Global Market Review and Outlook

The fourth quarter proved challenging for markets around the world but ultimately delivered positive results, with all major asset classes posting gains in the period. U.S. equity markets added 2.7% in the period despite a record-setting government shutdown, disappointing employment data, and growing concerns over AI sustainability and valuations. In the end, economic momentum, healthy corporate earnings, and policy clarity into Federal Reserve rate cuts carried the day. Internationally, equities fared even better, with developing markets advancing 4.9% and emerging markets 4.7%. Investor-friendly stimulus policies in Europe and Japan and a weaker U.S. dollar fueled the gains. Fixed income continued to be more than just a ballast in portfolios as two Fed interest rate cuts supported gains in the period, with shorter-duration segments outperforming amid curve steepening. The Aggregate Bond index was up 1.1% in the period.

Source: Factset

Full year 2025 was much like the fourth quarter, volatile and unpredictable, but in the end rewarding across most major asset classes and geographies. In the U.S., the S&P 500 began the year with valuations elevated, and despite significant policy and macro shocks, the U.S. equity market (and economy) showed notable resilience. By year’s end, the S&P had registered 39 record highs along the way, ending the year just off a record close. A mix of cooling inflation, steadier economic growth, excitement about the AI buildout, and policy support (lower interest rates) ultimately overpowered tariff-induced fears early in the year. Fortunately, corporate earnings grew nicely (more than 10%)—especially among AI‑exposed tech and communications names—and that provided fundamental justification for the continued rise in stock prices.

Internationally, both developed and emerging market equities posted strong gains, markedly outperforming U.S. stocks for the year. They entered 2025 trading at multiyear valuation discounts to U.S. stocks, and this backdrop set the stage for stocks to react favorably from policy stimulus and a weaker U.S. dollar. For the full year, the MSCI All-Country World ex U.S. Index returned 31.2%, comfortably surpassing the S&P 500 and posting its largest relative outperformance since 2009.

Bond markets also performed well in 2025. The U.S. Core Bond Index returned 7.3%. Falling yields and tighter credit spreads, driven by three Federal Reserve rate cuts, supported these gains. Similar accommodative moves occurred around the world. The Global Aggregate Bond Index gained 7.3% on the year.

As we close the book on 2025, we are now more than halfway through the 2020s, and what a remarkable decade it has been so far. In 2020, U.S. equity and bond returns were shaped by the pandemic shock and an extraordinary policy response. As demand recovered and supply chains strained, inflation surged to a 40‑year peak of 9.1% in June 2022, prompting the fastest Fed tightening cycle in decades, which pressured rate‑sensitive assets. Russia’s invasion of Ukraine amplified volatility, and bonds suffered one of their worst drawdowns in history in 2022. In 2023, stress from regional bank failures (e.g., SVB, Signature, First Republic) rattled markets until authorities provided backstops to shore up liquidity and confidence. Political tail risks also intruded, but corporate profit growth continued and equities rebounded sharply from late‑2022 lows. Positive returns in 2023–2024 were led by mega‑cap technology and the AI boom, concentrating gains but lifting broad indices to repeated record highs. Then came tariffs, but as inflation cooled, lower interest rates ensued—supportive for duration and risk assets. And here we are today, near all-time highs in many markets around the globe, including the S&P 500 here at home.

We bring up the recent past merely to highlight that the starting point in 2026 is markedly different than a few years ago, or even last year. Economic growth is very healthy, inflation remains below its recent highs, and the Fed is friendly. Stock valuations are more expensive, credit spreads are near their tightest levels in decades, and expectations for earnings and economic growth are elevated.

There is good reason for the built‑in optimism, however: the tech sector is in its most dynamic innovation cycle since the late‑1990s internet era; companies are posting record profits; and S&P 500 earnings have grown at double-digit percentage rates in each of the last two years, with another 10%-plus gain expected in 2026. Consumers—the engine of the U.S. economy—continue to spend, and with interest rates moving lower, spending and investment activity delayed by higher rates could be unlocked.

In addition, fiscal stimulus via the One Big Beautiful Bill Act (OBBBA)—including lower tax rates, larger refunds, and reduced withholding—could lift consumer spending in early 2026. On the corporate side, OBBBA’s business‑friendly provisions, such as full expensing for equipment and R&D, may sustain business investment. Continuing labor‑market softness could give the Fed latitude to keep lowering interest rates, adding further monetary support. In short, ingredients are in place for further market momentum.

We carry these elevated expectations into 2026 with guarded optimism, however, as risks abound. Softer employment trends or a re-emergence of inflation could sap consumer spending and pressure corporate profits. A more uncertain Fed path given recent dissenting votes could raise policy error risk and slow the trajectory of expected interest rate cuts. Geopolitics could further elevate commodity and logistic tail risks, and global growth could disappoint as Europe’s energy and export sensitivities linger. On the equity side, concentration in mega‑cap/AI leaders leaves benchmarks exposed if earnings or capex payoffs disappoint. On the bond side, historically tight credit spreads leave little cushion if growth disappoints or funding costs rise.

The world will undoubtedly surprise us again in 2026 as it did last year (and every other year). We cannot predict what lies ahead, but we remain constructive on both equities and fixed income. We are not risk averse in this market but believe caution and pragmatism are prudent. As always, we believe a disciplined approach focused on long-term goals is the best way to navigate the path forward.

For equities in the U.S., we expect 2026 returns to be driven more by earnings growth and breadth than by multiple expansion given current elevated valuations (P/E 22x-23x). Fortunately, the outlook for corporate profit growth remains constructive. Macro conditions should be supportive but not booming, Fed policy is expected to ease further, and AI-related capex remains a powerful tailwind. Tariff‑related frictions, elevated forward P/E multiples (22x-23x), and large fiscal deficits can keep volatility elevated. However, if productivity gains from AI investment begin to materialize and deliver earnings growth beyond mega caps, equities can move higher.

Internationally, policy easing in Europe (ECB/BoE), a potentially softer dollar, and attractive relative valuations leave room for continued stock catch‑up versus the U.S.—particularly in developed ex‑U.S. markets. Emerging markets face mixed prospects amid trade uncertainty and geopolitical risks but still may benefit given valuation gaps and currency tailwinds.

In fixed income, coupons should provide most of the basis for bond returns in 2026 given the large price realization in 2025 and the forecast for a gradual ease of rates this year. In that regard, yields remain compelling in high‑quality bonds despite very tight credit spreads. Municipal bonds remain attractive for taxable investors given resilient fundamentals and broadly stable credit quality. U.S. Treasurys remain favorable for those looking for ballast and real return. We continue to shy away from high yield given historically tight spreads, which leaves less margin for error should economic surprises occur throughout the year.

The investment landscape today is certainly dynamic and seemingly ever-changing. We are not sure what 2026 will bring us, but we aim to deliver sustainable results and preserve your trust in every market environment, adhering to disciplined processes and maintaining a clear focus on quality and risk management that has served us well over time.

If there are any questions or if we can be helpful in any way, please do not hesitate to reach out.

Warm regards,

John, Cam, and team