As we look forward to a new year, it’s worth reflecting on the rather remarkable one we’ve just experienced. The global stock market (as measured by the MSCI All Country World Index) is on track to deliver double-digit returns. The global bond market (as measured by the Bloomberg Global Aggregate Index) is set to round out the year with a total return in the high single digits. All this despite tariff and inflation concerns, a government shutdown, AI bubble talk, and geopolitical upheaval.
What happens now? While no one without a flux capacitor and a DeLorean can predict the future with certainty, understanding the key themes shaping markets can at least provide perspective and help us set expectations for 2026. A few worth noting:
Diversification is working again: In 2025, international stocks have outpaced U.S. markets, with developed market stocks (MSCI EAFE) and emerging market stocks (MSCI EM) each gaining around 30% in U.S. dollar terms. This has been driven by two key factors: improving growth expectations in many economies and the weakening dollar, which can boost returns for U.S.-based investors. This underscores the importance of balance and diversification. Read more about Modera’s approach to geographic diversification here.
Artificial intelligence (AI) continues to drive growth and stock valuations are elevated: AI has captured enormous attention and investment. Companies are spending trillions of dollars building the infrastructure needed to support this technology. While AI will undoubtedly transform our economy, the key question is whether current stock prices already reflect this future growth. Read more about Modera’s perspective regarding a potential AI bubble here.
Economic growth remains positive but uneven: The economy continues to grow at a healthy pace with the most recent Gross Domestic Product (GDP) reading at 3.8% year-over-year (YoY), though not everyone is experiencing this equally.1 Some sectors and income groups are thriving, while others face challenges. This is sometimes referred to as a “two-speed” or “K-shaped” economy. For investors, it’s important to separate what affects the overall market and how this might differ from our daily experiences.
Tariff concerns may continue: Despite significant attention in 2025, tariffs have not caused the economic disruption many feared. Inflation has remained relatively stable, with the most recent Consumer Price Index (CPI) reading at 2.7% YoY.2 This doesn’t mean tariffs are unimportant, but it suggests that their effects may be more nuanced than headlines suggest.
Political developments will create headlines: The upcoming midterm election, ongoing discussions about government debt, and changes to the Federal Reserve Board of Governors will all generate news throughout the year. While these topics matter for policy and planning, history shows that markets have performed well across different political environments.
And finally,
The Federal Reserve will continue supporting the economy: At its December 2025 meeting, the Fed cut its benchmark rate by 0.25% to a range of 3.5% to 3.75%.3 This decision reflects the challenging balance the Fed faces between managing inflation and supporting the job market. Chairman Powell emphasized that while inflation remains “somewhat elevated,” the balance of risks is tilting toward labor market weakness. The Fed has cut rates 3 times this year and by 1.75% since last September. At the same time, the Fed upgraded its GDP projections for 2026 to 2.3% (from 1.8%), reflecting optimism about U.S. economic resilience.4
As Powell prepares to step down, the institution faces the twin challenges of steering inflation back to its 2% target and supporting a labor market that remains in flux. With only one additional rate cut anticipated across 2026 and 2027 according to the Fed’s “dot plot” projections, policy is poised to shift from active adjustment to stability and careful monitoring.
It’s important to note that the Fed only controls the “short end” of the yield curve, meaning interest rates that are closely tied to the federal funds rate. Long-term interest rates depend on many other factors, such as economic growth, inflation, and productivity. So, rather than follow the Fed’s every move and parse every statement, investors should continue to focus on these longer-term trends to understand the impact on interest rates and bonds.
As we enter 2026, investors face a familiar challenge: balancing concerns with the reality that markets have consistently rewarded patient, disciplined investors over time. The list of worries is ever-present, yet history suggests that for every crisis that disrupts markets, many more feared events have failed to materialize. What defines resilient long-term investors isn’t the ability to predict which concerns matter most, but the ability to remain invested throughout all phases of the market cycle.
Whatever the new year brings, rest assured that we will be there to guide you and provide thoughtful financial counsel. We are honored to play such an important role in your lives. Happy holidays from the Modera family to yours!
3 https://www.federalreserve.gov/newsevents/pressreleases/monetary20251210a.htm
4 https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20251210.htm
Bloomberg data provided by Bloomberg. MSCI data © MSCI 2025, all rights reserved.
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