Q1 2026 | Quarterly Newsletter
- Spectrum Investment Advisors
- Feb 2
- 7 min read
Quarterly Economic Newsletter Snapshot:
International stocks led the way in 2025 as markets recovered from the April tariff shock.
U.S. economy continued to grow, boosted by large scale investment in AI.
Tax refunds may provide relief to the consumer.
The S&P 500 moved higher by 2.7% in the fourth quarter to finish 2025 with a 17.9% total return. International stocks led all broad stock categories with the MSCI EAFE index posting a 31.2% return. The Bloomberg US Aggregate Bond index rose by 7.3%, its best return since 2020.
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Lessons from 2025
As seen in the table to the right, international stocks outperformed U.S. stocks by 13.3% in 2025. It was the largest outperformance by international stocks over U.S. stocks since 1993 (MSCI EAFE vs S&P 500). A weakening U.S. dollar generally helps international returns for U.S. investors. In 2025, currency effects accounted for roughly one-third of international stock returns, highlighting the diversification benefit that global equities can provide. The chart below shows investors who stayed the course in 2025 were rewarded. The S&P 500 gained almost 39% off of the low in April. It also shows that the highest single day return for the year occurred just 5 days after the worst day. It is not uncommon for the best days in a year to closely follow some of the worst days. It is tempting to "get out until things settle down", but that could mean missing out on some of the best returns during the recovery.
Economic Update
In April, many economists feared new tariffs would lead to slower growth, higher inflation and higher unemployment. Thankfully, the economy avoided that scenario as seen in the table to the right. The first half of the 2025 endured sweeping government spending cuts and tariff increases, but the second half had more favorable news. The One Big Beautiful Bill Act (OBBBA) that was signed in July extended stimulus for the economy. The Federal Reserve also provided support by lowering interest rates three times in the fall. Perhaps the biggest lift to the economy throughout 2025 was the continued expansion of artificial intelligence. According to PIMCO, the tech sector's capital spending on AI contributed 40-45% of US GDP growth over the first nine months of 2025. These tailwinds are expected to support solid economic growth in 2026.
AI Bubble?
Consecutive years of strong market returns naturally raise questions about the sustainability of future performance.
The good news is the majority of returns from the big tech sector names have come from real growth in revenues and earnings, not speculation in stock price. According to FactSet, 2026 earnings for tech companies in the S&P 500 are expected to grow 30% after increasing 24% in 2025.
The chart to the right shows that when factoring in the expected growth rates, tech sector valuations are roughly in line with the rest of the market.
Although AI hyperscalers (Alphabet, Amazon, Meta, Microsoft, and Oracle) are spending hundreds of billions on innovation, much of the spending is being supported by higher revenues, limiting the impact on their strong balance sheets. Roughly 55% of people use AI in some fashion today, leaving plenty of room for continued growth.
Overall, AI does not appear to be in a bubble. However lofty expectations could lead to
volatility if sales and earnings disappoint. 2025 was a prime example that downside surprises can happen. Big tech/AI stocks are not immune to that. For context, tech stocks in the S&P 500 went through four declines of over 20% in the last 10 years, yet still delivered an annualized 24% return during the full period. Diversification and rebalancing can help participate in the gains while reducing some of the downside pain.
The U.S. Consumer - Health Check
While AI investment has supported recent growth, the U.S. consumer remains central to economic activity. Consumption has been strong, but on average the bottom 60% of households are outspending their income. This has contributed to an increase in delinquencies (late payments) on loans. The good news is delinquencies stabilized in 2025, with the exception being student loans (see chart). The resumption of student loan payments following Covid-era relief has proven challenging. There is speculation some borrowers were unaware payments resumed in October 2023. On January 16, 2026, the Department of Education paused involuntary wage garnishments on defaulted loans to allow borrowers more time to bring their loan back into good standing.
Tax Refunds May Provide Relief
The One Big Beautiful Bill Act signed in July included several tax breaks. For example, standard deductions for single filers went up $750. Since withholding tables were not adjusted mid-year, this should mean larger refunds when tax returns are filed. J.P.Morgan estimates that the average tax refund this spring will be greater by $800. Not all will receive a bigger refund, but the aggregate increase should help consumers.
U.S. Debt Watch
U.S. debt has grown to 125% of GDP, up from 105% in 2015. The U.S. is not an outlier in terms of current debt. Out of the list of countries to the right, only the U.K. has a higher 10 year government bond yield. According to Rick Reider, Chief Investment Officer of Fixed Income at BlackRock, the greatest concern with the debt isn't the ability to pay obligations, but that an unforeseen shock destabilizes the market. Recent volatility in Japan is an example of the concern. Reider is also finalist to replace Jerome Powell as Chairman of the Federal Reserve. He believes nominal GDP growth must exceed deficit growth for U.S. debt levels to be sustainable. Jack Bowers, of Fidelity Monitor & Insights agrees. He estimates getting the deficit down to 3% of GDP from the current 6-7% would solve a lot of problems.
Saying Goodbye
In November, Warren Buffett announced he will be "going quiet" as he relinquished his role as CEO of Berkshire Hathaway to Greg Abel. We leave you with another bit of advice from what may be his final letter: "Don't beat yourself up over past mistakes - learn at least a little from them and move on. It's never too late to improve."
Conclusion
For those of you who wish to revisit your portfolio, please contact us at 800-242-4735. For more on the markets, click on the resources tab on our website.
Spectrum Investment Advisors 6329 W. Mequon Road Mequon, WI 53092 262-238-4010 | www.spectruminvestor.com
Data as of 12/31/25 unless otherwise noted. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors. The S&P 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. Barrel of Oil: West Texas Intermediate. Inflation Rate: CPI. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. Indices cannot be invested into directly. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
Benchmark Disclosures: Morningstar Category Averages: Morningstar classifies mutual funds into peer groups based on their holdings. The Category Average calculates the average return of mutual funds that fall within the category during the given time period. The following indexes and their definitions provide an approximate description of the type of investments held by mutual funds in each respective Morningstar Category. One cannot invest directly in an index or category average. Index returns do not reflect trading, advisory and other fees and expenses which are incurred in your actual investment accounts and would reduce your returns. Intermediate-Term Bonds: Bloomberg US Agg Bond Index–Measures the performance of investment grade, US dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS, ABS and CMBS. Allocation 50%-70% Equity–These funds invest in both stocks and bonds and maintain a relatively higher position in stocks. These funds typically have 50%-70% of assets in equities and the remainder in fixed income and cash. Large Cap Value: S&P 500 Value Index–Measures the performance of value stocks of the S&P 500 index by dividing into growth and value segments by using three factors: sales growth, the ratio of earnings change to price and momentum. Large Cap Blend: S&P 500 Index–A market capitalization-weighted index composed of the 500 most widely held stocks whose assets and/or revenue are based in the US. Large Cap Growth: S&P 500 Growth Index–Measures the performance of growth stocks drawn from the S&P 500 index by dividing it into growth and value segments by using three factors: sales growth, the ratio of earnings change to price and momentum. Mid Cap Value/Mid Cap Growth: S&P MidCap 400 Index–A market cap weighted index that covers the complete market cap for the S&P 400 Index. All S&P 400 index stocks are represented in both and/or each Growth and Value index. Mid Cap Blend: S&P MidCap 400 Index–Measures the performance of mid-sized US companies, reflecting the distinctive risk and return characteristics of this market segment. Small Cap Value: Russell 2000 Value Index–Measures the performance of small-cap value segment of Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. Small Cap Blend: Russell 2000 Index–Measures the performance of the small-cap segment of the US equity universe. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. Foreign Large Cap Blend: MSCI EAFE NR Index–This Europe, Australasia, and Far East index is a market-capitalization-weighted index of 21 non-US, developed country indexes. International Developed Stocks: MSCI EAFE NR Index. Emerging Stocks: MSCI Emerging Markets Index-captures large and mid cap representation across 24 Emerging Markets (EM) countries. Small Cap Growth: Russell 2000 Growth Index–Measures the performance of small-cap growth segment of Russell 2000 companies with higher price-to-value ratios and higher forecasted growth values. Real Estate: DJ US Select REIT Index–Measures the performance of publicly traded real estate trusts (REITs) and REIT-like securities to serve as proxy for direct real estate investment. Natural Resources: S&P North American Natural Resources Index– Measures the performance of US traded securities classified by the Global Industry Classification Standard (GICS) as energy and materials excluding the chemicals industry and steel but including energy companies, forestry services, producers of pulp and paper and plantations. Past performance is no guarantee of future results. This report is for informational purposes only and should not be construed as a recommendation or solicitation to buy or sell any security, policy or investment. PE Ratio is the measure of the share price relative to the annual net income earned by the firm per share.