No no, we can get much more than a 1-2% improvement in chemical rocket performance. The issue is that for our needs thusfar (large objects to LEO and GEO, small objects further out with long transit times and gravity assists or ion propulsion), H2/O2 has been fine and it's not been worth all of the headaches of more energy dense fuel mixtures, like Li-(LF2|FLOX|OF2)-LH2 triprop. But we can indeed get a 25% improvement in ISP if we're willing to work with very hazardous, toxic chemicals (at least the resultant LiF isn't as toxic as F2!). It was already done in a lab-scale development back in the late 1960s. And let's not kid ourself, NASA has indeed launched successful missions using toxic, corrosive and dangerous chemicals as propellants. But this would be a new upper bound in this regard. I doubt they'd ever use a propellant like that on a lower stage, but for an upper stage or a return stage... it's a possibility.
Without invoking significant toxicity we can improve the picture somewhat. Burning the lithium with O2 (and of course H2 for exhaust flow reasons) is also a very high energy propellant, but it still means working with metallic lithium in some form or another (liquid, hybrid, slurry, cryosolid, etc), which most people would really like to avoid. But it is possible to do.
A small boost to H2/O2 can be made with aluminum - it only boosts the Isp a few percent (I believe about 4%-ish, though I'd have to double check), but it also gives a nice secondary bonus of really increasing your propellant density. Aluminum is neither dangerous nor toxic, but burning it with the H2/O2, and in a reliable manner, hasn't been tackled yet.
Boron is another high-energy compound one can use. As is beryllium (Be-F2-H2 is even more powerful than Li-F2-H2 by a small margin), but it's hugely expensive and extremely toxic in dust form.
Beyond all of the "familiar" stuff there's a lot of research on more exotic compounds with strained chemical bonds which remain in a metastable state until burned; there's way too many such compounds to list here. But at present they all generally suffer from either production cost issues or problematic instabilities.
Oh, and you can also improve performance by increasing the chamber pressure. That said, it's rather modest - if I recall a doubling of chamber pressure is usually on the order of a 7% ISP boost. But it does mean that advances in material technologies can translate to advances in rocket ISP. And there's also a wide range of other modifications to engine design that could boost rocket ISP to lesser extents.