By Akemi Kondo Dalvi, CPA/PFS, CFP
Hello 2026! It’s that time of the year when market analysts dust off their crystal balls to predict what the year ahead will hold. The first few days of 2026 have already been unpredictable and turbulent, so forecasting with surety may be a stretch.
However, looking back at 2025, the stock market did very well despite a great deal of policy change and uncertainty. In fact, 2025 was the third positive market performance year in a row, giving investors a great deal to be thankful for.
Domestically, every U.S. market category posted positive market gains. Looking broadly, the Wilshire 5000 Total Market Index gained 2.3% in the fourth quarter of 2025, closing the year with a 17.1% positive return.
Focusing on U.S. Large Cap stocks, the S&P 500 Index gained 2.4% in Q4, and closed 2025 with a total gain of 16.4%. Smaller companies, as measured by the Russell 2000 Small-Cap Index, also posted positive gains for the year at 12.8%. All things AI (artificial intelligence) were hot in 2025, and the tech-heavy Nasdaq Index was also, gaining 20.1% in 2025.
International markets posted bragworthy gains in 2025, many exceeding U.S. returns. The broad-based EAFE Index, measuring developed foreign economies, gained 4.5% in the last quarter (in dollars), and an impressive total gain of 27.9% in 2025. Regionally, European stocks gained 22.9% in the prior year, and emerging markets as measured by the EAFE EM Index gained 30.6% for the year.
Examining alternative investments and domestic real estate, as measured by the Wilshire U.S. REIT Index, lost 1.7% in the last quarter of 2025, but posted positive returns of 2.7% for the year. Commodities, as measured by the S&P GSCI Index, had a volatile ride and recorded a negative return of 0.3% in the fourth quarter and negative 0.2% for 2025. Utility stocks dipped in the last quarter of the year by 2.1%, but closed the year positive at 12.7%.
The bond market cooled in 2025, as yields fell across the board by some measure. Currently, five-year treasuries are yielding 3.73% and 30-year government bonds are yielding 4.84% annual coupon rates. Five-year municipal bonds are yielding 2.39% in aggregate, and 30-year munis are yielding 4.19%.
All in all, 2025 was a bit of a rollercoaster, but stuck a smooth landing. Looking ahead, 2026 is a difficult picture to paint. 2025 Bill H.R.1, also known as the One Big Beautiful Bill Act (OBBBA), lowered taxes for Americans. Estimates suggest the OBBBA tax savings will amount to more than $517 billion in tax refunds. That is a 44% increase in refunds over 2024 (received in 2025), and could give consumption or consumer spending a boost in the first quarter of 2026.
However, it is important to note that a proportionate amount of tax savings generated by the OBBBA went to the highest income earners, who tend to spend a smaller share of their overall income than lower income earners.
American debt continues to be daunting. In 2025, the U.S. government debt reached $38 trillion, and appears to be climbing faster than ever. Private household debt has also risen to a record $18.4 trillion. Perhaps foreshadowing future economic trouble, credit card and auto loan delinquencies have risen above pre-pandemic levels, indicating perhaps Americans are extending their credit to unsustainable levels.
Common sense tells us that decreasing government income from tax revenue and increasing government debt at the same time is not sustainable for long-term economic success. While the political left advocates for an overhaul of the tax code, and the right advocates for lower government spending, economic studies have shown that both higher tax revenue and lower government spending must be enacted, in conjunction, to successfully reverse the U.S. deficit problem.
The chair of Federal Reserve, Jerome Powell, will reach the end of his term in 2026. In May, a new Fed chairperson will be appointed, and many suspect the new chairperson will more closely align with the Trump Administration’s views that interest rates are too high.
Typically, when the Central Bank lowers interest rates, the stock market reacts positively in the short term, so this could be a positive tailwind in mid- to late 2026. However, lower interest rates can lead to inflation in the long term if it is not monitored diligently. Further, how will the U.S. manage the interest due on surging government debt when interest rates resume their normal levels again after short-term rate cuts?
Additional near-future positive news is the OBBBA now allows corporations to deduct 100% of their equipment purchases in the year they spend the money, rather than amortizing, or spreading out the tax deduction over a set series of future years. The last time a similar tax provision was enacted in 2017, corporate investment in new equipment surged, and the U.S. GDP level increased almost a full percentage point during the same period.
Finally, geopolitical conflict has peaked again. No one knows where the conflict with Venezuela will lead, but the market tends to shift for military conflict, not fall. In other words, while AI was the driver of the stock market in 2025, investors may seek the certainty of defense, intelligence, energy, and commodities (like oil) in 2026 instead.
What does all this mean for investors? The American economy and corporations successfully navigated the uncertainty of tariffs, rollercoaster of precious metals, and the longest government shutdown in history in 2025, closing at new market highs. Many economists are cautiously optimistic for a bullish 11% market gain in 2026. However, the gigantic variable is geopolitical risk in the short term, and inflation in the long term.
We can debate with good reasoning all plausible outcomes for 2026. However, perhaps we should instead be grateful for our investing good fortune from 2025, and hope that we’ll enjoy more of the same in the year to come.
If you could benefit from an independent review from a financial professional as you start the new year, please reach out to your Certified Financial Planner or CPA Personal Financial Specialist. Whether you are exploring cash flow management, charitable gifting strategies, preparing for retirement, or navigating new tax policy changes, we’re here to help you make sense of it all.
Source: Bob Veres Insider Information
The opinions expressed above are solely those of Kondo Wealth Advisors, Inc. (626-449-7783 info@kondowealthadvisors.com), a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, Inc. nor its representatives provide legal, tax or accounting advice.