Market Commentary December 31, 2025

Market Commentary December 31, 2025

2025 has come to an end and provided another strong year in financial markets.  The S&P 500 posted a return of 2.4% in Q4 and finished the year up 16.4%. The S&P 500 Equal Weighted (S&P EW) ended the quarter up 0.9%, and 9.3% for 2025.  International stocks finished the year strong with the MSCI EAFE Index up 4.5% in Q4, ending 2025 up 27.9%. Bonds were up 1.3% in Q4 as the Bloomberg US Intermediate Term Corporate Bond Index posted a return of 8.0% in 2025. 

In 2025 we saw the sixth instance of a three-year period of annual double-digit S&P 500 returns since 1929. Additionally, we’ve had double-digit S&P 500 returns in 6 out of the last 7 years, which hasn’t happened since 1949-1955. There have only been three periods with more than three consecutive double digit return years.  The periods of 1942-1945, and 1949-1952 saw four consecutive years of double-digit returns while the booming 90’s had five consecutive double-digit return years between 1995 and 1999. 

One of the biggest questions many investors have been concerned with after such a significant run of good returns is “is this sustainable?” In almost any given year there are numerous articles written about potential market bubbles, and 2025 was no different. The rise of the AI trade has been doing a lot of heavy lifting for several years, and it is reasonable to wonder if markets haven’t possibly gotten too far over their skis.

Bubbles typically form around some sort of transformative technology or trend that rapidly attracts new investors and capital resulting in ballooning asset prices, extreme valuations and increased leverage in the financial system. 

While the AI trade is based on new technology and has attracted rapid and massive investment resulting in large market returns there are some differences. Bubbles typically form around less mature companies that don’t have the sophisticated controls required to manage the growth. The big winners in the AI trade have been some of the largest businesses in the world with sophisticated and experienced management teams and well capitalized balance sheets with limited debt.  Additionally, while many AI stock prices have run and valuations are elevated, there has also been a significant amount of growth in their earnings.

As a point of caution, there has been an increase in the amount of debt being used to finance AI infrastructure towards the end of 2025. We are also cautious around the number of reciprocal deals occurring between the AI large language model (LLM) creators (which are largely unprofitable) and the data center and hardware providers (whose increased demand is being driven by the LLM developers). 

Shifting to the Federal Reserve, the Fed cut rates by 0.25% in December, its third cut of 2025. The decision was not unanimous though as two members of the 12-person board felt a cut was unwarranted, while another wanted a 0.50% cut. The differences in opinion were in part due to concerns over incomplete economic data during the government shutdown.  Additionally, the Fed announced near-term Treasury bill purchases to support market liquidity which could be mildly stimulative to the market. 

The quarter also saw the beginning and end of the longest US government shutdown which lasted 43 days. Data surrounding labor market health and inflation was incomplete during that time. However, a 2.7% CPI in November and an incrementally higher 4.6% unemployment rate shifted the focus of concern in the Federal Reserve from fighting inflation to supporting labor markets.

Q4 for bonds was broadly characterized by what is referred to as a “steepening yield curve.”  Under normal circumstances, shorter term yields are lower than longer term yields.  In Q4 as shorter-term yields moved lower on Fed actions, longer term yields moved little and, in some cases, moved higher.  This resulted in a steeper yield curve.

As we enter 2026, we remain optimistic. The Fed’s pivot toward lowering interest rates, resilient corporate earnings, and consumer spending have supported stocks. However, potential labor market softness, stretched valuations, and geopolitical uncertainty are clouds we are keeping our eyes on.

As always, if you have questions regarding your portfolio, please consult your financial advisor. We appreciate your continued trust in SG Long Financial and look forward to working with you in the future.

Rob Richardson, CFA

Chief Investment Officer

Important Disclosures

Past performance is no guarantee of future results. Investing involves risk, including the possible loss of principal. The S&P 500 Index is a recognized benchmark used by investors and the investment industry for the equity market. Indexes are not a managed portfolio and are not subject to advisory fees or trading costs.  Investors cannot invest directly in the S&P 500.  Indexes and/or market benchmarks references used throughout this report remain the copyrighted property of their respective owners. Before investing, please carefully consider your investment objectives, risks, charges, and expenses. Views expressed do not necessarily represent the views of S.G. Long Financial Service Corp. (“SGLFS”) and are subject to change at any time based upon market or other conditions. The information provided is for general informational purposes only and should not be considered individualized or personalized investment advice.

SGLFS is the parent company of S.G. Long & Company and SGL Investment Advisors, Inc. S.G. Long & Company is a broker-dealer registered with the SEC, a FINRA member firm and a state-registered investment advisor. SGL Investment Advisors, Inc is a SEC registered investment advisory. Clients and employees of SGLFS may maintain positions discussed herein.