The upward trajectory of equity markets continued in the fourth quarter, with Santa delivering an all-time high for the S&P 500 Index to investors on Christmas Eve, only to be surpassed by New Year’s Eve! As the year comes to a close, the S&P has now closed higher for seven consecutive months and is closing in on the 7,000-point mark, nearly double the lows seen all the way back in… late 2022. Market breadth improved in the fourth quarter as concerns regarding the “circularity” of the capital flows supporting the development of artificial intelligence raised investor eyebrows. But make no mistake; it’s been an AI-driven year in the market, with only three S&P 500 sectors outperforming the broader index: Information Technology, Communication Services, and congratulations if you are able to name the third (Industrials).
U.S. stocks, as measured by the S&P 500 Index, rose in the fourth quarter, including dividends. International stocks, as measured by the MSCI All Country World Index ex-US, rose in the quarter, including dividends. The continued rebound in international stocks is notable after years of underperformance and has been driven in part by compelling relative valuations as well as expansionary fiscal measures taken by large Western economies. A weak US dollar has further enhanced the performance of international markets for US investors.
Reasons for optimism
While fears of an AI bubble are widespread, we still see reasons for optimism that extend far beyond the AI ecosystem: (a) the government shutdown, though lengthy and painful for many, came and went with limited economic disruption, (b) fears of a trade war with China have diminished following the Trump-Xi summit in late October and the resulting tariff reduction, and (c) persistent signs of consumer resilience, particularly high-income households.
Stocks have also responded favorably to an improving rate environment, with the Fed lowering rates by 75bps over the last four months of 2025. Fed Governors are forecasting one additional cut in 2026, though the market view is more dovish, pricing in two interest rate cuts over the next 12 months. (For a deeper look into the interest rate environment, please refer to our Fixed Income and Economic Outlook sections.)
Earnings, similarly, remain a tailwind, with S&P 500 companies delivering ~13.5% growth in the third quarter, well ahead of the 7.9% consensus forecast. The “beats” were not just limited to technology, with 83% of companies delivering upside in the quarter, comfortably above the 78% average over the past five years. Not all of the earnings beats were rewarded by investors, (eg, NVDA), but it’s clear that the underlying earnings momentum that has driven the market higher over the past three years is still supportive of current valuations. As we have written many times, we believe stocks follow earnings, and we will be watching 2026 guidance announcements closely for any signs of slowing.
Growth on Main Street remains similarly robust, with third quarter gross domestic product (GDP) climbing 4.3% on a seasonally and inflation-adjusted basis. It is worth noting that this is a “pre-government shutdown” reading, but it represents a 50bp sequential uptick and came in >100bps ahead of economists’ expectations. The strong report doesn’t obscure the underlying challenges in the economy (eg, a sluggish job market, slowing business investment, weak consumer confidence), but the limited impact of tariffs and the robust consumer spending environment appear to be winning the day for the US economy, at least for now.
Outlook
After three consecutive years of outsized gains for equity markets, what does 2026 hold for investors? Wall Street strategists have made their opinion known, predicting the S&P will climb ~11% to their consensus 7,554 target. This is hardly a controversial stance, with The Wall Street Journal noting that 19 of the 23 forecasts fall within a 700-point range. And it’s worth noting that not a single strategist is forecasting a down year in 2026. So much for the AI bubble.
The Journal went on to note that Wall Street strategist forecasts are almost certain to be wrong. “They usually call for a gain in the high single-digits because that’s a pretty safe guess – the 50-year average change in the S&P 500 has been 8.9%. Just know that average isn’t typical: There have only been two years in the past 30 when the S&P 500 actually rose between 5% and 10%.”
So where does that leave Howland Capital’s Investment Committee? Generally balanced, as we navigate a still robust earnings outlook with a sluggish job market and worsening consumer sentiment. We continue to work to avoid market timing and instead strive to identify high quality companies that we believe can deliver consistent earnings growth over an economic cycle.
The economic cycle of the moment is, of course, dominated by artificial intelligence, and we added AI exposure to our models over the course of 2025. That said, in true Howland fashion, we have taken steps to build that exposure in a diversified and risk-managed fashion. So while our clients’ accounts do have exposure to the “Magnificent 7,” they also have exposure to companies that we believe will benefit from AI in a variety of ways over the medium-term and often trade at more reasonable valuations. (For what it’s worth, only two of the “magnificent” seven stocks meaningfully outperformed the S&P 500 in 2025.)
The blend of headwinds and tailwinds outlined above does increase the likelihood of market volatility in the new year. At Howland Capital, we believe our buy and hold approach to investing allows us to keep our clients’ accounts invested regardless of market outlook. Our philosophy also guides our thinking as we review and evaluate investment opportunities. That said, we recognize that not all of our clients require a long-term investment horizon for all of their assets. It’s why we manage separate accounts for each of our clients: matching asset allocation, stock selection, and risk management with specific client needs and the timing of those needs. Regular communication helps guide those decisions, and we would encourage you to reach out if you have specific concerns or cash needs upcoming in 2026
