Market Summary

Markets remained buoyant during the fourth quarter of 2025, capping a strong year for most asset classes. Investor enthusiasm continued to center on artificial intelligence, while small- and mid-cap and value-oriented stocks also posted solid gains following the Federal Reserve's interest rate cuts in October and December. International equities performed well as a weakening US dollar encouraged investors to seek opportunities abroad. Declining interest rates also helped fixed income markets generate strong returns for the quarter and for the year, showing that previous rumors of the bond market's demise appear greatly exaggerated.

Looking ahead, investors will need to balance a constructive economic backdrop with emerging risks. We expect economic growth to remain resilient into 2026, supported by easing monetary policy, potential tax relief and productivity gains driven by continued advances in artificial intelligence. Corporate earnings growth remains a key pillar of this outlook, though results may become more uneven across sectors and regions.

From an opportunity-set perspective, select areas of the market appear attractively valued. Small- and mid-cap stocks trade at a meaningful discount relative to large-cap peers, and international equities continue to offer diversification benefits, particularly if the US dollar remains under pressure. In fixed income, bonds can still provide reasonable income and portfolio ballast, especially if inflation continues its gradual decline.

At the same time, elevated valuations in certain segments, most notably large-cap US equities and corporate credit, are likely to temper near-term return expectations. 

Policy-related uncertainty also bears watching. Increased scrutiny of the Federal Reserve and rising fiscal deficits could contribute to volatility in interest rate and currency markets and complicate the path for inflation. While overall labor market conditions remain healthy, higher unemployment trends among younger workers may further reinforce a "K-shaped" economy, where higher-income households remain resilient while lower-income consumers face ongoing affordability challenges.

In an environment where risks and opportunities are more evenly balanced, we believe investors should remain focused on long-term, goals-based asset allocation and diversification. Equities remain essential for growth-oriented portfolios, particularly when emphasizing high-quality companies with strong balance sheets and reasonable valuations. Meanwhile, bonds continue to play a valuable role by providing income, diversification and stability as the economic cycle evolves.

Equities

The S&P 500 Index rose 2.7% during the quarter, bringing the index's 2025 calendar-year returns to 17.9%. The year's strong performance follows two consecutive strong years for the index, with the S&P 500 posting a 26.3% return in 2023 and a 25% return in 2024. 

The Healthcare sector returned a notable 11.7% during the quarter, led by pharmaceutical companies. Value stocks outperformed growth, with the Russell 1000 Value Index returning 3.8% and the Russell 1000 Growth Index returning 1.1% during the quarter.

International equities finished the year strong, with the MSCI EAFE returning 4.9% during the quarter and 31.2% for 2025, the largest annual outperformance relative to the S&P 500 since 1993. Asian markets performed particularly well, with Japan up 25.3%, China up 31.4% and South Korean markets up an impressive 92.5%. From a sector perspective, non-US financials and utilities led returns with both sectors rallying approximately 50% during 2025. US investors benefited additionally from the depreciating dollar relative to other currencies, with the US Dollar Index (DXY) declining 9.7% during the year. 

Emerging markets also had an exceptional year, with the MSCI Emerging Markets returning 4.7% during the quarter and 33.6% during the calendar year. 

Fixed Income

Fixed income securities benefited from the Federal Reserve's continued interest rate cut cycle with rates falling from 4.25% to 3.75% during the quarter. The Bloomberg US Aggregate Bond Index returned 7.3% during the year, reflecting both high coupon payments and falling yields which pushed bond prices higher. High yield bonds benefited from higher yields, with the Bloomberg US Corporate High Yield benchmark posting an 8.6% return in 2025.

The municipal bond market lagged on a relative basis due to a large wave of new issuances as infrastructure projects related to the Build Back Better Act continued to make progress. During 2025, the Bloomberg Municipal Bond Index returned 4.3%, and the S&P Municipal Bond High Yield benchmark posted a 3.9% return. 

Commodities

Oil prices were volatile but continued to fall during the quarter, ending the year near $57 per barrel, down 22.5% from the start of 2025. Gold continued its prolonged rally, rising 12.2% during the quarter and 62.5% for the year. Gold is now up more than 135% over the past three years as investors sought safety amid uncertainty. 

The Bloomberg Commodity Index posted a 5.9% return for the quarter and 15.8% for the year as prices rose across energy and industrial metals. Looking ahead, growing energy demands from expanding data center infrastructure are likely to contribute to continued volatility across commodity markets.