Investment Review for Fourth Quarter 2025

2025 in pieces.

Financial markets in 2025 were shaped by a major shift in leadership, moving away from “U.S. exceptionalism” toward a broader global rally. While the year ended with strong gains, the path was volatile, marked by an early rotation and a rapid, policy-driven rebound in the spring.

U.S. markets began the year at record highs, but by mid-February, the narrative of American dominance began to weaken. International markets—particularly Europe and Emerging Markets—entered 2025 at much lower valuations and staged a strong catch-up rally. As concerns grew around AI leadership and stretched valuations, U.S. stocks sold off while foreign markets largely held their gains.

Volatility peaked on April 2, 2025 (“Liberation Day”), when the U.S. administration announced sweeping tariffs. The impact extended well beyond equities. U.S. large-company stocks fell 4.8% in a single day, their worst decline since 2022, while smaller companies dropped even more as investors worried about pressure on domestic profit margins.

Just days later, the administration announced a 90-day pause on the most aggressive tariffs, triggering a sharp reversal. U.S. large-company stocks surged 9.5% in one session. Although U.S. stocks fell roughly 12% to 15% during the selloff, the recovery was swift. The S&P 500 regained its pre–Liberation Day levels in just 17 trading days and reached new highs by late June.

By year-end, the laggards of 2024 had become the leaders of 2025. Emerging Markets finished up 33.6%, nearly double the S&P 500’s 17.9% gain. A 9% decline in the U.S. dollar played a key role, boosting international assets and commodities.

S&P 500 concentration and market leadership.

The S&P 500 is now more concentrated than at any point in modern history, with its top ten holdings representing over 40% of the index. This top-heavy structure increases volatility and reduces the diversification many investors expect from broad market exposure.

With performance tied so closely to a small group of technology giants, index investors are more vulnerable to sector-specific shocks or regulatory changes. Historically, periods of extreme concentration have often been followed by rotation, as capital moves away from market leaders toward the broader market. If that pattern repeats, smaller companies or equal-weighted strategies may outperform in the years ahead.

Market leadership is rarely permanent. Just as past industrial and energy leaders eventually gave way to the digital economy, today’s AI-driven companies will face growing challenges as they scale. This environment may favor active decision-making over purely passive strategies as investors search for the next generation of leaders.

Federal Reserve rate cuts and the yield curve.

After peaking at 5.25%–5.50%, the Federal Reserve began cutting short-term interest rates in late 2024 and throughout 2025, signaling the end of the most aggressive inflation-fighting cycle in decades. By lowering rates toward a more “neutral” level—ending 2025 around 3.50% to 3.75%—the Fed aimed to prevent the labor market from cooling too sharply while signaling confidence that the worst of the inflation surge was behind us.

In early 2024, the Treasury yield curve—a chart that plots interest rates on government bonds from short-term to long-term—was inverted, meaning short-term rates were higher than long-term rates. This inversion is a classic warning sign of recession. After multiple rate cuts, the curve returned to a more normal upward slope by late 2025.

Notably, while short-term rates declined, longer-term rates such as the 10-year Treasury moved higher. This steepening reflects improved long-term growth expectations and investors demanding greater compensation for inflation risk and rising government debt. The message from the bond market is clear: the economy has stabilized, but the ultra-low-rate era is unlikely to return.

Compensation for bond market risk.

Current bond market conditions reveal a notable lack of protection against risk. The difference in yield between safe U.S. Treasury bonds and riskier corporate bonds—known as spreads—remains well below historic averages. Even investors in relatively stable, investment-grade bonds are being paid very little for taking on additional risk. The situation is more pronounced in the high-yield bond market. Despite carrying a much higher risk of default, these bonds offer yields that are far below historical norms. 

With little margin of safety, bonds are vulnerable if economic growth slows or inflation reaccelerates. At current levels, investors are simply not being adequately compensated for the risks they are assuming.

Inflation and employment.

The U.S. economy has entered a phase of “stagnant stability,” defined by a low-hire, low-fire labor market. Unemployment remains low at 4.4%, and wages are growing at 3.8%, allowing workers to modestly outpace inflation.

However, job creation has slowed sharply. The December jobs report showed just 50,000 new positions added, the weakest annual growth since the pandemic. Employers are retaining workers but have largely paused new hiring.

Job openings have fallen to 7.1 million from a post-COVID high of 12.1 million, leaving fewer openings than unemployed workers for the first time in years. There is now less than one job opening for every unemployed person, shifting bargaining power back toward employers and making it harder for workers to change jobs for better pay.

With inflation near 2.7%, household budgets have stabilized, but high housing costs and limited job mobility are weighing on confidence. For many Americans, the economy feels secure if you have a job—but far less forgiving if you are searching for one.