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In the December edition of Market in Five Charts, Chairman and Chief Global Strategist Rick Pitcairn reviews why 2025 delivered stronger-than-expected market performance and highlights the key factors investors should watch as 2026 approaches.
One of the most surprising insights from 2025 was the disconnect between performance and sentiment. Despite strong returns, institutional investors ranked 2025 among the most pessimistic years on record. Early-year negativity gave way to a second-half rally, illustrating how behavioral biases—particularly recency bias—can shape investor perceptions even when fundamentals improve.
Market strength also extended well beyond mega-cap technology stocks. While much attention focused on the “Magnificent Seven,” the Russell 1000 Value Index posted solid double-digit gains. Importantly, those returns came at significantly lower valuations than the broader S&P 500, signaling healthier and more diversified market participation.
Corporate fundamentals supported this strength. At the start of the year, expectations called for flat or declining S&P 500 profit margins, yet margins rose steadily throughout 2025. This improvement may reflect early efficiency gains, potentially linked to increased adoption of artificial intelligence—an important trend to monitor going forward.
Earnings growth played a critical role as well. Beginning in the spring, earnings forecasts consistently moved higher, surprising to the upside. As Pitcairn CIO Nathan Sonnenberg has noted, markets respond less to headlines and more to incremental changes in fundamentals such as earnings, margins, and interest rates—and in 2025, those changes supported higher valuations.
Looking ahead to 2026, liquidity will be an important factor to watch. Liquidity conditions became less supportive after mid-year, particularly following the resolution of the debt ceiling. While equities absorbed this shift, more speculative assets reacted more visibly. With liquidity likely to remain constrained, it could present a headwind for risk assets in the year ahead.
As 2025 concludes, the year offers a clear reminder: markets often move ahead of sentiment. Maintaining focus on fundamentals—earnings, valuations, margins, and liquidity—will remain essential in 2026.
Disclaimer: Pitcairn Wealth Advisors LLC (“PWA”) is a registered investment adviser with its principal place of business in the Commonwealth of Pennsylvania. Registration does not imply a certain level of skill or training. Additional information about PWA, including our registration status, fees, and services is available on the SEC’s website at www.adviserinfo.sec.gov. This material was prepared solely for informational, illustrative, and convenience purposes only and all users should be guided accordingly. All information, opinions, and estimates contained herein are given as of the date hereof and are subject to change without notice. PWA and its affiliates (jointly referred to as “Pitcairn”) do not make any representations as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether referenced or incorporated herein, and takes no responsibility thereof. As Pitcairn does not provide legal services, all users are advised to seek the advice of independent legal and tax counsel prior to relying upon or acting upon any information contained herein. The performance numbers displayed to the user may have been adversely or favorably impacted by events and economic conditions that will not prevail in the future. Past investment performance is not indicative of future results. The indices discussed are unmanaged and do not incur management fees, transaction costs, or other expenses associated with investable products. It is not possible to invest directly in an index. Projections are based on models that assume normally distributed outcomes which may not reflect actual experience. Consistent with its obligation to obtain “best execution,” Pitcairn, in exercising its investment discretion over advisory or fiduciary assets in client accounts, may allocate orders for the purchase, sale, or exchange of securities for the account to such brokers and dealers for execution on such markets, at such prices, and at such commission rates as, in the good faith judgment of Pitcairn, will be in the best interest of the account, taking into consideration in the selection of such broker and dealer, not only the available prices and rates of brokerage commissions, but also other relevant factors (such as, without limitation, execution capabilities, products, research or services provided by such brokers or dealers which are expected to provide lawful and appropriate assistance to Pitcairn in the performance of its investment decision making responsibilities). This material should not be regarded as a complete analysis of the subjects discussed. This material is provided for information purposes only and is not an offer to sell or the solicitation of an offer to purchase an interest or any other security or financial instrument.