Market Recap December 2025: U.S. and global equities posted solid full-year gains in 2025, but the ride was much choppier than the headline returns suggest, with multiple 5–10% pullbacks clustered around policy and geopolitical shocks. Large-cap U.S. growth and tech again set the tone, as AI, cloud, and semiconductor names drove a disproportionate share of index performance, while more defensive and rate-sensitive sectors like utilities and parts of real estate lagged despite easing yields. Don’t fight this market. This doesn’t mean that the market won’t have a pullback, as they are necessary and healthy, but research shows that the best time to own the market is when it is hitting new all-time-highs.
For most investors, 2025 reinforced a few lessons: staying diversified across regions, sizes, and styles mattered more than precise rate calls; maintaining exposure to structural themes like AI and productivity paid off, albeit with periodic air pockets; and trying to trade each macro headline risked missing the powerful rebounds that turned a volatile year into a broadly positive one for balanced portfolios.
Bond Recap → 4 Quarters in a Row of Positive Performance: The bond market in 2025 delivered its strongest year since 2020, as falling yields and a Federal Reserve that cut policy rates by 0.75% sparked a broad rally across fixed income. Core U.S. bond benchmark, the Bloomberg U.S. Aggregate Bond Index, posted a return of 7.3%, aided by both price gains and attractive starting yields. Riskier segments outperformed: U.S. high-yield bonds returned more than 8%, and leveraged loans also produced solid mid‑single‑digit to high‑single‑digit gains, supported by resilient economic growth and low default rates. The year also marked a normalization of the yield curve as term premia re-emerged, with long-term yields settling in a roughly 4–5% range.
Federal Reserve Meeting Update: The FOMC cut the target federal funds range 25bp to 3.50%-3.75%, as expected. Most of the guidance provided by the statement, SEP, and policy implementation note was unsurprising. There were three formal dissents for the first time since 2019. The policy statement noted “reserve balances have declined to ample levels”, and the New York Fed concurrently announced it will buy up $40B of T-bills. Otherwise, the most important change from the October statement was a move from “In considering additional adjustments to the target range…” to “In considering the extent and timing of additional adjustments to the target range…”. Chicago Fed President Austan Goolsbee and KC Fed President Jeff Schmid dissented in favor of leaving rates unchanged. Fed Governor Stephen Miran dissented in favor of a 50bp cut. The dot plot showed six of nineteen FOMC participants submitted “soft” dissents (two of which were Goolsbee and Schmid) by placing their end-2025 dots 25bp higher than where the December meeting’s policy announcement moved the fed funds rate. Governor Miran also submitted a soft dissent.
The Artificial Intelligence Capex Trade Continues to Work, But Is It a Risk? The markets are struggling to price a technology that is advancing at an exponential rate. While markets appear undeterred, even with solid fundamentals, markets can have a correction. We believe there is a difference between a bubble and an air pocket. While we don’t believe that we are currently in the former, the latter is a possibility. The boom in tech stocks and AI spending could lose its luster, even if temporarily. While few doubt the potential transformative impact of AI, a shift in momentum could be triggered by a range of factors (i.e., a miss on mega cap earnings, a supply crunch on power or critical materials, or an external liquidity shock). Given the significance of AI investment, such a slowdown could cause a swift pullback in the overall market, or at a minimum, pressure the AI-linked wealth gains that have lifted consumption.
Are We in an AI Bubble? Only time will tell if we are in a bubble, but let’s frame this question differently. Fears of asset bubbles popping have been drilled into every investor’s head since the “tulipmania” of the 1630s. Specifically, we’re taught that all booms lead to busts. But are all frenzies bad? Bubbles both create and destroy wealth. Perhaps a more nuanced approach is needed. Many modern technologies were accompanied by overenthusiastic investment (railroads, cars, airlines, computers). So, is there a way to do a cost-benefit analysis, rather than just a cost analysis, on bubbles? The key lies in what the boom produces and how it is financed. The worst possible kind of bubble is a bubble in unproductive assets (gold, land, tulips) financed by banks. The best possible kind of bubble (i.e., one that does not hurt growth too badly) is a bubble in productive assets, financed by capital markets. The Japanese bubble of the late 1980s and the US real estate bubble of the mid-2000s were ‘bad’ bubbles. By contrast, the “dot.com” bubble of the late 1990s was a ‘good’ bubble. A bubble in a productive asset financed by equity can work out without too much trouble (equity is known to be a “risky” asset). There’s a short-term cost, but a long-term benefit (i.e., a new technology).
What to Focus on Right Now:
Profit Growth Continues to Trend Higher – With Q3 earnings season wrapped up, the fundamental backdrop for equities remains supportive as we move toward 2026. As of the end of December, the next twelve-month earnings growth stands at 14.2%, the highest level since January 2025. If there’s one area of fundamental risk, it’s the continued concentration within the index – it can drive markets higher or lower. The top 10 companies now account for about one-third of total net income, meaning a miss from any major large-cap contributors could materially affect the overall earnings outlook. For now, though, growth remains robust for both 2025 and 2026.
Understanding the 2026 Narrative – Today’s narrative largely centers on two themes: continued AI-related capital expenditures, albeit at a slower pace, and the potential for an economic reacceleration supported by fiscal stimulus and Federal Reserve policy. While AI Capex growth will naturally moderate after such outsized investment levels, a key question is whether companies that issue debt to fund this spending will continue to receive the same valuation multiples they enjoyed earlier in the cycle. As for the prospect of an economic reacceleration, the question now is whether consumer momentum can be sustained through year-end before the fiscal stimulus starts to take effect in 2026.
S&P 500 EPS: ’26 (Exp.) EPS = $298.55 (+10.9%). ’25 (Exp.) EPS = $269.25 (+9.8%). ‘24 EPS = $245.16 (+11.5%). 2023 = $220 (+8.6%). 2022 = $219 (+0.5%).
Valuations: S&P 500 Fwd. P/E (NTM): 22.0x, EAFE: 15.8x, EM: 13.2x, R1V: 17.4x, and R1G: 28.1x. *
*Source: Bloomberg and FactSet, Data as of 12/31/25
Disclosures
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This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy.
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The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
The Nasdaq Composite Index measures all Nasdaq domestic and international-based common type stocks listed on The Nasdaq Stock Market. To be eligible for inclusion in the Index, the security’s U.S. listing must be exclusively on The Nasdaq Stock Market (unless the security was dually listed on another U.S. market prior to January 1, 2004 and has continuously maintained such listing). The security types eligible for the Index include common stocks, ordinary shares, ADRs, shares of beneficial interest or limited partnership interests and tracking stocks. Security types not included in the Index are closed-end funds, convertible debentures, exchange traded funds, preferred stocks, rights, warrants, units and other derivative securities.
The Dow Jones Industrial Average® (The Dow®), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.
The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries*around the world, excluding the US and Canada. With 902 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
The MSCI Emerging Markets Index captures large and mid-cap representation across 26 Emerging Markets (EM) countries*. With 1,387 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
Investment-grade Bond (or High-grade Bond) are believed to have a lower risk of default and receive higher ratings by the credit rating agencies. These bonds tend to be issued at lower yields than less creditworthy bonds.
Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.
Nasdaq-100® includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.
The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. This includes Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities, and collateralized mortgage-backed securities. ACA-2601-21.
