Quarterly Economic Review 4th Quarter 2025
Markets, Affordability and Your Financial Future
As 2025 comes to a close, our principal concern regarding the current U.S. economic landscape has gradually shifted from the slow but steady uptick in inflation to the erosion of consumer purchasing power.
Despite recent prices having somewhat stabilized, they’ve left behind a structurally higher cost-of-living baseline that continues to squeeze more and more household budgets. This ‘new normal’ is punctuated by a housing market that remains stubbornly constrained, along with a secondary surge in non-discretionary expenses (most notably auto, home, and health insurance premiums).
For many Americans, it’s an economic stabilization that feels less like a recovery and more like a new plateau. The distinction between financially treading water and effectively building wealth has sharpened, as everyday expenses remain elevated from their pandemic-era baseline. Considering this backdrop, now more than ever, discussing wealth preservation strategies with your BLBB advisor should be taking center stage in your planning discussions.
Navigating a New Federal Reserve Policy Phase
The Fed has been steadily transitioning into a ‘maintenance’ phase, characterized by a series of strategic rate cuts which have brought the Fed Funds rate down to a target range of 3.50% to 3.75%.1
But throughout the year, it’s been nothing short of a high-stakes balancing act: trying to preserve a cooling labor market (with unemployment reaching 4.6%)2 while remaining vigilant against a structural inflation baseline that remains stubbornly above the Fed’s 2% target. Often, this data-dependent path saw the Fed hold steady in an effort to gauge the impact of previous cuts; essentially seeking a ‘neutral rate’ that would neither stimulate nor restrict growth.
For investors, this shift has signaled an end to the “cash is king” era. As money market yields began to retreat from their 5% peaks, the portfolio focus has shifted towards reinvestment.
- Mortgage Rates: Despite Fed cuts, 30-year fixed rates have remained volatile, now hovering near 6.2% as the bond market prices in long-term deficit and inflation concerns.3
- Fixed Income: As the yield curve evolves, investors are finding opportunities by extending duration – moving out of short-term holdings into the ‘belly’ of the yield curve (e.g., 5-to-7-year maturities) to lock in yields.
10-Year vs 2-Year U.S. Bond Yield Spread
The spread between longer-term and shorter-term yields continues to widen.
Source: MacroMicro, December 23, 2025
Looking towards 2026, the Fed is projecting only one or two additional rate cuts. Additionally, with Chairman Powell’s term ending in May, a potential leadership change introduces fresh uncertainty – making high-quality bond ladders and tax-efficient municipals worth considering in an effort to create more resilient portfolios.
Has Inflation Been Tamed?
While the headline CPI has cooled significantly from its 9.1% peak in 2022 (coming in at 2.7% for November), it remains frustratingly above the Fed’s 2% target.4
Progress has been uneven, primarily split by a goods vs. services dynamic. Inflation for physical goods has largely evaporated now that supply chains have returned to normal – with categories like apparel and new vehicles seeing minimal increases (under 1%). Services inflation, on the other hand, remains sticky at 3.0%, driven by high labor costs. Additionally, energy prices have added fuel to the fire. While gasoline prices have been relatively stable for much of 2025, fuel oil and electricity costs spiked by over 6%, continuing to strain monthly household budgets.
On a positive note, real wage growth has finally turned the corner. With nominal wages growing at roughly 3.9%5 compared to 2.7% inflation, the average worker is finally regaining some of their lost purchasing power. For investors, however, the mandate is clear: portfolios must generate real (after-inflation) returns just to maintain purchasing power over time.
Another Strong Year for Equities
U.S. large cap stocks delivered another standout year, with the S&P 500 recording a return YTD of 16.39%,6 and 17.88%7 total return including dividends (marking the index’s third consecutive year of double-digit gains). Unlike previous sentiment-driven rallies, this year’s performance was grounded in fundamental strength; over 60% of the index's return was driven by robust earnings growth rather than pure multiple expansion.8
S&P 500 YTD Performance
After extreme volatility earlier in the year, the index steadily recovered throughout the rest of the year.
Source: Macrotrends, December 23, 2025
While the Magnificent 7 continue to drive the market, 2025 saw a healthy broadening of leadership. The AI narrative evolved from speculative excitement into a more tangible monetization phase, as mega-cap tech companies successfully integrated AI into cloud and enterprise software services. However, valuation concerns persist with the index’s forward P/E ratio climbing towards 22.0x (versus a 17.1x historical average).9 This has spurred a rotation into more quality-oriented sectors, with Financials and Industrials recently outperforming as those sectors are benefitting from a resilient economy and increased infrastructure spending.
Internationally, both developed markets (MSCI EAFE) and Emerging Markets (EM) quietly staged a massive comeback. YTD EM equities have surged more than 30% (nearly doubling the S&P 500's performance for the year)10 fueled by a weakening U.S. dollar and a ‘value rotation’ in Europe and Japan. Maintaining global diversification paid off handsomely, with international exposure acting as a vital ballast, providing access to different economic cycles and protecting portfolios during times of domestic volatility.
Heading into 2026, the case for a globally diversified portfolio is even more compelling. As U.S. valuations remain elevated, the structural growth in international markets offers a necessary hedge as well as a source of untapped value.
What BLBB Will Be Monitoring
As we look ahead to 2026, BLBB will be closely watching key economic indicators and variables, prepared to adjust as required:
- We’ll be watching the Fed’s path (including the selection of a new Chair in Q2). And although inflation has moderated, its potential persistence above 2%, fueled by trade policy and services costs, will remain a factor in our tactical adjustments.
- We’re also tracking consumer health, specifically the ‘K-shaped’ divergence of upper-income asset growth contrasted by the affordability crunch facing others and how this trend may impact the markets.
- Sustaining corporate earnings growth will be another area of scrutiny as market leadership broadens into other segments.
- Geopolitical developments and shifting valuation levels will inform our global stance, as we lean into international opportunities that offer more attractive entry points.
In the meantime, investors may want to discuss one or more of the following with your BLBB advisor:
- Shedding the ‘cash-heavy’ mindset of 2024 and 2025 and moving to a more active, diversified posture.
- Shifting towards longer 5-7 year fixed income durations that offer a buffer against reinvestment risk as money market rates retreat due to the Fed inching closer to interest rate neutrality.
- Diversifying away from mega-cap holdings in your equity portfolio in pursuit of a more balanced approach.
- Tilting towards international markets which continue to trade at a significant discount to the S&P 500 and offer exposure to different economic cycles (e.g., Europe’s defense buildout and Japan’s corporate reforms) that further diversify against domestic volatility.
Ultimately, our focus remains steadfast: ensuring the long-term preservation of your family’s wealth through comprehensive, data-driven planning that adapts to whatever future challenges arise.
Affordability concerns are real, but disciplined investing helps protect and grow wealth. Proactive portfolio management, tax-efficient strategies and comprehensive financial planning beyond just investments can help ensure that your long-term objectives don’t get sidetracked by short-term noise. Staying the course matters. Now’s the time to reach out to your BLBB advisor and schedule a 2026 planning discussion.
1 https://www.federalreserve.gov/newsevents/pressreleases/monetary20251210a.htm
2 https://www.bls.gov/news.release/empsit.nr0.htm
3 https://fred.stlouisfed.org/series/MORTGAGE30US
4 https://www.bls.gov/news.release/pdf/cpi.pdf
5 https://www.epi.org/nominal-wage-tracker/
6 https://www.slickcharts.com/sp500/returns/details
7 https://www.slickcharts.com/sp500/returns/details
8 https://www.carsongroup.com/insights/blog/sp-500-returns-in-2025-have-been-a-story-of-profitability/
10 https://www.msci.com/indexes/index/891800
Disclosures
Investment advisory services are provided by BLBB Advisors, a Pennsylvania-based investment advisor registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. SEC registration does not imply any particular level of skill or training. Additional information about BLBB is available in our current disclosure documents which are available on BLBB’s website (www.blbb.com) or the SEC’s public disclosure database (IAPD) at www.adviserinfo.sec.gov.
Past performance is not indicative of future results and investing involves a risk of loss, including a loss of principle.
Information contained herein is current and accurate at the time of release and is subject to change. Updated information is available, at any time, upon request. Certain responses contained herein may be historical in nature while other responses (identified by “may”, “would”, “could”, or “should” or terms like “strives” or “seeks”) may represent forward-looking statements. There are no guarantees that historical events will, or may, repeat themselves, or that BLBB’s actions, in response those events, would be consistent with previous BLBB responses and actions. Forward-looking statements are not guarantees, and they involve risks, uncertainties, and assumptions. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements.
BLBB’s investment approach may incorporate, among other things, asset allocation and portfolio diversification. While these strategies are designed to limit risk, there is no guarantee that such strategies alone, or in combination, will guarantee against a loss of principle.
Reinvestment Risk is the risk that a bond maturing with, for example, a 4% coupon rate might not be able to achieve the same 4% coupon rate in today’s market and must be reinvested in a bond with a 3.5% coupon rate. While shifting towards longer 5–7-year fixed income durations offer a buffer against reinvestment risk (Page 4), longer-term bonds are generally more sensitive to interest rate changes. While BLBB believes interest rates are likely to fall in 2026 (and bond values will rise), there are no guarantees. If interest rates were to rise in 2026, long-term bond prices (value) would likely fall.
While international markets currently trade at a significant discount to the S&P 500, investing in international securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
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