January 6, 2026
Market Review: 4Q 2025
The fourth quarter topped off an impressive year in financial markets with both stocks and bonds moving higher. Such positive results were juxtaposed with what felt like an abnormally unpredictable and foggy year. While every year is unique, the shifting policy goals and haphazard execution were significant enough to catch market participants off guard multiple times throughout the year.
After some initial volatility in the data following the imposition of tariffs, economic growth has come in strong and above the expectations of many economists. Perhaps most interesting and noteworthy is that while broad economic growth has firmed, labor markets seem to have weakened, with job growth slowing and the unemployment rate rising.
In U.S. stock markets, the primary theme of 2025 was the continued dominance of technology stocks. As can be the case with new technologies that are perceived to be revolutionary, investors embraced companies that were tied to the artificial intelligence (AI) theme, such as Broadcom and Palantir, and shunned those that face potential disruption, including Salesforce and other software providers. While there are certainly pockets of the stock market that may be over-exuberant, it is not all hype. Many large firms tied to the AI theme, like Microsoft and Alphabet have delivered robust sales and earnings growth. In fact, profit margins for the broad U.S. large company universe are among the highest they have ever been. Ultimately, these strong company fundamentals provide some explanation for high market returns in spite of economic and political uncertainty.
With AI garnering the majority of attention throughout the year, one could be forgiven for not noticing what happened in international stock markets. Aided by a decline in the value of the U.S. dollar, foreign stock markets were up over 30% in 2025, firmly outpacing U.S. stocks. This relative performance has been somewhat uncommon over the past decade and while it may be a bit too early to tell, could represent a shift in investor sentiment towards international stocks. There are some ties to the AI theme in international markets as well, but the financial and defense sectors were among primary drivers of return for overseas investors.
Not only were stock market returns strong, bond markets had a good year as well. Interest rates moved lower across the maturity spectrum, which created a positive environment for bonds. Shorter term interest rates saw more dramatic downward moves than did longer term rates, with the Fed lowering their benchmark interest rate three times in the second half of the year. Long-term rates did not fall as sharply as short-term rates due to longer-term concerns about inflation, fiscal deficits, and employment conditions, resulting in a steeper yield curve by year-end.
As we look into 2026, we may need to temper expectations after several solid years of market gains. Valuations are now somewhat stretched, not just in the U.S., but also internationally. Solid earnings results will need to continue for the market to move higher. From a broad economic perspective, the trend of rising unemployment is a concern. However, we believe the combination of abating headwinds from tariffs and government spending may provide the boost to get the labor market back on track. We will cover these items more in depth in our upcoming Annual Outlook.
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