Bristlecone Blog

After three years of strong gains, the first quarter of 2026 served as a reminder that markets do not move in a straight line. The S&P 500 fell roughly 4%, large-cap growth stocks posted their worst quarter since Q2 2022, and the Federal Reserve signaled that interest-rate cuts will come later and more gradually than markets had anticipated. Beneath the surface, however, the picture was more nuanced — small-cap stocks and value strategies eked out gains, commodities surged as oil prices jumped on Middle East tensions and the Strait of Hormuz shutdown, and corporate earnings continued to grow at a double-digit annual rate. For long-term investors, this type of quarter is not a warning sign — it is a normal reset that rewards diversification and disciplines expectations.

Even with a shaky start and plenty of headlines to worry about, 2025 turned out to be a strong year for investors. Interest rate cuts, steady corporate profits, and easing inflation helped lift stocks, bonds, and other asset classes. Diversification—especially beyond the largest U.S. companies—continued to play an important role as we head into 2026.

The third quarter of 2025 delivered strong returns across global markets as AI-driven optimism and renewed international strength reshaped investor sentiment, prompting a cautious reflection on how far this rally can run.

2025 highlights a key lesson: while U.S. markets have often taken the spotlight over the last decade or so, valuable global opportunities to enhance portfolio returns remain.

In late January, a Chinese artificial intelligence (AI) startup called DeepSeek launched a powerful, low-cost AI tool. This challenged the belief that only the most prominent U.S. tech firms could lead in AI.

Two important developments are worthy of exploration in this quarter's commentary. First, rising intermediate and long-term interest rates are creating a markedly different environment for bonds and the broader investment landscape. Second, the trends that have characterized stock market returns over the last few years continued to an even greater degree in the fourth quarter and full year 2024.