- Stocks Complete a Strong Quarter, Year, and Remarkable Three Years
- The Federal Reserve Faces Leadership and Policy Transition in 2026
- Economic Growth Remains Resilient, Albeit Narrowly Based
- New Fiscal Policy Includes Tax Relief but Also Health Care Pressures
- Portfolios Remain Fully Invested, with Defensive Elements
What happened in the financial markets in 2025’s final quarter and for the year as a whole?
Financial markets, and Thayer portfolios, enjoyed a solid fourth quarter, completing a robust 2025 as well as extraordinary three-year period. The S&P 500 gained 2.7% in the quarter and 17.9% for the year, capping off a heady 86.0% (23.0% annualized) three-year return. Non-U.S. stocks led the way in 2025, helped by a 10% drop in the U.S. dollar; respective returns for the quarter, year, and three years were 6.0%, 35.2%, and 64.5% (18.0% annualized). Bonds posted a very solid year as well, benefitting from Fed easing and surprisingly manageable inflation, with the AGG index rising 7.3% in 2025 after a 1.1% final quarter, and finishing a 14.7% (4.7% annualized) three-year gain.
The AI trade and “Mag 7” stocks continued to set the tone in 2025, though only Alphabet (up 66%) and Nvidia (up 39%) outperformed the S&P. Nvidia reached $5 trillion in valuation before a late-year pullback. The group definitely carried the broader market on its back over the three years; according to the New York Times, the S&P’s 86% cumulative return would have been around 40% without the seven stocks.
The Liberation Day (April 2) tariff program, whose roll-out triggered a 12% four-day sell-off, proved to be a relatively limited problem as the year progressed. Fears of a global trade war, with rampant retaliation and tariff escalation, did not bear out as many countries left the U.S. to its own devices and formed other trade deals. The private sector found supply workarounds and also did not immediately jump to passing along higher goods prices on to end-market consumers. This created a solid middle ground in which the economy did not grind to a halt and inflation, as noted, did not surge higher. The latter’s latest reading (November) was in range at 2.7%, having hovered around this level over the year.
The geopolitical front saw a forward step with a peace deal in Gaza, while resolution remained elusive in Ukraine. Tensions with Venezuela built with targeted drug boat strikes by the U.S., and culminated with the January 3rd Delta Force extraction of illegitimate president Nicholas Maduro from Caracas to a New York prison. Initial world market reaction was moderately favorable.
Where is the Fed’s policy as Jerome Powell enters his final months?
Heading into 2026, the Federal Reserve is facing transition in its leadership, with Jerome Powell’s tenure ending in May, but in terms of policy as well.
The central bank has been in an easing cycle, spanning two late-year rate cut series in 2024 and 2025, including quarter point reductions in 2025’s last three meetings. Having peaked in July 2023 at the 5.25-5.50% policy range, rates now stand 3.50-3.75%. As indicated in Powell’s post-December meeting remarks as well as in the meeting minutes, cuts may be done for now, with policy deemed close to or at an equilibrium point. Importantly, the markets so far have taken this in stride, indicating a welcome shift in sentiment away from rate-cut dependency.
Powell’s President Trump-appointed successor, current front-runners including Trump’s National Economic Council head Kevin Hassett and Fed committee (FOMC) member Christopher Waller, will inevitably feel White House pressure to significantly cut rates further. But the Chair is only one vote among twelve on the FOMC, and Fed independence has been a hallmark since its 1913 creation. Further, the new leader will have observed Powell’s solid overall record and steady resistance to outside pressure, both generally well-received and respected by the markets.
What is the state of consumption and GDP at a time of ebbing job growth?
GDP growth continued to be resilient in 2025, furthering a pattern of recession-defiance that we’ve seen over the past few years. The third quarter’s 4.3% growth, bringing the year’s growth rate up to about 2.5%, was an impressive surprise, carried by upper income consumer spending along with ongoing AI investment. The latter indeed has accounted for much of the year’s growth as well as the last three years, since ChatGPT’s launch in late 2022.
The economy’s reliance on high earners and the tech sector for growth may point to a broader fragility, which is showing up in the labor market. After averaging better than four million new jobs a year from 2021 through 2024, we’ve added only 544,000 after eleven months of 2025, and are barely positive in the last three. The unemployment rate is still historically healthy at 4.6%, but this is up from 4.0% at the start of 2025 and a 70-year low of 3.4% in April 2023.
The AI effect on employment is subject to ongoing analysis and debate and will continually change, but it’s a two-sided ledger (e.g. job gains in AI design, cybersecurity and grid-related electrical engineering, offset by job losses in entry-level office work such as economic or legal research, and data entry). In 2025 and early 2026 in particular, companies also may be holding off on hiring as tariffs get sorted out, including upcoming Supreme Court rulings on their legality. A new Business Roundtable survey indicates that more chief executives plan to cut rather than add jobs for the third straight quarter, which hasn’t happened since the deep 2008 recession.
What are possible impacts of new fiscal measures, including reduced federal health care support?
If monetary (Fed) policy pauses and becomes less of a market driver in 2026, fiscal policy may take the baton. The Big Beautiful Bill (BBB) will kick in immediately, a major element being renewal of the 2017 Trump tax cuts, preventing a significant hit on both corporations and individuals. The bill also includes expansionary tax measures such as a large increase in deductibility of state and local taxes for individuals, and friendlier accounting for business capital investment. Over the longer term, however, this could push fiscal deficits higher, and crowd out other federal spending, thus constraining GDP growth.
Nearer term, the BBB’s changes within the health care realm could represent a headwind. Medicaid cuts will impact coverage and financial well-being at the lower income levels and, if Congressional Budget Office projections bear out, lead to 7.5 million Americans becoming uninsured by 2034. This combines with the more recent complication of the Affordable Care Act (COVID-era) tax credit expiration on 1.1.26, due to non-resolution of this issue within the November negotiations to end the government shutdown.
It is very likely that Congress and the White House will find some way soon to avoid the drop-off of ACA tax credits and effective doubling of premium payments. It simply would be too politically damaging, particularly with leadership facing increasing pressure on the “affordability” issue. But as of this writing at January’s start, it remains an open question.
How are portfolios positioned heading into 2026?
We remain fully invested in Thayer client portfolios, albeit with a modestly defensive bias in the equity allocation (its overall full weight includes mostly long-only equities but also a modest position in a hedged equity vehicle), as well as within the bond group.
We entered 2025 with a conscious underweight of AI based on valuation concerns – we estimated a 36 times price to next-twelve-month sales ratio — and this was generally helpful with AI stock underperformance until the weight was restored to neutral in early June, where it remains.
This year, aggregate value of the AI sector remains rich, but sales have caught up rapidly, thanks to aggressive outlays for infrastructure, chips and data processing software. It can be sliced many ways, but one recent measure put the aggregate valuation of leading chipmakers (Nvidia, and four others) at around 13 times expected sales. This is still a decided premium over the S&P 500 (about 3.3 times) and even the tech-heavy Nasdaq 100 (about 8.8 times), but better than twelve months ago, and growth rates are currently supportive.
The bond book is being kept slightly short, recognizing risks around expansionary fiscal policy, with possibly higher deficits and Treasury issuance. The good news is that yields now are reasonable in most credit categories and across the maturity continuum. Here, as with equities, diversification is a virtue.
We hope the early new year treats you well. As always, please reach out with any questions or concerns.
David Beckwith, Chief Investment Officer
Thayer Partners Quarter 4 Investment Commentary
What happened in the financial markets in 2025’s final quarter and for the year as a whole?
Financial markets, and Thayer portfolios, enjoyed a solid fourth quarter, completing a robust 2025 as well as extraordinary three-year period. The S&P 500 gained 2.7% in the quarter and 17.9% for the year, capping off a heady 86.0% (23.0% annualized) three-year return. Non-U.S. stocks led the way in 2025, helped by a 10% drop in the U.S. dollar; respective returns for the quarter, year, and three years were 6.0%, 35.2%, and 64.5% (18.0% annualized). Bonds posted a very solid year as well, benefitting from Fed easing and surprisingly manageable inflation, with the AGG index rising 7.3% in 2025 after a 1.1% final quarter, and finishing a 14.7% (4.7% annualized) three-year gain.
The AI trade and “Mag 7” stocks continued to set the tone in 2025, though only Alphabet (up 66%) and Nvidia (up 39%) outperformed the S&P. Nvidia reached $5 trillion in valuation before a late-year pullback. The group definitely carried the broader market on its back over the three years; according to the New York Times, the S&P’s 86% cumulative return would have been around 40% without the seven stocks.
The Liberation Day (April 2) tariff program, whose roll-out triggered a 12% four-day sell-off, proved to be a relatively limited problem as the year progressed. Fears of a global trade war, with rampant retaliation and tariff escalation, did not bear out as many countries left the U.S. to its own devices and formed other trade deals. The private sector found supply workarounds and also did not immediately jump to passing along higher goods prices on to end-market consumers. This created a solid middle ground in which the economy did not grind to a halt and inflation, as noted, did not surge higher. The latter’s latest reading (November) was in range at 2.7%, having hovered around this level over the year.
The geopolitical front saw a forward step with a peace deal in Gaza, while resolution remained elusive in Ukraine. Tensions with Venezuela built with targeted drug boat strikes by the U.S., and culminated with the January 3rd Delta Force extraction of illegitimate president Nicholas Maduro from Caracas to a New York prison. Initial world market reaction was moderately favorable.
Where is the Fed’s policy as Jerome Powell enters his final months?
Heading into 2026, the Federal Reserve is facing transition in its leadership, with Jerome Powell’s tenure ending in May, but in terms of policy as well.
The central bank has been in an easing cycle, spanning two late-year rate cut series in 2024 and 2025, including quarter point reductions in 2025’s last three meetings. Having peaked in July 2023 at the 5.25-5.50% policy range, rates now stand 3.50-3.75%. As indicated in Powell’s post-December meeting remarks as well as in the meeting minutes, cuts may be done for now, with policy deemed close to or at an equilibrium point. Importantly, the markets so far have taken this in stride, indicating a welcome shift in sentiment away from rate-cut dependency.
Powell’s President Trump-appointed successor, current front-runners including Trump’s National Economic Council head Kevin Hassett and Fed committee (FOMC) member Christopher Waller, will inevitably feel White House pressure to significantly cut rates further. But the Chair is only one vote among twelve on the FOMC, and Fed independence has been a hallmark since its 1913 creation. Further, the new leader will have observed Powell’s solid overall record and steady resistance to outside pressure, both generally well-received and respected by the markets.
What is the state of consumption and GDP at a time of ebbing job growth?
GDP growth continued to be resilient in 2025, furthering a pattern of recession-defiance that we’ve seen over the past few years. The third quarter’s 4.3% growth, bringing the year’s growth rate up to about 2.5%, was an impressive surprise, carried by upper income consumer spending along with ongoing AI investment. The latter indeed has accounted for much of the year’s growth as well as the last three years, since ChatGPT’s launch in late 2022.
The economy’s reliance on high earners and the tech sector for growth may point to a broader fragility, which is showing up in the labor market. After averaging better than four million new jobs a year from 2021 through 2024, we’ve added only 544,000 after eleven months of 2025, and are barely positive in the last three. The unemployment rate is still historically healthy at 4.6%, but this is up from 4.0% at the start of 2025 and a 70-year low of 3.4% in April 2023.
The AI effect on employment is subject to ongoing analysis and debate and will continually change, but it’s a two-sided ledger (e.g. job gains in AI design, cybersecurity and grid-related electrical engineering, offset by job losses in entry-level office work such as economic or legal research, and data entry). In 2025 and early 2026 in particular, companies also may be holding off on hiring as tariffs get sorted out, including upcoming Supreme Court rulings on their legality. A new Business Roundtable survey indicates that more chief executives plan to cut rather than add jobs for the third straight quarter, which hasn’t happened since the deep 2008 recession.
What are possible impacts of new fiscal measures, including reduced federal health care support?
If monetary (Fed) policy pauses and becomes less of a market driver in 2026, fiscal policy may take the baton. The Big Beautiful Bill (BBB) will kick in immediately, a major element being renewal of the 2017 Trump tax cuts, preventing a significant hit on both corporations and individuals. The bill also includes expansionary tax measures such as a large increase in deductibility of state and local taxes for individuals, and friendlier accounting for business capital investment. Over the longer term, however, this could push fiscal deficits higher, and crowd out other federal spending, thus constraining GDP growth.
Nearer term, the BBB’s changes within the health care realm could represent a headwind. Medicaid cuts will impact coverage and financial well-being at the lower income levels and, if Congressional Budget Office projections bear out, lead to 7.5 million Americans becoming uninsured by 2034. This combines with the more recent complication of the Affordable Care Act (COVID-era) tax credit expiration on 1.1.26, due to non-resolution of this issue within the November negotiations to end the government shutdown.
It is very likely that Congress and the White House will find some way soon to avoid the drop-off of ACA tax credits and effective doubling of premium payments. It simply would be too politically damaging, particularly with leadership facing increasing pressure on the “affordability” issue. But as of this writing at January’s start, it remains an open question.
How are portfolios positioned heading into 2026?
We remain fully invested in Thayer client portfolios, albeit with a modestly defensive bias in the equity allocation (its overall full weight includes mostly long-only equities but also a modest position in a hedged equity vehicle), as well as within the bond group.
We entered 2025 with a conscious underweight of AI based on valuation concerns – we estimated a 36 times price to next-twelve-month sales ratio — and this was generally helpful with AI stock underperformance until the weight was restored to neutral in early June, where it remains.
This year, aggregate value of the AI sector remains rich, but sales have caught up rapidly, thanks to aggressive outlays for infrastructure, chips and data processing software. It can be sliced many ways, but one recent measure put the aggregate valuation of leading chipmakers (Nvidia, and four others) at around 13 times expected sales. This is still a decided premium over the S&P 500 (about 3.3 times) and even the tech-heavy Nasdaq 100 (about 8.8 times), but better than twelve months ago, and growth rates are currently supportive.
The bond book is being kept slightly short, recognizing risks around expansionary fiscal policy, with possibly higher deficits and Treasury issuance. The good news is that yields now are reasonable in most credit categories and across the maturity continuum. Here, as with equities, diversification is a virtue.
We hope the early new year treats you well. As always, please reach out with any questions or concerns.
David Beckwith, Chief Investment Officer