Thanks to falling interest rates and resilient corporate profits, U.S. equities ended 2025 amid solid gains despite limited economic data due to a government shutdown. The S&P 500 and NASDAQ Composite rose 2.35% and 2.57% respectively while the Dow Jones Industrial climbed by nearly 3.6%.
Tech and AI led U.S. market gains for six consecutive months as the quarter began, but sentiment got shaky late in October when the Senate failed to pass a funding bill, triggering a U.S. government shutdown. The halting of the federal government limited access to economic reports, forcing investors to turn to major consumer-focused companies for insight into economic conditions.
November was choppy at first, but once the shutdown wrapped on the 12th, fresh CPI reports indicating cooling inflation helped fuel a late month rally that recovered earlier losses. The Fed cut short-term rates, but mixed signals from the labor market introduced fresh uncertainty about how policy may shift in the New Year.
ECONOMIC CONDITIONS:
U.S. – GDP Increases
GDP: The economy grew at 3% in the third quarter, based on the initial Q3 estimate from federal data delayed by the government shutdown. It beat economists’ forecasts of 3.2% and marked the highest economic growth in two years. Job growth slowed, with only 22,000 jobs added in August, well below the 75,000 expected. [13]
Labor: The latest jobs report combined full data for November and partial data for October. Employers added 64,000 jobs in November, an upside surprise, as economists had only anticipated a 40,000 job gain. By contrast, the economy shed 105,000 jobs in October, reflecting government job cuts offset by private sector gains. [14]
Housing: Sales of existing homes rose 0.5% in November over the prior month, falling off from October’s upwardly revised 1.5% month-over-month gain. Year over year, sales fell 1.0% compared with October’s 1.7% gain. Regionally, sales increased month over month in the Northeast and South, were flat in the West, and fell in the Midwest.18 The median existing home sales price in November was $409,200, 1.2 percent higher than a year ago. The supply of unsold homes decreased slightly month over month but increased 7.5 percent year over year. [18]
International – Mixed Signals
The Eurozone macro picture stayed mixed: manufacturing—especially Germany—remained in contraction, but services activity and hiring were firmer, and bank lending began to Inflation eased, the ECB held rates steady in December, and it lifted its 2025 GDP forecast to 1.4% from 1.2%. UK shares also performed well, led by internationally focused large caps (financials, mining, defense, commodities) helped by strong demand, high commodity prices, and a slightly weaker pound, while domestically exposed firms lagged amid pressured consumers and persistent costs
Elsewhere, the Bank of Japan raised rates in December and hinted at further hikes in 2026, reinforcing optimism about domestic. With valuations near the high end of historical ranges, late-quarter volatility increased—especially in AI/defense names—but solid earnings momentum and ongoing governance reforms helped underpin the broader market.
EQUITIES:
Broadening and Rising
Over the fourth quarter of 2025, US equities registered a gain, even amid the longest government shutdown on record and rising job The S&P 500 Index posted a nearly 18% increase for the year. Market leadership during the quarter remained concentrated in the communication services and technology sectors, but there were some signs of market broadening. Several cyclical and defensive sectors—including industrials, financials, healthcare and utilities—posted strong, double-digit gains for the year.
Internationally, The MSCI EAFE Index rose 4.54 percent in the fourth quarter. It outperformed all three major U.S. market averages over the quarter and for the full 12 In Europe, Spain (+11.84 percent) was the clear leader among the major developed markets. The United Kingdom (+6.21 percent) and Italy (+5.20 percent) also outperformed the MSCI EAFE Index, while France (+3.21 percent) and Germany (+2.55 percent) also logged gains.12 Pacific Rim stocks were mixed, with Japan (+12.03 percent) notching a solid gain for the three months. Australia (-1.52 percent) was under pressure. Korea (+23.06 percent) was the standout for the quarter and year (+75.63 percent). [12]
FIXED INCOME: Solid Returns
U.S. FIXED INCOME: Returns were more muted in US Treasuries. The yield curve steepened, with yields rising in longer maturities, but falling in the shorter, interest-rate-sensitive part of the curve. The Federal Open Market Committee cut interest rates by 25 basis points when they met in October and again in December, taking the federal funds rate to 3.5-3.75%. Following the reopening of the US government, delayed labor market data suggested a moderation—but not a collapse—in labor demand, with the low-hire, low-fire trend continuing.
DEVELOPED INTERNATIONAL FIXED INCOME: There was marked divergence across global government bond markets during the final quarter of 2025. Despite volatility, UK gilts were the notable outperformer. November’s Budget was well received by markets, as the government announced a larger-than-expected fiscal headroom and a smaller-than-expected gilt remit for the year. That assuaged fiscal concerns. The Bank of England, following a dovish hold, cut the base rate by 25 basis points at its December meeting in what was a close (5-4) vote.
QUARTERLY FOCUS: Changing of the Guard?
The headline-making gains are exciting, but the real story of Q4 is the rotation of the leaders of the pack. Easing monetary policy paired with a more selective approach to AI seems to be creating room for new winners, potentially signifying an important regime shift to a healthier, more balanced U.S. market. A handful of large tech and growth stocks dominated performance for years. In Q4 we saw the first meaningful signs of a broader set of companies and styles leading the charge. Large-cap value stocks increased around 4% while small caps hit new highs as the Fed delivered two rate cuts. Healthcare attracted fresh interest as some of the AI hype cooled. Weak spots included traditional defensives like real estate, utilities, and consumer staples.
For roughly three years, only about 30% of S&P 500 companies have outperformed the index—well below the long-term average near 49%—highlighting how a small cohort has driven most index gains. The Q4 rotation, paired with easier monetary policy and a more selective approach to AI as the theme matures, could create room for new winners. If breadth expands meaningfully, it would mark an important regime shift for markets.
At the same time, international equities continued to lead in Q4, after years of underperformance vs US markets (see chart below). Both developed and emerging market stocks gaining close to +5% in the final quarter of the year.
A weaker U.S. dollar played a major role, pressured by rising trade tensions, policy uncertainty, and a rotation of investor flows toward non-U.S. markets, underscoring the importance of global diversification.
DPWM OUTLOOK: Seizing Opportunity
As we enter 2026, the global economy appears reasonably healthy, but risks linger. Persistent inflation, uncomfortably large fiscal deficits, and an unpredictable geopolitical climate create a delicate balance between caution and optimism. In times like these, chasing the hot trend is rarely the best path. Steady, disciplined investing—true diversification across regions, sectors, and styles, plus a thoughtful allocation to alternatives—tends to work better. The goal is to recognize where change is creating genuine opportunity, and where exuberance may be masking underlying fragility.
Markets have benefited from technological innovation and continued economic strength, but 2025 also reminded investors that volatility can be persistent—and volatility can be destructive to portfolios, particularly when positioning is concentrated in a single theme, region, or style. Portfolios built on hype and trends without a disciplined framework may look impressive for a time, but they often reverse sharply when sentiment shifts and investors rush to sell. By contrast, a diversified allocation grounded in fundamentals—spread across regions, sectors, and return drivers—can help reduce reliance on any single outcome and keep decision-making anchored when markets get noisy. Alternatives can further broaden the opportunity set by adding sources of return and potential income that may be less dependent on traditional public-market beta, while also helping manage portfolio resilience when dispersion rises. The road ahead may be unpredictably bumpy, but it’s still open to positive outcomes if we stay diligent, patient, and adaptable.
CITATIONS
1. Finance.yahoo.com, 12-31-2025
2. CNBC.com, 10- 31-2025
3. CNBC.com, 11-14-2025
4. CNBC.com, 11-28-2025
5. WSJ.com, 12-10-2025
6. WSJ.com, 12-18-2025
7. CNBC.com, 12-31-2025
8. SSga.com, 12-31-2025
9. RBC.com, 12-22-2025
10. TradingEconomics.com, 12-26-2025
11. Investopedia.com, 12-12-2025
12. MSCI.com, 12-31-2025
13. WSJ.com, 12-23-2025
14. WSJ.com, 12-16-2025
15. ChicagoFed.org, 12-5-2025
16. KPMG.com, 12-23-2025
17. National Association of Home Builders, 12-15-2025
18. Realtor.com, 12-19-2025
19. WSJ.com, 12-18-2025
20. KPMG.com, 12-23-2025
21. WSJ.com, 10-29-2025
22. WSJ.com, 12-10-2025
23. CNBC.com, 12-20-2025
24. Verena Street Coffee Statistics, 2025
25. National Coffee Association, 2025
26. Verena Street Coffee Statistics, 2025
27. Verena Street Coffee Statistics, 2025
28. Enterprise Apps Today Tea Statistics, 2023
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Graham Ditus
Tim Kulick, CPA®
Drew Kelleher, CFP®
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