Building on the robust performance through Q3, U.S. equity markets delivered modest gains in Q4 2025 amid sector rotation and a cooling in mega-cap technology momentum. The S&P 500 Index1 advanced by 2.3% during the quarter, bringing its full-year 2025 return to 16.4%. While enthusiasm for the mega-cap AI trade cooled in Q4, the Nasdaq Composite Index2 nonetheless ended the quarter up 2.6% and appreciated 20.4% for the full year. Meanwhile, the Dow Jones Industrial Average3 outperformed both indices in Q4, posting gains of 3.6% as investors navigated a softening labor market and the Federal Reserve’s continued rate-cutting cycle by pivoting toward value-oriented sectors and defensive plays. For 2025, the Dow was up a more modest 14.9%, reflecting the outperformance of growth over value over this longer time horizon.
While the S&P 500 Equal Weight Index4 posted gains of 0.9% in the quarter, trailing the market cap weighted S&P 500 Index by 1.4%, the return differential narrowed from the 5.6% and 3.4% performance gaps of Q2 2025 and Q3 2025, respectively, indicating improved market breadth. Still, for the full year, the market cap weighted version of the index outperformed equal weight by 7.0%, indicating that market leadership remained concentrated in mega-cap technology names and AI-linked
beneficiaries for most of 2025. Further evidence of narrow market leadership is found in the “Magnificent Seven”5,which saw a marked performance decline in Q4 yet still delivered an average return of 3.6%, bringing the full year average return to 22.4%.
The Russell 2000 Index6, tracking small-cap stocks, followed an exceptionally strong Q3 with a more pedestrian return of +1.9% in Q4, bringing its 2025 performance up to 11.3%. Small cap equities experienced choppier price action in the quarter, initially benefiting from lower borrowing-cost expectations before giving back gains late in the quarter as growth concerns re-emerged.
International markets extended their positive gains in Q4 2025, outperforming U.S. equities amid a stable dollar and regional tailwinds. The MSCI World ex USA Index7 appreciated by 4.9% in the quarter, supported by a value-led rally in developed international markets, and finished 2025 up 28.6%. The MSCI Europe Index extended its strong run with a 5.9% quarterly return, bringing its 2025 performance to 31.9%. European equity market performance was propelled by prior ECB rate cuts and expansionary fiscal policy in key EU countries such as Germany. The MSCI Japan Index gained 3.1% in Q4, building on prior momentum driven by corporate governance reforms and more recent reflationary momentum, and ended the year up 22.1%.
Emerging markets posted solid results, with the MSCI Emerging Markets Index8 up 4.3% and 30.6%, in Q4 2025 and 2025, respectively. Emerging market performance was largely attributable to Korea in Q4 with the MSCI Korea Index advancing 27.0%, fueled by AI-driven semiconductor demand and aggressive corporate governance reforms. The outperformance was not confined to Q4 as the index nearly doubled (+96.6%) in 2025. The MSCI India Index, while significantly lagging Korea, was nonetheless up 4.6% in Q4, though full year index performance was a lackluster +3.0%. China was a significant Q4 laggard, with the China MSCI Index falling by 7.7% in Q4 due to weaker than expected economic data, renewed real estate crisis fears, and persistent tariff and trade headwinds. Despite the Q4 downturn, the index still managed to appreciate 28% in 2025 on strong performance in Q1 and Q3 2025.
On the domestic monetary policy front, the Federal Reserve remained accommodative, delivering two additional 25-basis-point rate cuts in October and December. These cuts brought the Federal Funds Rate to a range of 3.50%–3.75%. However, the December decision saw an unusual 9-3 vote, reflecting growing dissent among officials regarding the balance between a sluggish job market and stubbornly elevated inflation. Markets broadly interpreted the Fed’s positioning as constructive for liquidity conditions going into 2026, though the central bank continued to stress data dependency. The updated Summary of Economic Projections indicated a median expectation for two additional cuts by year-end 2025, with futures markets aligning closely on this path.
In fixed income, the 10-year U.S. Treasury yield ended 2025 at 4.18%, up from 4.16% at the start of the quarter, but down considerably from the 4.58% level at the end of 2024. This modest quarterly increase once again masked intra-quarter fluctuations: yields plunged to quarter low of 3.94% on 10/21/25 before a late quarter surge pushed rates higher to close out the year. The iShares Core U.S. Aggregate Bond ETF (AGG)9 advanced 0.9% in Q4 while the longer-term falling yield trend resulted in the ETF finishing the year up 7.2%. Longer duration bonds were negatively impacted by the modest increase in Q4 yields, with the iShares 20+ Year Treasury Bond ETF (TLT) falling 1.0% (+4.2% in 2025). By contrast, short-term exposure via the iShares 1-3 Year Treasury Bond ETF (SHY) yielded a Q4 return of +1.1% (+5.0% in 2025).
Brent crude, after closing Q3 at $67.02 per barrel, experienced sharp swings: falling 10.4% to $60.07 on 10/20/25 on oversupply fears before bouncing back up by 11.0% in just four days as increased geopolitical risk briefly cast doubt on the supply glut hypothesis. While the commodity experienced some price volatility in the ensuing weeks, the overall trend was mostly lower, with Brent crude closing out the year at $60.85, representing a 9.2% (18.5%) decline in Q4 2025 (2025).
Precious metals extended their strong 2025 performance, supported by lower real yields, central-bank demand, and continued interest in portfolio hedging. Gold surpassed $4,000 per ounce for the first time in October, driven by central bank buying and its status as a safe-haven asset amid geopolitical uncertainty. Gold delivered a Q4 return of 12.6% on its way to a full year gain of 64.5%. Silver, however, was the standout commodity of 2025, with a staggering 2025 return of 142.3% on the back of a Q4 gain of 51.6%. Silver’s outsized returns can largely be traced to persistent supply deficits, robust industrial demand, and the same safe haven dynamics that have propelled gold prices higher.
As we transition into 2026, the market narrative continues to hinge on two interconnected forces: labor market trends and the trajectory of inflation. Current data shows a resilient consumer, persistent yet still-manageable inflation pressures, and a potentially softening labor backdrop that has meaningfully diverged from consumer demand. However, downside risk remains in the case of resurgent inflation and/or sustained labor market weakness.
