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Market Commentary

Monthly Financial Markets Commentary — January 1, 2026

The mania for stocks continued in the month in December, with indices hitting all-time highs. The 2025 rally was mostly a matter of multiple expansion rather than fundamentals, as GAAP earnings did not significantly increase. Broad measures of employment and business activity were weak, and there were worrying signs in consumer delinquencies, bankruptcy filings, unemployment claims, private employment and consumer sentiment. Breadth in the market was very poor, with only two stocks, Nvidia and Microsoft, accounting for 15% of the S&P 500 Index.

By historical measures, such as price-earnings, price-to-sales, market-cap-to-GDP, Schiller CAPE Ratio, stocks are grossly overvalued. But investors, particularly retail investors, remain sanguine, as momentum has returned. Every dip in the market since 2010 has proven to be a buying opportunity; therefore it is not surprising that investors and investment advisors have come to believe the stock market only goes up, and that every drawdown in the market is a buying opportunity.

For 2025 the S&P 500 Index, the capitalization-weighted broadest measure of U.S. stock market performance, returned 17.88%. The Nasdaq Composite Index, another capitalization-weighted index, but more reflective of growth stocks, returned 20.61%. Finally, the Dow Jones Industrial Average, a price-weighted index, returned 14.82%. All returns are on a total return basis that includes dividends.

The Morningstar U.S. Aggregate Bond Index, a broad measure of the U.S. bond market, returned 7.30% for the year. The Fed recently cut the Fed Funds Rate by .25%; nevertheless the long-end of the curve has not fallen that much, indicating the Fed has little control over long-term rates. Credit spreads remain at very low levels, meaning that investors are demanding very little premium over so-called risk-free 10-year treasuries.

The sectors in the equity market that performed the best in 2025 were Communication Services, Information Technology, and Industrials at 32.1%, 23.1% and 16.8%, respectively. Real Estate, Consumer Staples, and Energy fared the worst at -0.6%, 0.7% and 4.1%, respectively. It is not hard to spot the influence of the AI trade, as anything connected with the AI story got a valuation premium. This is true even for industrials, as those associated with data-center buildouts were given a premium valuation.

The comparison of current price/earnings ratios and dividend yields as of January 1, 2026 to those of the prior year is as follows.

* based on 12-month trailing data

The dividend yield, which is at historic lows, is a reliable metric of valuation, since it cannot be manipulated as earnings frequently are. Dividend yields continued to fall in 2025.

Gold and crude oil most recently traded at $4,375.75 and $58.25, respectively, compared to $2,625.50 and $73.75 one year earlier. Gold rose in reaction to global political instability, increased holdings by all central banks and general concerns about the value of the dollar and creditworthiness of the United States. Gold significantly outperformed the S&P 500 index in 2025 (as it has since January of 2000). The drop in the price of oil is concerning, as it frequently is an indication of the weakness of the economy and a harbinger of slower economic activity.