Year-End 2025: Resilience, Fed Easing, and a 2026 Outlook

Newsletter — December 2025

Dear Clients and Friends,

As we close the books on 2025 and look ahead to the holiday season and a new year, we want to provide a thoughtful review of recent market developments, the economic landscape, and the evolving policy environment in Washington. Despite periods of heightened volatility, patient investors have been rewarded this year, and we continue to believe that high-quality, diversified portfolios remain well-positioned for the opportunities and challenges that lie ahead.

2025 in Review: Resilience Amid Uncertainty

U.S. equities delivered solid gains through most of 2025, driven by continued corporate earnings growth, productivity gains from artificial intelligence adoption, and a resilient consumer.

November brought a sharp pullback, however, as concerns over elevated valuations in technology shares, lingering inflation pressures, and policy uncertainty triggered a 4–6% correction across major indexes. The “Magnificent Seven” mega-cap technology names – which had powered much of the year’s advance – were particularly hard hit, declining more than 6% in the month. Value-oriented and smaller-cap segments held up relatively better, highlighting the benefits of broad diversification.

Fixed-income markets reflected a more cautious tone. The 10-year U.S. Treasury yield hovered around 4.1–4.3% through much of the fall, ending November near 4.13%. Intermediate-term, high-quality bonds provided ballast during the equity sell-off, while high-yield credit benefited from still-solid corporate fundamentals.

Economic Backdrop: Growth Persists, Inflation Remains Sticky

The U.S. economy has continued to expand at a moderate pace despite headwinds from higher interest rates and policy disruptions. Third-quarter GDP growth came in near 4% annualized (per available nowcasts), supported by healthy consumer spending and business investment – particularly in AI-related infrastructure.

Labor markets have cooled gradually but remain resilient, with private payroll indicators showing steady (if slower) job creation. Unfortunately, the prolonged government shutdown that began in October delayed critical official data releases – including October employment and CPI figures – leaving policymakers and investors relying on private surveys and alternative metrics. Available indicators suggest core inflation remains in the 2.8–3.0% range, above the Federal Reserve’s 2% target but trending lower over time.

The Federal Reserve cut the federal funds rate by 25 basis points in both September and October, bringing the target range to 3.75–4.00%. Minutes from the October meeting revealed a divided committee, with some members concerned that further easing could rekindle inflation, while others prioritized labor-market risks. Market expectations for a December cut have fallen below 50%, and we anticipate the Fed will proceed cautiously into 2026, likely delivering only one or two additional reductions if inflation continues to moderate.

Policy Developments in Washington

Tariff policy remains the largest wildcard. While sweeping new tariffs announced earlier in the year contributed to market volatility, many of the most aggressive proposals have been paused or moderated during negotiations with trading partners. We expect a pragmatic approach in 2026: targeted tariffs to address specific trade imbalances, paired with incentives for domestic manufacturing and energy production. History from the first Trump term shows that tariff threats are often used as negotiating leverage rather than fully implemented policy.

Overall, the combination of lower corporate taxes, deregulation, and fiscal stimulus from the One Big Beautiful Bill Act could provide a modest tailwind to economic growth and corporate earnings in 2026 and beyond.

Outlook for 2026: Cautious Optimism

Looking ahead, we expect U.S. economic growth to remain above-trend at 2–2.5%, supported by AI-driven productivity gains, easier financial conditions, and pro-growth policies. Corporate earnings are forecast to rise 7–11%, with broader participation beyond the largest technology names.

We anticipate:

• Equities: Continued leadership from U.S. stocks, particularly in sectors benefiting from deregulation (financials, energy, industrials) and AI infrastructure. International equities may face headwinds from a stronger dollar and selective tariffs.
• Fixed Income: Modestly lower Treasury yields (10-year potentially in the 3.75–4.25% range) as the Fed eases gradually. High-quality credit and intermediate-duration bonds remain attractive for income and ballast.
• Key Risks: Renewed inflation from tariffs or fiscal stimulus, geopolitical flare-ups, or an overly restrictive Fed policy. We monitor these closely and stand ready to adjust allocations.

Our core conviction remains unchanged: long-term investors are best served by staying invested in a disciplined, diversified portfolio aligned with individual goals and risk tolerance. Short-term volatility – while uncomfortable – has historically created opportunities for those who maintain perspective.

We are grateful for your continued trust and partnership. Please don’t hesitate to reach out to discuss your portfolio or any questions you may have as we enter the new year.

Wishing you and your family a joyful holiday season and a prosperous 2026.

Sincerely,

Eric Boyce, CFA

President & CEO

Forward-looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.

Risks: All investments, including stocks, bonds, commodities, alternative investments and real assets, should be considered speculative in nature and could involve risk of loss. All investors are advised to fully understand all risks associated with any kind of investment they choose to make. Hypothetical or simulated performance is not indicative of future results.

Investment advisory services offered through Boyce & Associates Wealth Consulting, Inc., a registered investment adviser. Boyce & Associates Wealth Consulting, Inc. has Representatives Licensed to sell Life Insurance in TX and other states.