Nov 14, 2025 Market Commentary – A Soft Landing Takes Shape
Despite a noisy backdrop, 2025 turned out better than many expected. Inflation moderated but didn’t collapse, growth slowed without breaking, and the labor market cooled gradually instead of crashing. The U.S. economy continued to expand at a modest but positive pace, supported by solid consumer spending and gains in productivity—particularly from AI-driven efficiencies.
Inflation still hovers in the mid 3% range, higher than the Fed’s long-term target but trending down. New tariffs added mild pressure to prices, though the overall impact was smaller than feared. Unemployment rose toward the mid-4% range, but the move was largely structural—reflecting automation and slower hiring—rather than a wave of layoffs. Consumer demand proved resilient, with higher-income households continuing to spend, offsetting weakness in lower-income segments. All told, 2025 was a year of deceleration, not contraction.
Equities: Riding the Wall of Worry
Stocks are performing strongly in 2025 with the S&P 500 and Nasdaq both posting solid double-digit gains thus far. Optimism around artificial intelligence, stable earnings, and the expectation of future rate cuts outweighed tariff and policy uncertainty. Technology and growth stocks lead the charge, while value and defensive sectors lagged.
A key development in the second half of the year was the broadening of market leadership. While large-cap tech continued to dominate, mid-caps and small-caps finally joined the rally as investors priced in the start of a Fed easing cycle. Corporate earnings growth was steady, margins held firm, and sentiment improved as uncertainty around inflation and policy eased.
Outside the U.S., developed international markets rose substantially to start the year, while emerging markets grew over the last few months —helped by cheaper valuations and earlier currency stabilization.
Fixed Income: From Pain to Potential
Bond markets finally saw relief after two difficult years. Yields peaked mid-year, then drifted lower as the Fed shifted toward a more accommodative stance. The first rate cut arrived in September, signaling a new policy phase, followed by another cut in late October. The Bloomberg U.S. Aggregate Bond Index is on pace for its best performance year since 2020.
Investment-grade bonds and high-yield, low-credit bonds both had strong performance YTD in the 7 – 8 range. Carry remained attractive: even after the rally, most high-quality bonds continued to yield north of 4%. Many investors began extending duration from short-term cash positions toward intermediate maturities to lock in these yields before further cuts.
Real Assets: Divergent Paths
Commodities and precious metals performed well in 2025, while real estate continued to lag. Gold was a standout, climbing to record highs as investors sought safety amid policy and geopolitical uncertainty. Broader commodities benefited from resilient global demand, particularly in energy and industrial metals.
By contrast, real estate struggled under the weight of higher financing costs. Commercial properties continued to reprice lower, with office and retail facing persistent headwinds. However, signs of stabilization emerged late in the year as rate expectations peaked. Datacenter and infrastructure assets were relative bright spots, supported by the growth of digital infrastructure and AI-related capital investments.
Our 2026 Outlook: Gradual Normalization, Not Recession
The path forward looks smoother than many feared. Inflation should remain in a 2.5%–3.5% range for much of 2026 before drifting closer to 2% over the next few years. The labor market will continue to loosen modestly, but not enough to derail growth. Productivity gains, supply-chain improvements, and a more stable policy environment should all support modest but sustainable expansion.
The Federal Reserve’s pivot to rate cuts marks a major shift. We expect additional small reductions in early 2026, bringing policy rates toward 3% and potentially ending quantitative tightening. Liquidity should improve as the Fed transitions from draining to adding reserves. That easing, combined with still-solid corporate fundamentals, should underpin a favorable environment for both equities and bonds.
This backdrop supports a “soft landing” scenario—slower growth, cooler inflation, and improving financial conditions. While geopolitical and trade risks persist, they are less likely to dominate markets in 2026. For investors, the setup is one of cautious optimism: yields remain attractive, earnings are growing, and policy tailwinds are re-emerging.
Portfolio Strategy: Positioning for Opportunity
Equities
We maintain an overweight to U.S. equities versus international markets. Earnings strength, technological leadership, and policy clarity continue to favor U.S. exposure. The market’s leadership has broadened beyond mega-cap tech, which supports maintaining equity exposure even after a strong year.
Within equities, our focus remains on quality and secular growth:
- Technology and communication services continue to lead due to AI adoption, cloud infrastructure, and digital transformation.
- Health care remains attractive for its blend of defensive and innovative growth, with biotechnology and medical technology offering pipeline visibility and margin upside.
- Industrials benefit from automation, reshoring, and defense spending trends.
We remain underweight consumer discretionary and consumer staples, where valuations and profit pressures remain challenging.
Overall, we emphasize companies with strong balance sheets, operational discipline, and durable business models—those best positioned to navigate policy and rate transitions.
Fixed Income
Our fixed-income stance has shifted from defensive to balanced. We are neutral overall but have extended duration to capture potential price appreciation as yields fall. Intermediate-term Treasuries, agencies, and high-quality corporates form the core, supplemented by municipals where tax advantages apply.
Within high-yield debt we remain cautious with a focus on short-duration, higher-quality exposure where the risk/reward remains acceptable. Structured products with government guarantees can add modest yield without materially raising risk.
Alternatives and Real Assets
We maintain an overweight to alternatives, with a preference for commodities and gold over real estate. Commodities provide inflation protection and may benefit from continued infrastructure and AI-related energy demand. Real estate remains selective; stabilization may continue as financing costs fall. Private equity and private credit are also worth watching for renewed opportunity as liquidity improves should they be appropriate for you on an individual investor level.
Cash Alternatives
Cash alternative yields remain appealing but will likely drift lower as rate cuts progress. Gradually redeploying excess cash into equities and bonds during volatility makes sense for long-term investors.
Bottom Line
The investment landscape heading into 2026 looks constructive. Inflation is cooling, growth remains positive, and the Fed is shifting toward support rather than restraint. Together, these forces improve the risk-reward balance for both stocks and bonds.
Investors should remain fully invested, lean into quality and innovation, extend bond duration modestly, and use volatility as an opportunity to build long-term positions. A disciplined focus on fundamentals—not headlines—will be key to capturing returns in a gradually normalizing environment.
— The Seventy2 Capital Team
Commentary and Research provided by:
Michael Levitsky, CFA®, CAIA® – Managing Director, Investment Strategy
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