During the fourth quarter, the S&P500 total return was +2.65% in U.S. dollars. Adjusting for currency, the S&P500 returned +1.17% in Canadian dollars, as the Canadian dollar appreciated 1.02 cents during the quarter to $0.7286. The TSX total return was +6.25% in the fourth quarter.

After two interest rate cuts in the U.S. in September and October, the Federal Reserve cut rates by another 25 basis points (0.25%) for the third time in December 2025. The December cut was generally viewed as a hawkish cut, meaning the Fed was viewed as cautious about additional cuts as the Federal Open Market Committee (FOMC) appeared divided, with six of the 19 members favouring no cut. Fortunately, four of the six who favoured no cut are not currently voting members. Still, two members dissented, which can sometimes be associated with turning points in policy decision-making.

This division may reflect the significant shift in the economic outlook for 2026 in the FOMC’s Summary of Economic Projections (SEP) (Exhibit 1). The outlook for real GDP was revised higher to 2.3% from 1.8% in the September projections. A positive takeaway from the SEP was the downshift in the inflation outlook. PCE inflation (the Feds preferred measure) is expected to decline to 2.4% in 2026 from 2.9% in 2025, an improvement from the September forecast of 2.6% for 2026. The SEP also shows inflation falling further to 2.1% in 2027, close to the Feds 2% target, as the one-time transitory tariff impacts roll off. The forecast for the unemployment rate in 2026 was unchanged at 4.4% from the September SEP. Overall, the stronger growth, lower inflation, and relatively low unemployment forecast are not a bad way to start 2026 all while interest rates could still come down somewhat as the December SEP continues to project another rate cut in each of 2026 and 2027.