For the third consecutive year, U.S. stocks posted solid gains—shrugging off concerns about tariffs, higher interest rates, inflation, a long government shutdown, and broader economic uncertainty. While markets were led once again by mega-cap, technology-oriented companies such as Nvidia and Alphabet, participation was notably broad. Small-cap stocks and the typical stock both rose by double digits, and the performance gap between large-cap value and large-cap growth narrowed to its smallest level since 2021, meaning value stocks and growth stocks performed similarly over the year.
Foreign markets were a particular bright spot in 2025, helped in no small part by a weakening U.S. dollar which fell roughly 9% for the year. Both developed markets—such as those of Europe and Japan—and emerging markets delivered stronger returns than U.S. markets, creating the widest performance gap between foreign and U.S. markets in nearly two decades.
Bonds also delivered solid results. While we don’t expect bonds—generally a more conservative asset class—to keep pace with equities over time, returns were positive across most segments. Government and high-quality corporate bonds performed well, as did higher-yield, higher-risk bond sectors.
Despite the strong full-year results, 2025 was far from a smooth ride. Volatility was especially pronounced in the first half of the year, when the Trump administration outlined plans to impose sweeping tariffs on nearly every U.S. trading partner. Markets reacted swiftly, with stocks selling off nearly 20% in short order (see chart below). As it became clear that these tariffs were unlikely to be implemented at the initially proposed levels, investor confidence gradually returned, allowing markets to recover and push higher into year-end.
For FSA clients, most portfolios are now at or near all-time highs. Passive strategies remained fully invested during the sell-off, and because the decline was relatively brief—lasting just seven weeks from peak to trough—those portfolios fully participated in the subsequent rebound. Active strategies faced a more challenging environment as the drawdown triggered the FSA Safety Net®.
Fortunately, portfolios were back to fully invested positions by the end of the second quarter and have performed well since. Strategies utilizing the FSA Safety Net® are designed to help limit significant losses during major market declines. However, sharp selloffs that reverse quickly can create short-term headwinds. For clients who prioritize downside protection for their critical retirement money, occasional periods of lag during volatile markets may be a reasonable trade-off.
What to Expect in the New Year
From a technical perspective, market conditions remain encouraging. Broad equity indices show well-defined uptrends, suggesting healthy participation across many stocks rather than leadership from only a narrow group of mega-cap names—a positive sign for market durability.
Our current analysis favors foreign equity funds and small-cap stocks, and every strategy holds allocations to one or both. At the same time, most portfolios maintain meaningful allocations to large-cap funds, including the S&P 500, which continues to benefit from its technology-heavy composition.
With tax cuts putting additional money into consumers’ pockets and favorable tax treatment encouraging business investment, it’s reasonable to imagine market momentum continuing for a fourth straight year. That said, extended runs of strong performance can also lay the groundwork for excesses. We are beginning to see signs of froth in certain areas tied to artificial intelligence, as well as in related sectors such as utilities and energy production—both traditional and renewable (hydrogen, uranium, etc.).
Adding to the cautionary backdrop, 2026 represents the second year of the four-year presidential cycle. Historically, this has been the weakest year of the cycle, with average returns of approximately 3% over the past 150 years. Beyond historical patterns, geopolitical tensions—including developments involving Iran, Ukraine, Venezuela, and Greenland—could keep investors on edge.
The chart below, from Ned Davis Research, is a forecast based purely on historical tendencies. It suggests a positive start to the year, potential challenges in the middle quarters, and a stronger finish toward year-end.
This outlook aligns with our disciplined and risk-aware approach. For now, all strategies are fully invested in equities and will remain that way as long as market trends remain favorable.
Portfolio Updates
Please note: Because we manage client portfolios individually, your holdings may differ slightly from the composites described below.
Strategies Using the FSA Safety Net®
Income (Strategy #1)
It was a pretty consistent year for this very conservative strategy. The portfolios have been relatively stable since we got past the tariff tantrum of last spring. Currently, these portfolios have a mix of high yield bonds (35%), defensive/eclectic bond funds (30%), high-quality bond funds (15%), and foreign bond funds (15%).
Income & Growth (Strategy #2)
This strategy produced consistent returns last year. The portfolios have been relatively stable since we got back into equities in May. In the fourth quarter, we added a fund designed to do well amid elevated or rising inflation. We also added a second foreign-bond fund. At year’s end, the portfolios held 30% large-cap stocks, 5% mid-cap stocks, 10% foreign stocks, and 5% in an inflation-hedge fund, with nearly 50% in bond funds.
Conservative Growth (Strategy #3)
These portfolios have been fully allocated to their maximum equity levels since the summer, and we have made only a few trades since then. Currently, these portfolios hold a diversified mix of large-cap stock funds (35%), defensive equity funds (20%), international funds (10%), and small-cap funds (10%), with 20% in bond funds.
Core Equity (Strategy #4)
This strategy has performed well since the portfolios were reinvested in the second quarter. For most of the year, these portfolios were more heavily weighted toward large-cap growth-oriented funds, but recently we have been shifting them back toward value. Currently, there is a diversified mix of S&P-type funds (45%), large-cap growth (20%), large-cap value (10%), foreign stocks (10%), and small-cap funds (10%).
Tactical Growth (Strategy #5)
The tariff tantrum disrupted this aggressive strategy most notably, given its more volatile holdings. Once we increased investments again in the second quarter, these portfolios performed well. Currently, the portfolios are beginning to tilt toward value funds (5%), foreign stocks (20%), and small-cap stocks (10%). Large-cap S&P-type funds occupy the largest weighting at 42%, with a modest allocation to commodities at 10%.
Active Strategies WITHOUT the FSA Safety Net®
Sector Rotation
Strong results were posted in the fourth quarter for this sector rotation strategy, enabling these accounts to post double-digit returns for the year. Recently, the strategy has been drifting away from technology-oriented sectors. In the January rotation, it holds an eclectic mix of the following sectors: semiconductors, telecommunications, health care, banks, energy, and basic materials.
Global Rotation
This strategy also struggled through the early volatility of last year but has recovered nicely by focusing heavily on the growthier segments of the stock market. During the quarter, we sold the international fund and added a small-cap fund, though on the second day of the new year we sold one of the large-cap growth funds to buy an international fund. Currently, this portfolio holds 64% in large-cap funds, with 16% in small-cap funds and 16% in international funds.
Strategies That Remain Fully Invested Through ALL Market Cycles (Passive)
Global Balanced
This strategy maintains a constant allocation of 50% stocks (including large-cap, small-cap, foreign, and real estate) and 50% in fixed income (high-quality, high yield, and foreign). The foreign investments provided a nice tailwind for this strategy in 2025.
Global Moderate
This strategy maintains a constant allocation of 70% stocks (including large-cap, small-cap, foreign, real estate, and gold) and 30% in fixed income (high-quality and foreign). The foreign investments and gold provided a nice tailwind for this strategy in 2025.
Global Growth
This strategy maintains a constant allocation of 90% stocks (including large-cap, small-cap, foreign, real estate, and gold) and 10% in fixed income. The foreign investments and gold provided a nice tailwind for this strategy in 2025.
As always, please contact your advisor if there have been any changes in your circumstances that could affect how we manage your portfolio.
Ronald Rough, CFA
Chief Investment Officer
Disclosures are available at www.fsawealthpartners.com/disclosures/market-update.
FSA’s current written Disclosure Brochure and Privacy Notice discussing our current advisory services and fees is available at www.fsawealthpartners.com/disclosures or by calling 301-949-7300.
