4th Quarter Commentary – January 2026
Fourth Quarter Market Summary
Equity markets closed out 2025 on a strong note, capping another resilient year for investors. The fourth quarter began with familiar concerns around interest rate policy, geopolitical developments, global economic growth, and a government shutdown. Despite the noise, corporate fundamentals remained solid. Earnings generally exceeded expectations, financial conditions remained steady, and consumer activity continued to provide meaningful support to the economy.
The S&P 500 gained over 2% during the quarter, with performance once again heavily led by the technology and AI-linked companies. That said, small- and mid-cap stocks also participated in the uptrend, signaling healthier and more diversified market strengthening.
International equities also delivered positive results, rising approximately 5.1% in the fourth quarter. Currency movements were relatively stable, with the U.S. dollar largely range-bound, limiting its impact on international returns for U.S.-based investors.
Fixed income markets posted small gains during the quarter as bond yields slightly declined. High-quality bonds benefited from improved rate stability, compared to the volatility seen in years prior. The Bloomberg U.S. Aggregate Bond Index advancing approximately 1.1% for the period and over 7% for the year.
Below is a table highlighting various market index returns over the past 3, 12, and 36 months:
Q4 2025 Recap
The fourth quarter of 2025 continued to prove resiliency. Despite the longest U.S government shutdown in history, consumer sentiment near record lows, and relentless negative headlines, the upward trend continued. US stocks (large, mid, and small) all advanced more than 2% for the quarter and finished the year near or at all-time highs. In a year with persistent background noise, companies still showed up every day and focused on earning more money. Regardless of the political environment, businesses marched forward, accelerated new technology adoption, channeled capital towards AI, automation, earnings growth, and for the most part, successfully navigated through very choppy seas. A reminder to the general investor population to take a step back, put a halt to panic or worry, and maintain a long-term perspective on all the positive that is still taking place in investment world.
During the quarter, the Federal Reserve cut interest rates two more times, totaling three quarter-point rate cuts for 2025. This signaling a shift from the “higher for longer” mindset, to a more gradual easing cycle going forward. Inflation, popularly represented by CPI (a measurement of average change of prices over time), slowly moved closer to the Fed’s comfort zone of 2%. CPI closed out December at 2.7%.
On the fixed income side of the world, it was great to see bonds acting like bonds again. Bond funds resumed their traditional role as portfolio diversifiers and steady income generators, offering a cushion during periods of equity volatility.
With relatively stable currency movements for the quarter, international equities rallied over 5% for the final quarter of the year and closing out over a 32% return for the year. An area we will spend a little more time on in this report.
2025 showed us that diversification across various asset classes worked out well and will continue to be key going forward. Below, is popular chart from MFS Fund Distributors, Inc., displaying the best and worst asset classes over the last 20 years. While everyone wants to be in the best performing asset class every year, no one is savvy or wise enough to predict which will come on top. Leadership changes year to year and many could not stomach the wild swings chasing the top performer. This showing the importance of having a diversified portfolio - being a consistent solid performer, while smoothing out the ride along the way.
Spotlight on International Stocks
After trailing US stocks for more than a decade, international stocks came to center stage in 2025. As we reviewed above, international stocks (measured by the MSCI ACWI ex US index) rose over 32% for the year. A strong driver of this return, was the decline of the U.S. dollar. The dollar dropped by nearly 10% over the course of the year (relative to a basket of global currencies), as a primary result of fiscal concerns and reduced confidence in US policy (Morningstar). Given those uncertainties, many foreign investors and central banks started to seek diversification in the currencies and assets they own.
Another driver of the recent decline are interest rates. As U.S. rates have declined over the last couple of years with Fed rate cuts, the interest rate differential between U.S. yields and international yields have dropped, making U.S. fixed income investments less attractive than they have been. The charts below (J.P. Morgan) share this change as well as the long-term cyclical nature of the U.S. dollar.
Right now, it’s nearly impossible to predict whether this upward trend in international stocks will remain or if they will continue to outperform the U.S. markets. What this does tell us is, there is a case to continue to have some amount of international exposure as part of having a well-diversified portfolio. Not only to be able to participate on the upside of a potential longer-term strengthening, but also a hedge against further U.S. dollar weakness.
Final Thoughts
While uncertainty is a constant in investing, so is the value of preparation and perspective. By keeping a long-term focus and making prudent decisions along the way, we believe clients are well positioned for the future. Our team looks ahead with watchful optimism and remains fully committed to guiding you through the road ahead.
"There are far, far better things ahead than any we leave behind." – C.S. Lewis
Look forward to seeing you in 2026!
Philip E. Huber, Jr. CPA, CFP®
phuber@hwafinancialgroup.com
JR Geld, CFA, CFP® 410-696-4025
jgeld@hwafinancialgroup.com
Danny Pereira, CFP®
dpereira@hwafinancialgroup.com