Q4 2025 Summary – Resilience Through Clouded Signals

The fourth quarter closed a year defined by shifting policy signals and unexpectedly resilient markets. While fiscal negotiations, central bank actions, and uneven global growth shaped the macro backdrop, risk assets generally extended gains, closing out a volatile year on a constructive note. As the year ended, investors were left balancing strong performance against an increasingly complex policy environment.

U.S. Policy and Economy

The U.S. government entered a partial shutdown in 4Q after Congress failed to pass a funding agreement, reinforcing concerns around fiscal discipline and policy uncertainty. The shutdown lasted 43 days, leaving hundreds of thousands of federal workers furloughed. Beyond its human and fiscal impact, the shutdown disrupted the release and reliability of key economic data, particularly from the Bureau of Labor Statistics, obscuring inflation and labor market signals that underpin Federal Reserve policy expectations. Attention now shifts to the January 30 funding deadline, where another lapse in funding could renew data gaps and further complicate the policy backdrop early in the new year.

The Federal Reserve extended its easing cycle during the quarter, cutting the Fed Funds rate by 25 basis points at both the October and December meetings and bringing the target range to 3.50%-3.75%, as officials grew increasingly concerned about labor market softening. Policymakers framed the back-to-back cuts as insurance against a slowing economy rather than a response to inflation dynamics, citing decelerating job creation and a gradual rise in the unemployment rate.

The December decision was marked by a 9–3 split, highlighting internal debate between members concerned about lingering inflation risks and those prioritizing support for labor-market conditions. Reflecting that tension, the updated “dot plot” showed a wide distribution and a slower pace of easing ahead, with one additional cut projected for 2026 and another in 2027. Separately, the Fed announced plans to resume Treasury bill purchases, for the first time since March 2022, emphasizing that the move reflects routine balance-sheet management rather than a shift in the stance of monetary policy.

The government shutdown distorted the normal flow of economic data during the quarter, resulting in delayed and incomplete releases. Available inflation data pointed to easing price pressures, with the November CPI report showing headline inflation at 2.7% year over year and core CPI at 2.6%, down from 3.0% for both measures in September. The October CPI release was not published, while the Bureau of Economic Analysis postponed its October and November PCE reports. Labor market data showed clearer signs of cooling, with payrolls revised lower for August and September and the unemployment rate drifting higher to 4.6%, reinforcing the Fed’s growing focus on employment risks.

Economic activity remained resilient but uneven late in the year. The 3Q GDP report, released in December, showed strong growth of 4.3%, supported by robust consumer spending. However, forecasts for 4Q point to more moderate expansion (Atlanta Fed GDPNow: 2.7%), as ISM manufacturing PMI and retail sales both softened during the quarter. The Conference Board’s Consumer Confidence Index also declined, suggesting households are becoming more cautious as labor market conditions cool and financial conditions remain restrictive.

Global Macroeconomics

Outside the U.S., economic momentum and policy responses varied meaningfully across regions in 4Q. Central banks remained on divergent paths, and growth outcomes reflected a mix of cyclical improvement and renewed headwinds.

The European Central Bank held policy rates steady as disinflation progressed, maintaining a restrictive stance to ensure inflation stabilizes at its 2% target over the medium term. European Union annual inflation was 2.4% in November 2025, down from 2.5% in October. The euro zone ended 2025 with its strongest quarterly growth in more than two years, as resilient services activity offset continued weakness in manufacturing, according to PMI data. Fiscal policy also turned incrementally more supportive, with increased infrastructure and defense spending providing a modest tailwind. In the U.K., the Bank of England cut rates by 25 basis points in December as inflation eased, though policymakers emphasized a cautious approach given lingering price pressures and uncertainty around the growth outlook.

Japan continued its gradual transition away from ultra-easy monetary policy, with the Bank of Japan delivering another modest rate increase of 25 basis points to 0.75%, the highest level in 30 years, while reiterating that sustained, demand-driven inflation remains a prerequisite for further normalization. Recent data showed Japan’s economy contracted in 3Q, its first decline in six quarters. Political developments added a new dimension to the policy backdrop following October’s election of Prime Minister Sanae Takaichi, whose economic agenda emphasizes fiscal support alongside structural reform. Key priorities include increased infrastructure and defense spending, as well as targeted investment in strategic growth areas such as semiconductors, artificial intelligence, and batteries.

China’s economy grew 4.8% year over year in 3Q, supported by resilient exports and keeping growth near the government’s “~5%” objective, though marking the weakest pace in a year. More recent data pointed to renewed softness, with November retail sales and industrial production falling short of expectations amid weak domestic demand, a soft labor market, and continued contraction in the property sector. Slowing fixed-asset investment and persistent weakness in consumption contributed to expectations that full-year growth would fall short of official targets, prompting policymakers to announce targeted fiscal measures aimed at stabilizing activity and supporting domestic demand.

Global Equities

U.S. equities advanced in 4Q25, extending gains from earlier in the year as investors navigated a more mixed macro backdrop while continuing to reward earnings resilience. The S&P 500 rose 2.7% for the quarter, finishing the year up 17.9% and completing a historic recovery following the volatility of 1H25, when tariff announcements around Liberation Day weighed heavily on sentiment. Late in the year, performance leadership shifted as losses in technology stocks reflected growing scrutiny of AI-related valuations. Sector dispersion increased, with Health Care (+11.7%) delivering strong gains following earlier underperformance, while Information Technology posted more modest returns (+1.4%) as momentum in the AI trade slowed. Real Estate (-2.9%) and Utilities (-1.4%) lagged amid higher long-end yields, profit-taking, and increased uncertainty around AI-driven power demand. The style rotation of the last year continued, with Value (Russell 3000 Value: +3.8%) outperforming Growth (Russell 3000 Growth: +1.1%), while large cap equities (Russell 1000: +2.4%) slightly outpaced small caps (Russell 2000: +2.2%).

Market valuations remained elevated with the Shiller P/E ratio ending 4Q at its second highest level on record, only exceeded by the Dot-Com Bubble, while the market-cap-to-GDP Ratio (the “Buffett Indicator”) climbed to roughly 220%, underscoring the extent to which market gains have continued to outpace U.S. economic growth.

Non-U.S. equities extended their lead over U.S. markets in 4Q (MSCI ACWI ex-USA: +5.1%) and posted their strongest annual performance relative to U.S. stocks (+32.4%) since 2009. The U.S. dollar was broadly flat against a basket of major currencies during the quarter and remained meaningfully lower year to date (DXY: -9.4%), marking its worst annual performance since 2017. European equities advanced broadly (MSCI Europe: +6.2%), with banks and defense stocks lifted by improving fundamentals and government spending measures. Japanese equities (+3.2%) also posted gains, despite a weaker yen, on strong earnings, continued AI-related demand, pro-growth economic policy signals, and ongoing corporate governance reforms.

Emerging market equities also delivered solid performance in 4Q (MSCI EM: +4.7%) and finished the year up 33.6%. Korean and Taiwanese equities led the index, driven by strength in semiconductor-related industries. Chinese equities declined during the quarter, including losses among large technology firms, as economic data pointed to slowing retail sales and industrial activity and President Xi Jinping signaled limits on future government stimulus.

Fixed Income

Fixed income markets posted positive but more subdued returns in 4Q as Treasury yields were broadly stable and volatility declined. The Bloomberg US Aggregate Bond Index gained 1.1% for the quarter, bringing full-year returns to 7.3%. The yield curve ended the quarter slightly steeper with front-end yields declining and longer maturities rising, following two 25 bps Federal Reserve rate cuts during the quarter. Inflation expectations edged marginally lower, with the 10-year breakeven rate declining modestly.

Credit sectors continued to benefit from supportive technicals and steady demand. Investment-grade corporates were up 0.8% in 4Q, underperforming Treasuries, while MBS (+1.7%), ABS (+1.3%), and CMBS (+1.3%) outperformed. High yield corporates advanced 1.3% (+8.6% YTD), with lower-quality segments lagging late in the quarter. Leveraged loans gained 1.2%, supported by stable short-term rates and continued CLO issuance. Municipal bonds continued their rebound following a challenging first half of the year, with the Bloomberg Municipal Index up 1.6% in 4Q and 4.3% for 2025. Despite historically heavy issuance, demand remained supportive, allowing municipals to finish the year in positive territory after a volatile start.

Global fixed income returns were mixed. The Bloomberg Global Aggregate Index returned 0.8% in 4Q and 4.9% for the year on a USD-hedged basis, while unhedged investors (+0.2% QTD, +8.2% YTD) benefited from currency effects. Central bank policy paths diverged with the Fed and BOE cutting rates while the ECB held steady, and the BOJ raising their policy rate to the highest level in three decades. Emerging market debt outperformed developed markets, led by hard-currency sovereigns (JPM EMBI: +3.3% QTD, +14.3% YTD), supported by spread tightening and improving risk sentiment.

Liquid Alternatives

Liquid alternatives delivered strong results in 4Q, led by commodities and precious metals. The Bloomberg Commodity Total Return Index rose 5.8% in the quarter and finished the year up 15.8%. Gold prices surged roughly 12.1%, capping a standout year (+64.4% YTD), as geopolitical uncertainty, central bank demand, and a weaker U.S. dollar bolstered safe-haven appeal. The S&P Global Natural Resources Index advanced 6.7% (+28.9% YTD), supported by strength in metals and mining, while the S&P Global Infrastructure Index was flat but delivered a strong annual return (+14.1%). REITs declined (FTSE Nareit: -1.6%) as higher long-term yields weighed on valuations, while MLPs gained 3.8%.

Closing Thoughts

2025 will likely be remembered as a year defined by constant crosscurrents. Markets absorbed a steady flow of policy shifts, tariff announcements, monetary easing, AI enthusiasm, geopolitical conflict, fiscal strain, and even a government shutdown that disrupted key economic data. Despite these challenges, markets remained resilient and delivered strong returns across most asset classes. As 2026 begins, uncertainty remains elevated, and we encourage investors to maintain a long-term perspective and a prudent asset allocation with appropriate levels of diversification.

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