Monthly Market Commentary

December Market Update: A Solid Year Comes to a Close

By Abbey Henderson, CFP®, RLP®, CAP®, AEP®

December capped off a third consecutive year of meaningful gains for U.S. equity markets, even though the month itself delivered a slight pullback as investors rotated and reassessed valuations. For the full year, major U.S. indexes posted double‑digit total returns, buoyed by resilient corporate earnings, diminishing inflation pressures, and optimism about future monetary policy. Markets entered 2026 with a cautiously constructive tone, but the environment is likely shifting from broad-based momentum to one where selectivity and fundamentals matter more.

U.S. Markets Took a Breath to End the Year

After reaching record or near‑record levels in December, major indexes retraced slightly as year‑end profit‑taking and sector rotation took hold. Stocks finished 2025 with strong annual gains – the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average all delivered robust returns – while volatility remained relatively subdued. Even in early January 2026, markets began the first full trading week of the year on a generally positive note, led by energy and technology sectors after geopolitical developments and continued AI-driven optimism.

2025 Full‑Year Results:

• S&P 500: +16%
• Nasdaq Composite: +20%
• Dow Jones Industrial Average: +13%
• Russell 2000: +11%

These results reflect strength across market segments, yet they also highlight how performance dispersion – particularly late in the year – became more pronounced as sectors diverged.

Leadership Kept Rotating

The market’s leadership story carried over from November into December. Earlier in 2025, mega‑cap technology and AI‑linked names drove much of the advance, but by year‑end, leadership broadened as investors committed profits in richly valued names and rebalanced into areas with more defensive characteristics or cyclical value.

Technology and communication sectors still posted very strong full‑year returns, but December saw relative weakness among high‑multiple growth stocks. At the same time, traditional defensive areas like healthcare and utilities, as well as financials, showed resilience on stable earnings and steady cash flows.

2025 Sector Performance (S&P 500)

Source: S&P Dow Jones Indices

Strong full‑year returns from Growth and Tech masked some late‑cycle rotation as investors became more discerning, seeking value and stability alongside innovation.

The Economy Slowed but Stayed Positive

2025’s economic backdrop was one of moderation rather than expansion, yet still positive overall. Overall growth slowed compared with prior years but stayed above contraction – reflecting a soft landing rather than a hard slowdown. Consumer spending remained the primary driver of U.S. economic activity, particularly in services.

Inflation eased toward the Federal Reserve’s target range during the latter part of the year, alleviating some pressure on monetary policy and fostering market calm. Core inflation trends moved closer to the Fed’s 2% goal, helping anchor expectations for rate stability in early 2026.

Federal Reserve projections at year‑end signaled slower growth, a gradual increase in unemployment, and inflation converging toward target – suggesting that policy rates may have reached or neared their peak for this cycle.

Global Markets Were Uneven

International equities displayed mixed results in December, with developed markets broadly outperforming some emerging regions. The UK’s FTSE 100 posted notable strength as it approached historic levels during the holiday season, and global sentiment favored markets with solid dividend yields and relative valuation appeal.

Emerging Asian markets – especially in technology‑heavy regions – lagged due to cooling sentiment toward certain AI‑linked names and semiconductor demand expectations, underscoring ongoing divergence in growth drivers across regions.

Corporate Earnings Remained a Market Anchor

Earnings results in 2025 continued to support equity valuations. Most S&P 500 companies reported year‑over‑year revenue growth with earnings beating consensus in aggregate. Forward guidance generally suggested continued – albeit moderate – profitability, underpinned by margin discipline and operational efficiencies.

Tech and communication services remained earnings contributors, while financials, healthcare, and industrials added diversification. The critical question going into 2026 is whether companies sustain profit growth without relying extensively on valuation expansion. WRAL News

Consumers Stayed Resilient Despite Soft Sentiment

Consumer sentiment remained muted compared with long‑term averages, yet actual spending held up well throughout 2025. Nominal holiday retail sales grew year‑over‑year, particularly in experiences, travel, and select discretionary categories. When adjusted for inflation, real retail activity expanded at a more measured pace – suggesting consumers were active but value‑conscious heading into 2026.

Housing Market Remained Challenged

Housing activity stayed subdued in December as elevated mortgage rates and limited inventory continued to constrain transaction volumes. Pending home sales remained soft across many regions, while prices stayed firm due to ongoing supply constraints. This dynamic continues to present an affordability challenge, particularly for first‑time buyers.

Manufacturing Stayed Weak; Services Held Up

Manufacturing activity remained a relative weak spot, with regional Fed surveys showing contractionary conditions and subdued new orders. Services activity continued to outperform goods‑producing sectors, illustrating an ongoing divergence between segments of the economy.

Commodities Mixed; Precious Metals Strong

Commodities performance varied in 2025. Precious metals – especially gold – ended the year strongly, supported by stable or declining real yields and investor demand for diversification. Energy markets experienced volatility tied to evolving supply dynamics, geopolitical developments, and shifting global growth expectations.

Bottom Line: A Good Year With Important Lessons

Looking back on 2025, it was a solid year for investors:

• Double‑digit positive returns across major U.S. indexes
• Cooling inflation that approached the Fed’s target
• Continued positive (if moderate) economic growth
• Strong corporate earnings overall Edward Jones+1

What worked in 2025:

• Technology and communication services led with notable gains
• Broad diversification paid off
• Patient, long‑term investors were rewarded
• Corporate earnings exceeded expectations

What changed by year‑end:

• Market leadership broadened beyond mega‑cap tech
• Defensive sectors showed renewed strength
• Volatility stayed relatively subdued but could return
• Valuations remained elevated, supporting a more selective market

Looking Ahead to 2026

As we step into 2026, the market opportunity set remains constructive but narrower than in recent years. Key themes likely to influence performance include:

1. Selectivity Matters More
   Returns are becoming differentiated across sectors – broad market momentum is less reliable than stock‑specific fundamentals.
2. Fundamentals Trump Momentum
   With valuations stretched in parts of the market, future gains may depend more on companies delivering actual earnings growth, not valuation expansion.
3. Economic Moderation, Not Contraction
   Growth appears to be slowing but staying positive – favoring balanced positioning rather than aggressive bets on any one outcome.
4. Volatility Will Return
   Current calm does not guarantee continued peace – economic data releases, policy decisions, corporate earnings, and geopolitical events can ignite periodic volatility.

Despite a modest December pullback, early trading in 2026 was constructive, with markets gaining ground in the first full week of the year on optimism tied to energy and tech leadership and supportive macro signals.

Your 2026 Roadmap

Entering 2026, keep these principles at the forefront:

• Maintain diversification
• Manage risk thoughtfully
• Stay focused on long‑term goals
• Be prepared for differentiated returns and shifting leadership

A strong finish to 2025 doesn’t guarantee smooth sailing ahead – but it does reinforce the value of thoughtful positioning and disciplined planning.

Sources:

bea.gov | bls.gov | factset.com | msci.com | spglobal.com | richmondfed.org | dallasfed.org | Reuters | AP News | Business Insider | TradingEconomics