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Summary
• Large-cap U.S. equities returned +17.9% in 2025 (after +25.0% total returns in 2024). Foreign developed and emerging markets equities returned +31.2% and +33.6%, respectively, in 2025.
• S&P 500 earnings growth rates consensus forecasts are +16.3% in 2026 and +16.6% in 2027.
• Unemployment rates will remain at 4.4%-4.5% throughout 2026 and 2027, and the “low hire, low fire” labor market phenomenon of 2025 will persist, according to consensus forecasts.
• We forecast a 30% probability of a hard landing U.S. recession in 2026. 20% is a “normal” year recession forecast.
• The biggest risks to stock and bond markets are oil and natural gas negative supply shocks caused by Iran’s closure of the Strait of Hormuz. In aggregate, corporate earnings were quite strong, and the U.S. economy was accelerating before the war, providing resilience. Supply chain management teams around the globe faced severe tests from the COVID crisis in 2020 and Russia’s invasion of Ukraine in 2022, and now they must save the global economies yet again.
• Bloomberg’s economic model (SHOK) “bad case” scenario assumes the Strait of Hormuz is closed for several months, oil prices rise to $170/barrel, and then after supply normalizes, oil prices decline to $100/barrel by year's end. In this scenario, their SHOK model forecasts reductions from baseline in real GDP of -0.3% for the U.S. and -1.2% for the euro area. It also forecasts additional inflation rates of 1.6% for the U.S. and 2.0% for the euro area, which central banks should “look through” as long as inflation expectations remain anchored (remember ‘transitory’?).
• We are respectful of the seriousness of this military conflict and pray that our service men and women return home safely as soon as possible.
