People in general began 2025 with trepidation about equity markets. Stocks were pricey, tariffs would rise, immigration (workers) would be stymied, and the US government would be more tumultuous than normal. Economists were on recession watch. Surely stocks would fall. Surprise, not the case!
Despite the noise, the US economy grew about three percent in 2025 and corporate profits grew an impressive 13 percent. Long-term interest rates were stable; however, short-term rates fell. Rising profits and falling interest rates explain the positive stock market direction. The S&P 500 rose 2.3 percent in the fourth quarter and jumped 16.7 percent for 2025.
Much of the economic growth came from a combination of affluent consumer spending and the Artificial Intelligence (AI) boom. These two factors accounted for 70 percent of GDP expansion. The five largest cloud service providers are spending more than $400 billion in AI capital expenditures.
The magnificent seven tech companies powered the S&P 500 higher for most of the year. They are such a large component of the S&P 500 that the index is becoming a projection of the future of AI.
2025’s fourth quarter did provide some rotation to other sectors that were previously ignored. Financials, transportation, health care, and energy became leaders. Tech stocks retreated. Having more sectors participate in advances makes for a healthier stock market.
As always, there are worries. Inflation remains well above the Fed’s 2 percent target. If the Fed cuts rates too much then investors will expect more inflation. Is AI a bubble that will pop? Will there be another government shutdown? Will tariff inflation arrive in 2026? Will government debt deficits? There are always issues to be concerned about!
With all that being said, TFEC is optimistic for 2026. S&P 500 earnings projections for 2026 are for 14 percent growth. Couple this with a Fed poised to cut interest rates into a growing economy and you have a tailwind for higher stock prices.
Sincerely,
Robert E. Caplan
Investment Advisory Committee Chair
| PERFORMANCE IS YTD AS OF 12/31/25 | |||||||||
| SINCE INCEPTION | |||||||||
| 12/31/25 | 1 YR. | 3 YRS. | 5 YRS. | 10 YRS. | 15 YRS. | 20 YRS. | 25 YRS. | 30 YRS. | |
| 100% Equity | 15.6% | 15.6% | 19.6% | 11.6% | 12.4% | 11.6% | 9.4% | 8.4% | 9.5% |
| SINCE INCEPTION | |||||||||
| 12/31/25 | 1 YR. | 3 YRS. | 5 YRS. | 10 YRS. | 15 YRS. | 20 YRS. | 25 YRS. | 30 YRS. | |
| 70% Equity & 30% Fixed | 13.5% | 13.5% | 15.3% | 8.2% | 9.4% | 8.6% | 7.6% | 7.0% | 8.1% |
| SINCE INCEPTION | |||||||||
| 12/31/25 | 1 YR. | 3 YRS. | 5 YRS. | 10 YRS. | 15 YRS. | 20 YRS. | 22 YRS. | ||
| 100% Fixed | 6.9% | 6.9% | 4.9% | 0.1% | 2.2% | 2.1% | 2.8% | 2.7% | |
| SINCE INCEPTION | |||||||||
| 12/31/25 | 1 YR. | 3 YRS. | 5 YRS. | 6 YRS. | |||||
| 100% ESG | 18.9% | 18.9% | 22.6% | 11.9% | 12.8% | ||||
View More Graphs
