Q4 2025 Market Review

KEY TAKEAWAYS

• US stocks continued climbing in 2025, with the S&P 500 gaining almost 18%, while international stocks soared nearly 32%.

• The Fed reduced interest rates by 0.75 percentage points even as it coped with stubborn inflation, citing labor market worries.

• Value lagged growth in the US, but international small value was among the best-performing asset classes of the year.

  
  

US stocks notched their third year in a row of double-digit gains, but it wasn’t the smoothest ride. The S&P 500 hit records in the winter that were followed by a spring swoon. After powering past that to new highs in the fall, the markets cooled a bit along with the temperatures. Still, the S&P 500 was up 17.9% for the year and closed near record levels. The climb came despite tariff uncertainty, interest rate changes, and concerns about the durability of AI’s gains—not to mention the longest government shutdown in US history. Global stocks rose (see Exhibit 1), with returns in developed international and emerging markets better than those in the US. In the bond market, US Treasuries were higher for the year, and the benchmark 10-year yield fell to just above 4%.

exhibit 1

Uphill Climb

MSCI All Country World Index (net) in 2025

Past performance is not a guarantee of future results.

Technology companies were below earlier highs at year’s end, but the tech-heavy Nasdaq still advanced 20.9% in 2025. Just months after reaching $4 trillion, NVIDIA became the first public company to reach a market capitalization of $5 trillion, though it wouldn’t hold that level. The headline names associated with artificial intelligence have been strong performers in recent years. But diversified equity portfolios don’t need to chase a few big names to have exposure to AI—the technology touches many types of businesses. Broad diversification can help investors avoid missing out on these winners, wherever they show up.

The US Federal Reserve cut the federal-funds rate by a quarter point three times, in September, October, and December, to a range between 3.5% to 3.75%, the lowest level in three years. In its December statement, the Fed cited labor-market worries as it lowered rates while also noting rising inflation and that not all members supported the rate decrease. But while investors may worry about the impact of Fed rate changes, market interest rates and the federal-funds rate don’t always move as one—the 10-year Treasury yield, for example, hasn’t always gone in the same direction as the fed-funds rate.

Market fluctuations coincided with trade talks throughout the year, most notably with the global tariff announcement from the US in April, after which stocks took a downward turn. But as tariffs were delayed and talks progressed—and with the US reaching a number of trade deals—the market rebounded. Still, questions remained about tariffs elsewhere. In a high-stakes case, the Supreme Court appeared skeptical about the legality of tariffs but has yet to rule on whether any recently imposed levies can remain in place. Adding to uncertainty late in the year, the government shut down in October and November for 43 days. But markets continued to post gains, as they often have during extended closures. Congress reached a deal in mid-November to reopen the government, but only through the end of January.

Looking Abroad

In a departure from recent years, developed international stocks fared better than their US counterparts. The MSCI World ex USA Index gained 31.9%, outpacing the S&P 500 by the widest margin since 1993 and serving as a reminder of the potential benefits of an internationally diversified portfolio. Emerging markets fared even better than developed markets, with the MSCI Emerging Markets Index rising 33.6%. Global equities, as measured by the MSCI All Country World Index, rose 22.3% for the year.

"Developed market international stocks outdid their US counterparts by the widest margin since 1993."

Likewise, investors who targeted value stocks outside the US were rewarded; however, value lagged growth in the US. Large caps outperformed small caps in the US and globally, but international small value was among the best-performing asset classes of the year. Longer term, US small value has been one of the best-performing asset classes since 2000. That has included a period of strong performance for the large-cap S&P 500: Over the past 10 years, it returned 14.8% annually. That’s a notable deviation from large caps’ long-term average, whereas the returns of small caps have been more in line with their historical performance over that same period. Elsewhere, high profitability stocks were outpaced by low profitability stocks in global developed markets in 2025, while the opposite was true in emerging markets.

In the bond market, US Treasuries returned 6.3%, sending the yield on the benchmark 10-year Treasury down to 4.18%. The broader bond market also posted gains during the year, with the Bloomberg US Aggregate Bond Index up 7.3%, its best annual return since 2020. The Bloomberg Global Aggregate Bond Index (hedged to USD)—a broad benchmark of sovereign and corporate debt—rose 4.9% for the year.

Investors showed increased appetite for gold in 2025, pushing prices up more than 50% to above $4,000 per ounce for the first time. Some market participants view gold as a hedge during economic downturns or against inflation. But since 1970, gold has often experienced large price swings relative to annual inflation. Over the same period, gold prices showed little relation to fluctuations in the US GDP. Whether gold was up or down doesn’t appear connected to what was happening in the economy. Since markets tend to reflect expectations for the economy in advance, it’s not clear holding gold provides additional protection against adverse economic developments.

Mind over Matters

A better way to cope with market volatility may be to simply pay less attention. Just this past year, if you had gone to sleep on April Fools’ Day and checked your investment portfolio a month later, you might have assumed the market had been relatively calm. But for investors who spent the month tracking daily returns, the experience likely felt more disruptive. April 2025 turned out to be one of the most volatile months in recent history, as market participants were processing new information about tariffs and trying to make sense of what the developments might mean for businesses, investors, and the global economy.

The same thinking can guide investors’ approach over longer time periods—especially when looking at data across many years or even decades. With reliable stock data stretching back to 1926, we are, as of this year, now able to consider a full century of stock returns. Doing so gives further credence to the merits of focusing on the long run. A short-term view of yearly gains and losses shows what may appear as wild swings in the market, as seen in Exhibit 2, but a long-term view reveals a fairly steady growth of wealth over the 100-year period.

exhibit 2

Two Views of Markets

S&P 500, Growth of Wealth vs. Annual Returns, January 1, 1926–December 31, 2025

Past performance, including hypothetical performance, is no guarantee of future results.

Closing

It is natural to want to stay informed about what’s going on in the world. And when markets are volatile, it may be hard to resist the urge to do something. But doing nothing can be a fine course of action. Thinking about investments over the long term might ease the urge to make hasty asset allocation changes. An investor who stayed the course over the long term—riding out the ups and downs of economic shocks, wars, and other crises—would have seen exponential gains in their investment. Declines can be painful in the moment, but markets have shown resilience throughout history. Last year was another example: Investors who stayed in their seats were well positioned to be rewarded.