Year End / Q4 Overview
If 2025 was anything for investors, it was both adventurous and rewarding. It served as a powerful reminder that markets can rise, markets can fall—often quickly—and that short-term forecasting or emotional reactions rarely benefit long-term investors.
By year-end, equity investors had ample reason to be encouraged. The S&P 500 gained approximately 18%, with returns driven primarily by solid earnings growth rather than valuation expansion alone. While the fourth quarter proved challenging at times, it ultimately closed on a constructive note. All major asset classes finished the quarter in positive territory, with the S&P 500 advancing 2.7% and the Bloomberg U.S. Aggregate Bond Index rising 1%.
If 2025 was a good year for remaining invested, it was an even better one for being globally diversified. After several years of underperformance, international equities finally delivered meaningful results. Non-U.S. markets outpaced the U.S., supported by more attractive starting valuations, stronger earnings growth abroad, and a modestly weaker U.S. dollar.
Strong corporate earnings growth underpinned equity performance, while interest-rate cuts—coupled with expectations for additional, though slower, easing—helped lift market returns. The rapid expansion of artificial intelligence also played a significant role. Investment in AI technologies is on track to become the largest infrastructure investment in the United States in a century, and its scale meaningfully influenced both economic activity and equity markets throughout 2025.
Asset class performance featured notable outliers. Precious metals led on the upside, with gold posting its strongest annual gain since 1979, rising 66%. On the downside, oil and bitcoin finished the year lower, declining 20% and 6.5%, respectively.
Monetary policy also shifted meaningfully as the Federal Reserve responded to signs of a softening labor market. The Fed reduced interest rates for a third time in December, bringing the target Federal Funds Rate to a range of 3.50%–3.75%. This occurred amid a temporary data blackout following the longest government shutdown in history. When delayed economic data was released, it showed the highest unemployment rate in four years (4.6%), largely driven by federal workforce reductions, raising concerns about the pace of economic growth.
Throughout the fourth quarter, the Federal Reserve continued its rate-cutting cycle but paired it with more nuanced communication. Since initiating cuts in September 2024, the Fed has lowered rates by a cumulative 1.75%, including two 0.25% reductions in October and December. However, policymakers signaled increasing caution and internal debate, emphasizing that future policy actions will remain highly dependent on incoming economic data.
U.S. Equities
Market leadership trends remained largely unchanged in 2025. Mega-cap stocks continued to outperform the broader large-cap universe, while large-caps, in turn, outpaced both mid-cap and small-cap equities across the board. U.S. mid-caps gained 1.64% in Q4 to cap off a total gain of 7.5% for the year, and small-caps showed similar performance, earning 1.7% in Q4 and 6.02% for the year. Both small and mid-cap stocks are trading significantly lower on a P/E basis than their large-cap counterparts, and it will be critical to see if these asset classes revert to historical means in the coming years.
International Equities
Despite the strength of U.S. markets, international equities were the standout performers of 2025. Improved earnings growth and attractive valuations fueled a strong rebound. The MSCI Emerging Markets Index gained 33.6% for the year—its best performance since 2017. Developed international markets also impressed, with the MSCI All Country World ex-USA Index rising 32.4% and surpassing the S&P 500 after several years of lagging performance. In both cases, gains were driven by favorable global market conditions, widespread monetary easing, and a weaker U.S. dollar.
Fixed Income
Fixed income delivered on multiple fronts in 2025, rewarding investors through both interest-rate sensitivity and credit exposure. As inflation moderated and economic growth settled into a more stable and less concerning pace, yields generally drifted lower across the curve. Duration, which had been a headwind in prior years, became a meaningful contributor to returns.
The 10-year Treasury yield edged higher in December to finish the year at 4.18%. The Bloomberg U.S. Aggregate Bond Index rose 7.30% for the year, while the Bloomberg U.S. Corporate High Yield Total Return Index advanced 8.62%. With some exceptions, municipal bond valuations remained attractive.
Overall, 2025 felt like a return to a more traditional market environment—one in which fixed income once again provided both income and stability, and diversified portfolios behaved as they were designed to.
In Closing
As we enter the new year, maintaining perspective is essential. Markets have produced strong returns over the past five years, but each year brings its own uncertainties and surprises. While no one can predict what lies ahead, we remain confident that a disciplined investment approach—grounded in long-term goals, diversification, and prudent risk management—offers the most reliable path forward.
Our team will continue to monitor economic developments and evolving market conditions closely, ensuring that portfolios remain aligned with your long-term objectives, regardless of short-term market fluctuations.