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Markets Decline
As 2025 drew to a close, the S&P 500 and the Dow slipped from the record highs that both indexes had reached the previous week. They regained some ground on Friday’s opening trading day of 2026 but finished with weekly declines of around 1%.
The S&P 500’s return for 2025 marked the third year in a row that the index generated a double-digit gain. The technology-oriented mega-cap stocks known as the Magnificent Seven extended their dominance of the U.S. market. Those seven names contributed 42% of the S&P 500’s total return in 2025 and 55% over the latest three-year period, according to S&P Dow Jones Indices. Moreover, the Magnificent Seven’s share of the index’s overall market capitalization rose to 34.9% at the end of 2025 from 33.5% at the close of 2024.
For the third year in a row, communication services and information technology were the top-performing sectors in the S&P 500. All 11 sectors delivered positive performance, while real estate was the weakest sector.
A U.S. bond market benchmark generated a return of 7.3% in 2025, a year that saw notable shifts in the outlook for inflation and monetary policy. The yield of the 10-year U.S. Treasury note reached as high as 4.80% in January before briefly slipping below 4.00% in October; it finished 2025 at 4.17%, down from 4.57% at the end of 2024.
Historically, January’s stock market performance has been a strong indicator of what may be in store for the rest of the year. In fact, about 72% of the time since 1929, the S&P 500 has posted a positive return for the year after gaining ground in January or has gone on to post an annual loss when the market has declined in the first month, according to S&P Dow Jones Indices. That’s also been the case each of the past four years.
As major U.S. banks prepare to open quarterly earnings season in mid-January, analysts expect that fourth-quarter earnings per share for companies in the S&P 500 rose by an average of 8.3%, according to a recent survey from FactSet. At the sector level, information technology and materials are expected to generate the strongest fourth-quarter earnings gains.
Labor market data due out on Friday will show whether recent weakness extended into December. The recent government shutdown delayed the previous report, which showed that unemployment rose in November to 4.6%, the highest since 2021. The economy generated 64,000 jobs after a decline of 105,000 the previous month. Jobs growth has been negative for three of the past six months.
Source: John Hancock Investment Management
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For the 2026 U.S. federal income tax year, the basic structure of tax rates remains the same as in 2025, with seven marginal brackets ranging from 10% to 37%. However, the income thresholds for each bracket have been increased for inflation, meaning taxpayers can earn more before moving into higher marginal rates. For example, the top 37% bracket for single filers now begins at about $640,600 in 2026, up from roughly $626,350 in 2025, and similar adjustments apply to all filing statuses.
These inflation-indexed increases are intended to prevent “bracket creep,” where wage growth pushes taxpayers into higher brackets without a real rise in purchasing power. In addition to bracket thresholds, the standard deduction amounts have also risen (e.g., from $15,750 to $16,100 for single filers and from $31,500 to $32,200 for married couples filing jointly).
Beyond the routine inflation adjustments, the One Big Beautiful Bill Act (OBBBA) enacted broader tax changes that affect 2026 filings. This law makes many of the tax cuts from the Tax Cuts and Jobs Act permanent and introduces or expands several provisions that can lower taxable income and taxes owed, such as enhanced standard deductions, new deductions for certain types of income (e.g., seniors), and tax treatment changes for items like tips. These legislative changes, combined with the adjusted 2026 brackets, are expected to reduce overall tax liabilities for many taxpayers compared to what they would otherwise face under the previous structure.
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Global financial markets are like a Rube Goldberg machine – affected by a lot of factors in unpredictable ways. Bloomberg evaluated 700 calls from 60 financial institutions regarding the outlook for 2026. Sam Potter of Bloomberg reported on key themes identified in those calls, including:
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Artificial intelligence (AI). Optimism about AI is nearly universal, reported Potter. “Astronomical expenditure. Uncertain rates of return. Uneven pace of adoption. By now every firm on Wall Street is well aware of the risks surrounding the artificial intelligence boom. But when it comes to the year ahead, few advocate walking away from what they describe as a ‘revolutionary’ technology.”
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Interest rates (a.k.a. monetary policy). Financial markets already anticipate that global central banks will ease monetary policy, which means they will lower rates. The exception is the Bank of Japan. In the United States, “The [Federal Reserve] will come under increased political pressure to cut rates…but most firms think the market is currently pricing too many cuts,” reported Potter.
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Government spending and taxes (a.k.a. fiscal policy). “Governments continue to stimulate their economies. In the U.S., the ‘Big Beautiful Bill’ includes tax cuts that should boost growth next year, while Germany has shifted from decades of fiscal restraint to a new era of significant borrowing and investment,” wrote a company cited by Bloomberg.
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Tariffs and trade. There was some uncertainty about tariffs. “Although it’s possible the Supreme Court could strike down parts of the Trump administration’s tariff regime, the growing dependence on tariff revenue suggests the authorities will find ways to keep barriers in place,” opined one of the institutions.
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Inflation. Overall, institutions expect inflation to remain sticky, although some say it might move lower “Inflation likely to remain above Fed's target…but could drift down if one-off price increases from tariffs wane or economic activity weakens,” wrote one.
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Geopolitics. As global tensions and crises continue, the unified global financial system may fragment, causing friction in the free market system. Potter cautioned that the overall view of institutions was, “…never underestimate the potential for geopolitical or trade-related shocks.”
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Depreciating U.S. dollar. When the value of the U.S. dollar falls relative to other countries’ currencies, it can make investments outside the U.S. more attractive than those inside the United States, stated an institution in the survey.
It’s interesting to note that government debt and deficits were not often mentioned. One firm stated, “Although there are many encouraging signs for the year ahead, there are also clear risks on the horizon, and investors should prepare for inevitable market pullbacks. Stocks are expensive. Sticky inflation and mounting government debt in the U.S., Europe and elsewhere are also cause for concern.”
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AJ Advisors
www.ajadvice.com
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Phone: (615) 709-8709
Fax: (615) 709-8709
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John Stauffer, CFP®
Partner
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Andrew Quinn, CFP®
Partner
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