Market Update: Ending 2025 Strong

As we close the books on 2025, investors find themselves standing before a familiar "Wall of Worry." Headlines are filled with anxieties ranging from government debt levels and political changes to lingering fears about inflation. It is natural to feel cautious in this environment. However, experienced investors know that markets often climb this wall, performing well even—and sometimes especially—when the news feels uncertain.

This year, that climb is being aided by a significant shift in the economic landscape. Thanks to recent moves by the Federal Reserve and the underlying resilience of US companies, "Christmas came early" for the markets. As we look toward 2026, we see a year that may not be explosive, but rather steady, broader, and full of opportunity for those who know where to look.

Here's a look at the five key themes driving our outlook for the year ahead.

1. The Federal Reserve: The Return of the Safety Net

The most significant development as we end the year is the clear pivot from the Federal Reserve. By cutting interest rates to a range of 3.50%–3.75%, the Fed has sent a powerful message: the war on inflation is largely over, and the focus has shifted to protecting jobs. This is a critical change in psychology for the markets, often referred to as the return of the "Fed Put."

• A Shift in Priorities: For the last two years, the Fed was willing to risk a recession to kill inflation. Now, they have signaled that they are "at neutral." This means if the economy weakens or unemployment ticks up, they are ready and willing to cut rates further to stimulate growth.

• Ending the "Tightening": Additionally, the Fed has effectively ended "Quantitative Tightening" (the process of shrinking their balance sheet). While this sounds technical, in simple terms, it means the "plumbing" of the financial system is returning to normal. This removes a major stressor from the markets and ensures there is enough liquidity (cash flow) to keep the system running smoothly.

2. The Economy: Why "Ho-Hum" is Good News

There is a lot of debate about whether the economy will boom or bust in 2026. Our view, supported by recent data, is that it will do neither. We see a "ho-hum" economy—one that grows at a steady, unexciting pace of roughly 2.0% to 2.3%.

While "boring" might not sound appealing, it is actually the ideal scenario for stocks right now.

• The Split Economy: Under the surface, the economy is mixed. We see massive strength in technology and Artificial Intelligence (AI) investment. However, other areas like housing, construction, and local government spending are cooling down.

• The "Goldilocks" Effect: These two forces—hot tech spending and a cooling physical economy—cancel each other out to create moderate growth. If the economy were too hot, the Fed would have to hike rates. If it were too cold, earnings would crash. This middle path allows corporate profits to grow without forcing the central bank to slam on the brakes.

3. Inflation: The Fear vs. The Reality

One of the bricks in the "Wall of Worry" is the fear that new tariffs or government policies will send inflation soaring again in 2026. However, when we look at the real-time data, we see a different story.

• Service Prices are Cooling: The "sticky" parts of inflation are finally loosening. We are seeing price stability in everyday services, such as dining out. When restaurants and service providers stop raising prices aggressively, it signals that the consumer is tapped out and wage pressures are easing.

• Shelter Costs: Housing and rent make up a huge portion of inflation data. Real-time metrics show these costs leveling off. Because official data lags behind reality, we expect official inflation numbers to continue drifting lower throughout 2026 as they catch up to what is happening on the ground today.

4. The Market: The Rally is Finally Broadening

For most of 2024 and 2025, the stock market felt like a one-trick pony. If you didn't own the "Magnificent 7" mega-cap tech stocks, you likely underperformed. That dynamic is finally cracking.

Following the Fed’s recent rate cuts, we have seen a rotation begin. The rally is expanding beyond big tech to include the other 493 companies in the S&P 500, as well as Small Cap stocks.

• The "S&P 493": As interest rates stabilize, traditional companies (industrials, financials, healthcare) are becoming attractive again. They no longer have to compete with 5% yields on cash, and their borrowing costs are coming down.

• The Active Advantage: This broadening market is the perfect environment for active management. In a world where everything goes up together, index funds win. But in 2026, we expect a dispersion between winners and losers. For example, within the AI sector, the market is beginning to punish companies that are just spending money on AI without showing profits, while rewarding those that are actually selling the tools. Picking these specific winners will be key.

5. Bonds: Yields, Supply, and Confidence

Finally, the bond market offers a stable foundation for portfolios, with the 10-year Treasury yield hovering around the 4% mark.

• The Wall of Supply: We do anticipate a record amount of corporate bond issuance in 2026—potentially near $1 trillion—as companies borrow to fund mergers and AI infrastructure. Usually, this much supply pushes prices down.

• High Confidence: However, demand remains incredibly strong. We look at "credit spreads"—the difference in yield between corporate bonds and safe government bonds. Right now, spreads are very tight. This tells us that investors are not worried about bankruptcies. The market is flush with cash looking for a home, and 4% yields in a stable economy are very attractive to global investors.

Summary

The outlook for 2026 is one of guarded optimism. The "Wall of Worry" remains, but the ladder to climb it has been provided by a supportive Federal Reserve and a resilient corporate sector.

We are moving away from an era where we simply feared inflation and relied on seven stocks to drive returns. We are moving toward a more traditional market cycle—one where economic growth is moderate, interest rates are normal, and returns come from a broader range of companies. It is a year to be invested, but it is also a year to be selective.

From all of us, we wish you a healthy, prosperous holiday season and a successful start to 2026.

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About Rigden Capital Strategies

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Disclosure: This content is for informational and educational purposes only and should not be interpreted as financial, legal, or tax advice. While we strive for accuracy, we do not guarantee the completeness or reliability of the information provided. Investment decisions should be based on individual circumstances, and we recommend consulting a qualified professional before implementing any financial, legal, or tax strategies. Past performance is not indicative of future results, and all investments carry risks, including potential loss of principal. No investment strategy can guarantee success or protect against loss in all market conditions. Investors should carefully consider their risk tolerance, investment objectives, and financial circumstances before making investment decisions.