Markets thrived in 2025, but outlook for 2026 looks murky

Nick Rummell

MANHATTAN (CN) — Wall Street enjoyed another year of massive gains despite cracks in the economy that some analysts say is bleaker for Main Street.

When markets closed on New Year’s Eve, the Dow Jones Industrial Average had clocked a 5,403-point increase for the year, roughly 12.6%. The S&P 500 and Nasdaq fared even better, with the former gaining more than 16% for the year and the latter finishing about 20% higher than it began 2025.

The gains on Wall Street follow a similarly huge year for investors in 2024, when the Nasdaq index gained about 30% and the S&P 500 increased by more than 27%.

“The K-shaped economy will likely persist in the next year,” Jeffrey Roach, chief economist at LPL Financial, wrote in an analysis, adding “the affluent are fine, if not thriving, while lower income households struggle with high rent payments, rising delinquencies and job uncertainty.”

Several factors point to a rockier path in 2026 for markets, however: a noticeably slowing labor pool, uncertainty about tariffs and fewer interest rate cuts.

The labor market in 2025 saw a notable slowdown from 2024, with about 610,000 jobs added throughout the year. The largest increase was in April, when 158,000 jobs were added after revisions, but in the second half of the year jobs reports fluctuated between minor gains and minor losses.

Some of the job stagnation could be chalked up to DOGE cuts to government employment that began last January. However, the private sector jobs reports from payroll company ADP followed a similar track as the federal jobs reports.

The largest increase after revisions to ADP’s data was in January 2025 at 186,000 jobs gained. The second half of the year saw a mere 64,000 jobs gained, however, following smaller gains in July and October and losses the remainder of the months.

The unemployment rate also has steadily ticked up from 4% in January to 4.6% in November. Employment data for 2025 is incomplete, as the final jobs reports for last year are due out next week.

Future jobs reports may look different in 2026, as the Bureau of Labor Statistics is planning changes to its methodology. The shifts likely will result in lower initial employment estimates and lower revisions to previous payroll reports, Nancy Vanden Houten, lead U.S. economist at Oxford Economics, wrote in an investors note.

“That assumption would push monthly job growth for recent months into negative territory … and below our current estimate of the breakeven rate of job growth of about 30,000,” she wrote.

Tariffs remained one of the biggest economic storylines for 2025 after President Donald Trump announced a bevy of import taxes soon after taking office.

Stocks dropped following the original tariffs, which caused the administration to delay and change the taxes throughout the year. The impact on inflation also has been less than economists originally forecast.

Inflation has slowed despite a slight increase earlier in the year, with recent prints showing only a 2.7% year-over-year increase despite economists expecting half a percentage point higher. “The inflation bump from tariffs is behind us,” Jamie Cox, managing partner at Harris Financial Group, said in mid-December.

Economists say the last inflation print may be misleading due to garbled data collection during the government shutdown, and they now look anxiously to the inflation report for December.

So, too, does the Federal Reserve, which last month voted 9-3 to reduce the federal funds rate by another quarter-point — its third cut for 2025 — to hit 3.5% to 3.75%. Analysts believe the Fed will continue to cut rates through 2026 but do not agree on the magnitude.

The minutes from the Fed’s final meeting in 2025 indicate a divided central bank still worried that “overall inflation had been above target for some time and had not moved closer to the 2% objective over the past year.”

The minutes also showed most Fed members believed higher tariffs had temporarily increased goods inflation, but some members “expressed uncertainty about when these effects would diminish or the extent to which tariffs would ultimately be passed through to final goods prices.”