Cheers to a Good Year. Let's Crack Open a Pepsi
Here's why I'm sharing a drink with Dougie as I reflect on 2025 and look to 2026.
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It is hard to believe that this is my last column in 2025. It was another good year for investors, even as most of the gains were driven once again by the Magnificent Seven tech stocks. While the S&P 500 didn’t quite return the 20%-plus as the index did in 2023 and 2024, annual gains in the high teens are nothing to sneeze at. In fact, this is only the third time since the 1920s with three-straight years with over 15% annual returns. Only during the Internet Boom did the index return 20% or more for three-straight years.
Some good things happened in 2025. Inflation, while over the Federal Reserve’s official 2% target, is under 3%. Gasoline prices are at their lowest point since 2021. Average rents have also fallen nationally for four-straight months. With the large numbers of apartments that came online in 2024 and 2025 combined with mass re-migration, rents are likely to be flat or fall further in 2026. And the ‘shelter component’ is by far the largest component of the consumer price index calculation.
Despite huge concerns around the implementation of much higher tariffs, the markets have weathered much better than initially expected. They have not contributed to inflation as projected, either. Most of the main components driving inflation higher like property taxes, medical costs and various forms of insurance, are not exacerbated significantly from tariffs.
Economic growth has been quite robust the past couple of quarters, averaging just over 4%. Helped greatly by the surge in technology spending driven by the AI revolution. Fourth-quarter gross domestic product will be dinged by the longest federal government shutdown in U.S. history, but should come in near 3%.
The economy is heading into 2026 in decent shape on the inflation and growth fronts. I would like to see both the market and economy become broader based than it has been over the past couple of years. As far as valuation, equities begin in 2026 trading at extreme levels view from a historical lens. The S&P 500 trades at north of 23- times forward earnings. As was recently noted on the Daily Diary, every time this has happened in history, stocks have returned between an average of 2% to -2% annually over the next decade.
Also noted on the Daily Dairy yesterday was that defensive sectors like healthcare and consumer staples have a global allocation of just 17%. The lowest level since the end of the Internet Boom. Therefore, one of my last portfolio moves in 2025 was establishing a position in PepsiCo, Inc. (PEP) yesterday via covered-call orders. This is Doug Kass’ stock of the year. Pepsi has a reasonable valuation, has attracted activist interest, and sports a four percent dividend yield. The position nicely reflects my cautious outlook on the overall market as we put 2025 in the rear view mirror.
At the time of publication, Jensen was long PEP.
