current market rally to continue.

With this adage in mind, a glimpse of what the coming year may hold can be found in the annual Wall Street forecasts. While these predictions should not be taken too literally, they do provide insight into prevailing sentiment and the conclusions of major research firms.

All 20 firms surveyed are forecasting market gains for the year ahead, which is fairly typical. However, the degree of optimism stands out. The median forecast calls for a 10.6% gain, marking only the eighth time in the past 26 years that the median expectation has exceeded 10%. Forecasts range widely, from Oppenheimer’s bullish target of an 18.1% return to Bank of America’s more restrained outlook of just 2.3%. Notably, these projections follow three consecutive years of double-digit gains.