The equity markets continued to enjoy a bull market in the fourth quarter of 2025, capping a year marked by resilient GDP growth, strong corporate earnings, moderating inflation, and a pivot by central banks toward less restrictive policy. The performance gap narrowed between large and small caps, with the S&P 500 gaining 2.7% and the Russell 2000 gaining 2.2%. Value modestly outperformed growth for the quarter, after a decade of underperformance, perhaps finally reaching a pivot point. Consumer sector stocks treaded water with historic low sentiment readings, even though consumer spending remained solid. Inflation data showed stickiness in the 3% range; nevertheless, the Federal Reserve delivered its third consecutive quarter-point rate cut, highlighting the softening jobs market. The housing market remained sluggish with mortgage rates substantially higher than they were over the previous decade, creating a challenging dynamic for existing home sales. As a result, Real Estate related stocks fared the worst. Health Care was the best performing sector led by the GLP companies, while Tech stocks posted modest gains, but were still at the top of the leaderboard for the year. Additionally, the international markets fared even better than domestic markets, with the MSCI World Index producing a return of more than 20% for the year and 3% for the quarter. The biggest winners for the quarter and year were the precious metals that surged to record highs. Cryptocurrencies, on the other hand, suffered significant declines during the quarter. Apparently, all that glitters is physical gold, not “digital gold.”
Corporate earnings exceeded expectations, posting double-digit year-over-year growth. Meanwhile, the bond market was very steady, with the yield on the 10-year Treasury spending almost the entire quarter in a range between 4% and 4.2%. Rising corporate earnings, combined with low and steady interest rates, are the foundation on which the bull market is built.
As for the outlook for the economy, there are many questions that need to be answered as 2026 progresses. The two biggest drivers are the continued investment and return on technology (AI) investments and the Fed’s monetary policy decisions. The outlook for both looks positive, leading to an optimistic consensus for the year. Despite historically extended equity valuations and a laundry list of geopolitical concerns, the “Fear Index” (VIX) continues to register at a five-year low.
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