January 2026 Market Outlook: Lessons from 2025 and What Comes Next

Gregg Pacitti CFP®
11 minutes ago
4 min read

Lessons from 2025 and What We’re Watching in the Year Ahead

As we begin 2026, it’s worth stepping back to reflect on what the markets taught us in 2025, and how those lessons shape our outlook for the year ahead. Despite persistent skepticism, loud recession calls, and headline-driven fear, markets once again reminded investors why discipline and perspective matter.

Below are the key takeaways from 2025 and the themes we’re watching closely as we move through a midterm election year.

2025 in Review: Resilient, Boring, and Surprisingly Strong

Coming into 2025, expectations were muted. We remained invested but dialed risk back modestly, favoring quality, diversification, and slightly higher Treasury exposure while staying roughly 85–90% fully invested across our model portfolios.

What followed was a year that surprised many

Markets stayed resilient despite constant recession warnings
Seven consecutive positive S&P 500 months at one point
Modest volatility, but no lasting damage
Double-digit gains S&P 500 index gains despite widespread bearish sentiment

A striking data point: throughout most of 2025, bearish investors outnumbered bullish investors, even as markets climbed.

Lesson: Markets don’t always move on consensus. They tend to climb walls of worry.

Sentiment vs. Reality: Why Fear Didn’t Win

Recession predictions have become almost routine. But the past three years reinforced a hard truth: Economic models and historical patterns are guides, not guarantees.

While warning signs existed, market breadth remained strong. In fact, by late December, NYSE market breadth reached new all-time highs, confirming participation beneath the surface.

The takeaway? A single scary chart or viral narrative doesn’t override broad participation and earnings growth.

Tariffs, Inflation, and the Media Narrative

One of 2025’s biggest moments of panic came during the spring tariff scare. Markets sold off sharply. Headlines warned of runaway inflation.

What actually happened?

Inflation continued to fall
Energy prices dropped meaningfully
Shelter inflation began easing
Volatility proved temporary

Historically, periods of policy uncertainty under Trump-era dynamics tend to produce front-loaded volatility, often followed by stabilization.

Lesson: Volatility is not the same as risk. Panic selling rarely pays.

Market Leadership: Still Narrow, Still Working

Technology—particularly AI, semiconductors, and infrastructure—once again led the market. While concentration remains high, this isn’t new. Leadership cycles come and go.

Importantly:

Capital spending by large tech firms helped prevent recession
AI investment expanded beyond just a handful of mega-caps
Equal-weight indexes lagged, but participation slowly broadened

We continue to monitor whether leadership widens, but we don’t fight trends until they clearly break.

The Consumer: A K-Shaped Economy Persists

Economic strength remains uneven:

Higher-income households continue spending
Lower- and middle-income households face pressure
Credit usage and delinquencies are rising modestly
Housing affordability remains strained

Mortgage rates may eventually ease, but supply constraints and affordability—not demand—are the bigger issue. Until borrowing costs fall further or housing supply improves, real estate remains a headwind.

Jobs: Slowing, But Not Breaking…YET

Job growth has cooled—but critically, job losses remain limited.

Key observations:

Healthcare and leisure sectors still hiring
Government payroll growth is reversing
Weekly jobless claims remain stable but weakening
No broad-based labor collapse however the decline of “payroll growth” has reached a level that historically coincides with recessionary periods.

This “Goldilocks” environment—slower growth without massive layoffs—has helped support markets.

2026 Outlook: A Midterm Year with Unique Dynamics

Historically, midterm election years are the weakest in the presidential cycle, averaging ~3% returns since 1970. Volatility is common, especially mid-year.

However, this cycle has notable differences.

1. The Fed Is No Longer the Enemy

Rate cuts already underway
More cuts possible
A more dovish policy tone
Liquidity improving—not tightening

That alone reduces downside risk compared to prior midterm years.

2. Bond Yields Remain Stubborn

Despite rate cuts, long-term yields remain elevated due to:

Massive Treasury refinancing (~$9 trillion)
Heavy bond supply
Sticky inflation perceptions

We expect yields to gradually normalize—but not collapse unless economic conditions deteriorate.

3. A Potential Consumer Tailwind: Tax Refunds

Tax law changes from the One Big Beautiful Bill Act (OBBBA) could increase total refunds by $100-140 billion in 2026 according to TaxFoundation.org —an under-discussed stimulus that may boost income and meaningfully support consumer spending throughout the year.

4. Ongoing “Walls of Worry”

Markets still face concerns around:

AI valuations
Earnings sustainability
Government shutdown risks
Policy uncertainty

But markets have navigated far worse in recent years and continue to do so.

Our Bottom Line

We don’t expect 2026 to repeat the outsized gains of recent years, but we also don’t see conditions that justify a more conservative allocation going into the year. However, this view is always subject to change.

Key expectations: