2025 | Year End Review
2025 Fourth Quarter Market Commentary
On November 5th, 1994, 45-year-old George Foreman fought Michael Moorer for the WBA and IBF boxing heavyweight championships. Trailing on all three judges’ score cards entering the 10th round, Foreman unleashed a brutal combination, knocking Moorer to the canvas and becoming the oldest world champion in heavyweight boxing history. In a similar upset, this aging (and raging) bull market rose up off the canvas in 2025. The markets started the match with high valuations, following the fantastic bouts of 2023 (up 26.3%) and 2024 (up 25%). Multiple combinations landed body blows with threats to U.S. dominance in Artificial Intelligence (AI), several global conflicts, the announcement of the largest tariff rates since the early 1900’s (and a subsequent 19% pullback) and the longest government shutdown in history. Cue the Rocky music, the S&P 500 posted double-digit returns for the 3rd-straight year, ending the year with a 17.9% return.
2025 could be viewed as a year of upsets and comebacks, with multiple trends broken across global equity markets. The Health Care sector staged a furious rally in the 4th quarter, gaining 11.7%, far outpacing the S&P 500’s 2.7% quarterly return. The unloved sector posted a 14% return for the year, shy of the S&P’s 17.9%, but respectable after multiple years of lagging. While Technology trailed the S&P for the quarter (up 1.4%), the AI theme remained a driver in market performance for the year, with Tech (up 24%), Communication Services (up 33.6%), and Industrials (up 19.4%) outpacing the S&P’s yearly return, while Utilities (up 16%) were just a touch behind. Health Care’s gains, along with the AI theme expanding beyond chips and data center providers into infrastructure and energy suppliers, helped Value stocks (up 3.7%) outperform Growth (up 1.1%) for the quarter. While Growth (up 18.6%) outperformed Value (up 15.2%) for the year, this outperformance paled in comparison to the outsized gains seen for Growth the prior two years.
The prospect of lower borrowing costs supported lower-quality (and more indebted) Small Cap names, with the Russell 2000 Index up 2.2% for the fourth quarter and 12.8% for the year, outpacing the higher-quality S&P Mid Cap (up 1.6% for Q4, 7.5% for ’25) and Small Cap (up 1.7% for Q4, 6% for ‘25) indices. While the AI theme is expected to broaden to other areas of the market besides Mega Cap Tech, with 39% of the Russell 2000 being unprofitable, we continue to have a quality bias in the Mid and Small Cap space.
Large Cap Growth has been the main driver of outperformance for U.S. Equity over International Equity since the Global Financial Crisis of 2008-2009, with dollar strength also contributing. The U.S. lost its championship crown in 2025, with foreign stocks outpacing domestics, aided by a 9% yearly decline in the dollar. Developed Markets’ strength in the quarter (up 4.9%) and year (up 31.2%) was driven by the Financials, Industrials, and Health Care sectors, on the back of expected deregulation, commitments to increased defense spending, and strong drug sales and pipelines, respectively. In Emerging Markets, the Tech sector drove returns as the AI theme dominated. The MSCI Emerging Markets Index outperformed U.S. and International Markets for the year, up 4.7% in Q4 and 33.6% in 2025.
In Fixed Income, after years of low yields, bonds once again provided income and diversification. While the 10-year Treasury yield fell 40 basis points during the year (from 4.58% to 4.18%), the majority of the returns in the Bloomberg Aggregate Bond Index (up 1.1% for Q4, 7.3% for ’25) came from income. Investment Grade (up 0.8% for Q4, 7.8% for ’25) and High Yield bonds (up 1.3% in Q4, 8.6% for ’25), slightly outperformed the broad bond market for the year, due to higher starting yields and spread compression.
As we look ahead to 2026, many of the themes from 2025 remain. Valuations remain elevated at 22x forward earnings for the S&P 500, and markets are concentrated (the top 10 names account for almost 40% of the index). But we expect earnings and equity returns to continue to broaden from the AI-associated Mega Cap names to the rest of the market. Analysts once again expect double-digit earnings growth for the year. If earnings can grow faster than prices, valuations can come down over time.
Geopolitical concerns remain in Russia/Ukraine, Iran, and now Venezuela, which may increase the odds of Chinese action in Taiwan. Equity markets are driven by earnings, and typically geopolitical events have little or no impact on earnings or long-term performance. However, a Chinese invasion of Taiwan could impact the semiconductor supply chain and is something to keep an eye on.
Tariffs remain a tool in the administration’s foreign policy toolbox. The market recovered from April’s lows and the impact of tariffs on inflation has been relatively muted so far. Fiscal stimulus in early 2026 (tax rebates from the One Big Beautiful Bill) and the potential for tariff rebates later this year, could support consumption and economic growth. Continued capex (business spending) on AI should support growth as well. We will get a new chair of the Federal Reserve Bank this year, with Jerome Powell’s term up in May. Markets will continue to be attuned to any threats to central bank independence. With the labor market softening (but still growing) and inflation somewhat elevated above the Fed’s 2% target, we expect the Federal Reserve to cut interest rates one to two times this year, to a range of 3.0 to 3.5%.
Within equities, the case remains to allocate beyond the AI theme and remain broadly diversified. Looking abroad, earnings are expected to grow after stagnating in recent years, supporting International Equity. Continued dollar weakness would also provide a tailwind. In Fixed Income, while corporate balance sheets are in solid shape, more of the AI-related capex is being financed through debt. With credit spreads tight, we advocate for a focus on high-quality bonds and active management. While we don’t expect rates to move lower from current levels, bonds currently provide solid income and the administration’s focus on mortgage rates and housing affordability could shift the supply of Treasuries to the short-end of the curve, driving prices up (and yields down) on the long-end.
Following his victory over Moorer, Foreman hoped for a potential super fight with Mike Tyson. It was the latter who famously said, “everyone has a plan until they get punched in the mouth.” It is important as we enter the year to review your plan and make sure your portfolio is aligned with your goals. While markets will land punches from time to time, long-term investors have a plan to endure the occasional bruises and remain standing. This allows us to enjoy the financial rewards a disciplined approach to wealth management provides.
We wish you and your families a healthy and prosperous New Year! As always, please reach out to us with any questions.
Jonathan F. Kolle, CFA®
President, Chief Investment Officer
Daniel A. Morris, M.S.
Co-Chief Investment Officer
Timothy J. DeAngelo, CFA®
Portfolio Manager
Shawn R. Keane, CFP®
Vice-President
Cindy de Sainte Maresville, CFP®
Certified Financial Planner
Rusty Giles
Director of Marketing
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