Economic data closed out 2025 with a mixed but stable picture—slower job growth, resilient services activity, and continued weakness in manufacturing—while markets entered 2026 with solid early momentum. As geopolitical headlines fade, investor focus is shifting back to earnings, valuations, and the durability of growth. With corporate profits expected to grow at a double-digit pace and key sectors supported by AI investment, defense spending, and improving consumer confidence, the market’s fundamental backdrop remains constructive even as risks tied to elevated valuations and a maturing cycle persist.
Week’s Key Items:
- The final nonfarm payroll report of 2025 showed the year to be the weakest for annual job growth since 2003 with just 584K jobs added to the economy. In December, businesses added 50K new hires, down from 56K in November. The unemployment rate meanwhile dipped to 4.40% from 4.50% the prior month as the labor force participation rate held relatively steady. For those fortunate to be on the job, the much-followed average hourly earnings metric rose 0.30% for the month, pushing the annual increase to 3.80%.
- Strong consumer spending helped power the services sector to its third straight month of expansion. The ISM Services Index rose to 54.4 in December, up from 52.6 in the prior month. Numbers above 50 indicate expansion while those below signal contraction. Employment, new orders, and a drop in prices helped push the index higher on the month.
- December was a tough month for manufacturers as weak demand and uncertainty surrounding tariffs held down factory activity. For the month, the ISM Manufacturing Index fell to 47.9 from 48.2 in the previous month. Pullbacks in production and inventories dragged down the index. December’s reading was not only the lowest of the year but marked the 10th straight month of contraction for the sector.
2026 Starts with a Bang
Markets wasted no time getting off the starting blocks in 2026, with the Dow, S&P 500, and Nasdaq Composite all up more than 1.70% year to date. Stocks surged on Monday in the first full week of trading following news of the U.S. capture of Venezuelan leader Nicolás Maduro on charges of narco-terrorism, drug trafficking, and weapons offenses. Investors quickly bid up shares of energy and industrial companies positioned to benefit from the potential rebuilding of Venezuela’s oil infrastructure. Markets received an added boost when the administration proposed a $1.5 trillion defense budget for 2027, up from the current $1 trillion. Geopolitical headlines remained front and center as the administration renewed calls to acquire Greenland on national security grounds, with talks expected to begin next week with Danish officials.
Despite the rapid pace of geopolitical developments, markets remained focused on economic data, which continued to point to a weaker—but not weak—labor market, a rebound in services activity, and ongoing softness in manufacturing.
With only a few trading days behind us, 2026 is already echoing some of 2025’s unpredictability. Geopolitical headlines drove much of this week’s market action, but these events were quickly absorbed by markets, with investor attention returning to the traditional drivers of returns: profits, valuations, and economic data. Next week kicks off the start of the Q4 2025 earnings season, with large banks reporting first. Investors will be focused not only on earnings results but also on forward guidance, particularly as valuations remain elevated. The S&P 500 currently trades at roughly 22x forward earnings, above its 10-year average of 19. Although expensive by historical standards, stocks could continue to advance if earnings expectations are met, with analysts projecting 15% aggregate earnings growth for S&P 500 companies in 2026.
The AI trade that dominated 2025 continues to have legs. Chip stocks rallied this week on strong AI demand and new product announcements from industry leaders such as Nvidia. Market leadership could also broaden beyond technology as the year unfolds, something we saw this week as emerging markets, cyclicals, and domestic small caps showed relative strength. Financials and consumer discretionary stocks also appear well positioned as tax cuts, lower interest rates, and rising real wages have improved household confidence. Meanwhile, policy initiatives—including the defense budget proposal and potential rebuilding efforts in Venezuela—could further support industrial, energy, and materials stocks.
If 2025 taught investors anything, it is that markets often evolve very differently than initially expected. Last year marked the third consecutive year of 10%+ equity returns, a streak that has occurred only six times since 1928. In half of those instances, markets went on to deliver a fourth double-digit year (1942–1945, 1949–1952, 1995–1999), but only once did the streak extend to a fifth (1995–1999). The point is not that returns are destined to fade, but rather that we have enjoyed a very favorable environment. Even so, as we enter 2026, fundamentals remain supportive.
That said, extended bull markets eventually give way to retrenchments. It has been quite some time since we have experienced a truly white-knuckle market, outside of shorter-lived episodes such as COVID, the Silicon Valley Bank crisis, or tariff-related volatility. Peter Lynch recently noted that “far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves.” Taken to an extreme, that is certainly true. Missed gains, hedging costs, and taxes all erode returns. But that is different from being financially and emotionally prepared for an eventual 20% drawdown (-18% mean, -11.7% median, -71.7% min, -0.73% max), which historically has occurred with some regularity and tends to last about 18 months on average.
Having closed the first full week of 2026, markets are already off to another strong start, and while we are optimistic about the year ahead, we are mindful that it is a rare thing to enjoy the level of returns markets have provided in recent years.
The Week Ahead
Key reports on inflation, retail sales, and home sales are slated to be released.
New Year, New Limits: What to Know about 2026 Retirement Contributions
As we settle into 2026, the Internal Revenue Service (IRS) has released updated contribution limits for retirement accounts to reflect annual inflation adjustments and recent legislative changes from the SECURE 2.0 Act. These increases give savers a chance to put away more for the future. The start of a new year is a good time to revisit retirement planning strategies and annual contributions to maximize long-term financial security. Below are some of the key retirement accounts and updated limits for 2026. As always, we encourage you to speak with your advisor about your individual retirement plan and savings goals to ensure you are on track.
Individual Retirement Accounts (IRAs) Contribution Limits
IRAs help individuals save for retirement but come with limits on how much you can contribute and, for traditional IRAs, how much you may be able to deduct based on income. Even if your traditional IRA contributions are not deductible, invested assets can still grow tax-deferred until withdrawn. For most taxpayers, the deadline to make 2025 IRA contributions is April 15, 2026, providing extra time after year-end to fund or top up an IRA.
- Traditional & Roth IRA limit for 2026: $7,500 (up from $7,000 in 2025)
- IRA catch-up contribution (age 50+) for 2026: $1,100 (up from $1,000 in 2025)
Traditional 401(k) and Roth 401(k) Contribution Limits
The IRS sets annual limits on how much employees and employers can contribute to 401(k) plans. For 2026, employees may defer up to $24,500, with a combined employee-and-employer contribution limit of $72,000. If you’re age 50 or older, you’re eligible for catch-up contributions. Additionally, under SECURE 2.0, participants ages 60-63 may be eligible for a higher “super” catch-up contribution if their plan allows.
- Standard elective deferral limit for 2026: $24,500 (up from $23,500 in 2025)
- Catch-up contributions (age 50+) for 2026: $8,000 (up from $7,500)
- “Super” catch-up (ages 60–63) for 2026: $11,250 (unchanged)
This means:
- Participants age 50 or older can contribute up to $32,500 in 2026
- Participants age 60-63 (if the plan permits) can contribute up to $35,750 in 2026
SIMPLE Retirement Plans
A Savings Incentive Match Plan for Employees (SIMPLE) individual retirement account (IRA) allows small-business owners to offer retirement benefits to themselves and their employees. SIMPLE IRAs provide tax advantages and have annual contribution limits, along with required employer contributions based on the plan’s matching or nonelective formula.
- Contribution limit for 2026: $17,000 (up from $16,500 in 2025)
- Catch-up contribution (age 50+) for 2026: $4,000 (up from $3,850 in 2025)
Planning Tip: Contribution Deadlines
Most employer-sponsored plans such as 401(k)s and 403(b)s require employee contributions to be made within the calendar year. Employees should review and update their payroll elections early to take full advantage of annual limits. For IRAs (traditional and Roth), taxpayers generally have until the federal tax filing deadline.
Bottom Line for 2026 Planning:
- Review and adjust retirement contributions early to take advantage of the higher limits.
- Keep April IRA contribution deadlines in mind
- Coordinate retirement, tax, and estate planning with your financial advisor or tax professional.
The start of a new year is an ideal time to revisit your financial plan, incorporate updated contribution limits, and ensure you are optimizing both your retirement savings and your long-term legacy goals.