2025 Year-End Report: What Could Go Wrong in 2026?

For the third year in a row, the US stock market was up double digits with NASDAQ leading at +20.4% (after gains of +43.4% and +30.8% in ’23 and ’24, respectively) and the S&P 500, the standard market benchmark, up +16.4% following robust gains of 24% in each of the two previous years.

The year started with positive expectations for the economy and earnings, particularly in tech and large caps, as AI adoption accelerated with expectations of productivity gains (over 65% of the S&P 500’s total return for 2025 was from AI-related activity: infrastructure, monetization, and AI cloud demand). Stocks opened the year reflecting both that optimism and the anticipation of a newly elected president who would cut taxes, ease banking and business regulations, and enact pro-business policies.

However, on April 2, President Trump announced a major tariff package that sent stocks spiraling downward, losing almost 19% from their February highs as other countries threatened retaliation and company managements of both large and small companies went into damage control, putting on hold spending plans while they figured out best and worst case scenarios around increasing costs, pricing impact, hiring, and more.

Despite the stutter step that lasted into late summer as government tariff policies seesawed back and forth, earnings continued to improve, up ten quarters in a row through the third quarter, with fourth quarter earnings currently being reported and expected to be the fifth consecutive quarter with double-digit earnings growth.

With labor softening — the oft-noted “no hiring/no firing” stalemate we are seeing — the Fed cut interest rates three times in the fall to forestall any further weakening and remains on high alert, watching for signs of a more serious jobs decline.

But jobless claims, a leading indicator, show no signs of stress, while unemployment hovers at a healthy 4.4%. Inflation remains above the Fed’s 2% target, with recent PPI data showing rising wholesale price pressures that do not augur well for further interest rate cuts, even as the prospective new Fed Chair, Kevin Warsh, a proponent of cutting rates further, prepares to take office in May.

Unexpected late-night tweets, ongoing tariff threats, sudden U.S. military interventions abroad and threats of more, combined with a stock market trading at over 22x 2026 earnings estimates, point to ongoing volatility.

But earnings ultimately drive stock performance, and most signs point to continued consumer spending given full employment and the $40–50 trillion in wealth created since 2019 (even as lower-income consumers continue to feel pressure). With roughly three-quarters of the U.S. economy driven by consumer spending, it remains realistic to expect continued economic growth, which should support higher equity markets by year’s end.

What could go wrong? The risk list is always long and almost never includes true one-offs like an economic shutdown due to a pandemic. A leading concern remains the unpredictable actions of today’s administration (e.g., Greenland, Iran, Venezuela), where sudden policy shifts can unsettle markets and impact business and consumer confidence. That discomfort shows up in persistently low consumer confidence surveys — often precursors to lower spending — though at present, low confidence and healthy spending continue in parallel. Other key risks include inflation that remains stubbornly above the Fed’s 2% target and a more meaningful deterioration in the labor market.

We continue to monitor the broader economy and the many forces shaping it, while seeking to mitigate external risks by building portfolios from the ground up with high-performing companies that have strong competitive advantages, durable tailwinds, and disciplined management teams capable of navigating uncertainty.

As the CIO of BD8 Capital Partners, I appear frequently on CNBC to discuss stocks and the broader market, as well as on other outlets including Bloomberg and Fox Business. We also share timely market commentary on X (Twitter), LinkedIn, and the BD8 Capital Partners Facebook page. Additional updates and information about the firm can always be found at https://bd8cap.com.

As always, we at BD8 Capital Partners continue to focus on your long-term financial future and planning needs, while managing your investments to help meet your financial goals. Thank you for your continued interest and trust. We look forward to navigating the remainder of the year with a measured and informed approach.

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