Closing Out 2025
It was quite the year for investors as the S&P 500 finished its third consecutive year of double-digit gains. The Nasdaq delivered yet another exceptional performance with three consecutive years of strong returns: up 43.4% in 2023, 28.6% in 2024, and approximately 21% in 2025 at the time of this writing.
Among individual stocks, SanDisk (SNDK) stands out with an incredible 567% gain this year. The storage drive company, which was spun off from Western Digital in February and added to the S&P 500 in late November, has been a major beneficiary of the massive data creation demands driven by artificial intelligence applications.
It was a volatile year for Bitcoin (BTC) as well, hitting all-time highs of $126,000 in October, only to finish the year down approximately 6% from where it started.
Opportunities in the "Real Economy"
The year also created compelling opportunities for patient investors. Many "real economy" stocks—companies producing the products and services we use every day—have significantly underperformed the market averages. A few of these value opportunities are in my Model Portfolio, and several more are on the watchlist for 2026.
It can be difficult to enter positions that aren't making new highs each day. However, I believe the prudent investor seeks out value and patiently waits for it to be recognized by the market.
Reasons for Caution in 2026
Many signs are pointing to caution for investors heading into 2026:
- Indexes appear frothy given historically high valuations and extreme concentration in AI-related stocks.
- The Magnificent 7 stocks, Nvidia (NVDA), Apple (AAPL), Alphabet (GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), and Tesla (TSLA), have a combined market capitalization of $21.5 trillion and make up 35% of the total market capitalization of the S&P 500.
- The Shiller P/E ratio—a measure of stock market valuation adjusted for earnings and useful for identifying overvalued and undervalued periods—sits at 40.5, its highest reading since the dot-com bubble.
- Unemployment has been steadily rising throughout 2025, reaching 4.6% in November. Many economic metrics point to a K-shaped economy, where the wealthy continue to prosper while the lower and middle classes fall further behind.
Going Forward
A core investing principle states that "time in the market beats timing the market." It is never advisable to try to time the market. However, being conservative and defensive with deploying new cash may be wise at this juncture. It may also be prudent to take gains on any of the hot stocks from the past year. As the saying goes, nobody ever went broke taking profits.
By far the best guidance on how to handle our investments comes from Proverbs 13:11 (ESV):
"Wealth gained hastily will dwindle, but whoever gathers little by little will increase it."
We would be wise to keep this wisdom in mind as we approach 2026. Have a happy and safe New Year holiday, and God bless you and your family.
