Fidelity^® Strategic Disciplines

The Big Picture

Global financial markets continued to deliver solid gains in both the fourth quarter and across 2025. U.S. stock returns were mixed in the final months as investors weighed slowing job growth and persistent inflation against elevated valuations for some artificial intelligence (AI) companies. Earlier in the year, investor sentiment felt the strain caused by shifting tariff policies and concerns over the impact of a new tax bill signed in July. However, resilient economic growth, rising corporate earnings, and optimism around AI ultimately powered strong full year returns for U.S. stocks.¹

International stocks also finished higher for the quarter and year, benefiting from favorable starting valuations and overcoming tariff-related challenges.²

The bond market delivered strong gains for both the quarter and the year.³ These positive returns were supported by attractive yields as well as declines in both short‑ and intermediate‑term interest rates. After pausing its campaign in January 2025, the Fed restarted its rate‑cutting program in October and again in December. Bond returns rose as investors anticipated, and then reacted to, the Fed’s rate cuts in the fourth quarter. However, following its December meeting, the Fed signaled it might keep rates on hold for a while. That shift pushed market expectations for additional cuts further into 2026, and bond returns dipped slightly in December as a result.

Looking ahead:

Analysts broadly expect economic and corporate earnings growth to continue into 2026. These types of conditions have historically supported stocks and other risk assets⁴ like corporate bonds. The recently passed tax bill could further boost consumer activity through measures such as higher standard deductions and lower tax brackets. Additionally, an increased state and local tax (SALT) deduction cap for certain taxpayers and a deduction on certain qualified tip income could further support American consumers. However, uncertainty remains as inflation may stay somewhat elevated. Higher inflation could have negative consequences for consumer confidence and spending, which are both major drivers of overall U.S. economic health.

In general, the market currently anticipates two more Fed interest rate reductions in 2026. This forecast is based on expectations for weakening employment trends and near-term inflation. However, these cuts may not come until mid-year or even later.

DID YOU KNOW?

Inflows into U.S. stocks hit a record $308B in 2025. Beating the last peak in 2021 by 14%.⁵

Sector positioning:

• We believe the portfolio is well diversified across the 11 S&P 500^® Index sectors (1a), offering balanced exposure with 7 sectors each accounting for almost 10% of the portfolio. This is in contrast to the S&P 500 which, as of 12/31/25, had a roughly 35% allocation to a single sector (technology) and roughly 45% in tech if including tech-related communication services companies.
• We increased exposure to consumer staples.
• We found a number of attractive opportunities among food & beverage as well as household products companies.
• Many companies in this sector have durable revenue and earnings, and currently trade at a very attractive valuation compared to an overall stock market that is expensive by historical standards.
• We reduced exposure to financials and technology.
• Within financials, several bank stocks outperformed and approached or exceeded our estimate of fair value, so we trimmed those positions.
• Similarly, we also reduced some outperforming semiconductor holdings within technology after significant gains.

The following investment types discussed here are for general informational purposes. All asset class categories referenced may not be represented within your specific strategy.

U.S. Stocks⁶

+2.4% QTR and +17.1% YR

Markets close out 2025 strong: Tech dominates, value stocks rebound, and commodities soar.

For a third consecutive year, 2025 saw U.S. stocks posted returns well above historical averages. For context, U.S. stocks have returned 17.1%, 23.9%, and 26.1% for 2025, 2024, and 2023 respectively. Meanwhile, the historical annual average return for U.S. stocks is 12.7%.⁷ This positive performance trend has been driven by ongoing higher-than-expected corporate earnings. Additionally, enthusiasm for companies viewed as AI beneficiaries led to outperformance in the communication services and information technology sectors for the year.⁸

Value stocks outperformed growth stocks in the fourth quarter, reversing the year-to-date trend.⁹ Growth stocks still led for the full year, driven by strong performance in the communication services and information technology sectors. However, their edge narrowed late in the year, as value stocks benefited from a move away from over-extended technology valuations toward companies with solid fundamentals and attractive pricing. Dividend-paying stocks also benefited from this shift, as they typically fall within the “value” segment of the market.

Sector performance was mixed in the fourth quarter, though all sectors posted gains for the year.¹⁰ Health care led the quarter as investors moved toward defensive areas of the stock market, drawn by stable earnings and renewed interest after earlier underperformance. Real estate was the weakest performer, pressured by high interest rates and tighter financing conditions. Additionally, a shift toward growth sectors like technology dampened demand for real estate stocks. For the full year, communication services and information technology led, returning 31.9% and 23.0%, respectively. These sectors were fueled by strong earnings and enthusiasm around AI innovation. Real estate and consumer staples remained the laggards for the year.

Large company stocks outperformed their generally less technology-oriented small and mid-size counterparts for the quarter and year.¹¹ This outperformance was powered by strong corporate earnings, optimism around AI innovation, and support from Fed interest rate cuts.

Commodity stocks posted solid gains for both the quarter and the year.¹² Precious metals led commodity stock performance, reaching record highs with an annual return of 80.2%, outperforming U.S. stocks by a wide margin.¹³ This rally was supported by rising prices in gold and other precious metals with significant industrial uses, such as silver and platinum.

International Stocks¹⁴

+5.1% QTR and +32.6% YR

Despite geopolitical challenges, international markets delivered impressive returns.

International stocks delivered strong gains in 2025 despite significant challenges including tariffs, geopolitical tensions, and regional conflicts.¹⁵ Positive corporate earnings and attractive valuations compared to U.S. markets helped drive strong outperformance versus U.S. stocks.

International developed market stocks delivered positive returns over the quarter and year and beat their U.S. counterparts over both periods.¹⁶ Europe was the top performing region for year, returning 36.3%.¹⁷ Plans for increased government spending supported European stocks in 2025, most notably within the banking, construction, and defense industries.¹⁸ Japan also had positive returns for the quarter and the year, supported by corporate governance reforms and rising AI-related investments.¹⁹

Emerging markets lagged international developed markets in the fourth quarter.²⁰ However, they finished ahead of international developed markets for the full year. China returned 31.4%, posted its best annual results since 2017, fueled by tech stocks tied to AI and government measures to improve corporate efficiency.²¹ Brazil and Mexico also stood out, attracting foreign investment thanks to low valuations, anticipated interest rate cuts, and improved fiscal outlooks.²²

Bonds²³

+1.1% QTR and +7.3% YR

Healthy yields and Fed interest rate cut supported a strong quarter for the bond market.

The broad investment-grade bond market experienced meaningful gains for the quarter and the year. 2025 was a year of elevated volatility, but one in which the bond market posted gains in all four quarters. Positive bond market performance was supported by high yields at the start of the quarter. Additionally, declining short and intermediate-term interest rates boosted bond prices. For the full year, bonds rose 7.3%, their best annual result since 2020.

All investment-grade sectors, including Treasury, corporate, and mortgage-backed bonds, posted positive returns for the quarter and the year.²⁴ For the quarter, U.S. Treasuries outperformed investment-grade corporate bonds, which were constrained by historically tight credit spreads.²⁵ However, for the full year, corporate bonds returned 7.8%, comfortably beating the 6.4% gain from Treasuries. Credit sensitive parts of the bond market that have tended to benefit from higher yields delivered solid returns for the quarter and the year. That included areas like agency mortgage backed securities (MBS), commercial MBS, and asset backed securities (ABS). For example, MBS returned 1.7% and 8.6% for the quarter and year, respectively. During the quarter, short-term bond yields fell while long-term yields rose, causing the yield curve to steepen. These movements were caused by Fed interest rate cuts as well as heavy issuance of long-term Treasuries to fund U.S. government spending. As a result, limited-duration and intermediate bonds had the strongest returns during the quarter within the taxable investment-grade bond space.²⁶

High-yield corporate bonds outpaced their investment-grade counterparts, returning 1.3% and 8.5% for the quarter and the year respectively.²⁷ Stronger-than-expected earnings kept default risks low, helping high‑yield bonds deliver impressive returns.

Meanwhile, after a shaky start to the year, municipal bonds rallied in the second half of 2025 and ended the year with a resilient fourth quarter. Specifically, municipal bonds gained 1.6% for the quarter, helping them offset a volatile first half of 2025 and lifting their full-year return to 4.3%.²⁸ Municipal bonds experienced positive returns as the budget bill signed in early July left their tax-exempt standing unchanged. The passage of this bill allayed investor concerns that had created uncertainty and driven outflows from the municipal bond market during the first half of 2025. Meanwhile, interest rates declined, and investor demand ticked higher. Furthermore, issuer fundamentals²⁹ for municipal bonds remained healthy, supported by stable tax receipts. Showing a reversal from their taxable peers, limited-duration and intermediate municipal bonds lagged their longer-term counterparts for the quarter.³⁰ As the year ended, yields on municipal bonds remained relatively high, offering tax-equivalent yields that compared favorably with U.S. Treasuries and corporate bonds.

Returns for Treasury inflation-protected securities (TIPS) were positive for both the quarter and the year.³¹ However, they remained mostly flat for the quarter as inflation expectations remained relatively stable.

The following tax management commentary is intended solely for clients whose investment strategy includes tax management.* It provides general insights into tax management within a broad market context and may not reflect the specific opportunities or circumstances of your individual account.

During much of 2025, U.S. stock market volatility was elevated, particularly around the April tariff announcements. However, volatility eased in the fourth quarter, which limited opportunities to improve after-tax returns through tax-loss harvesting.

That said, there were still chances to harvest tax losses in certain sectors, including health care, consumer staples, and financials, as investors weighed the outlook for the economy and consumer. Harvested losses may generate tax savings for some investors which can then remain invested.

In addition to tax-loss harvesting, we seek to enhance after-tax returns through other techniques, including investing in municipal bonds that seek to generate interest income free from federal and sometimes state taxes as well.

For Additional Information, please view our Quarterly Market Perspective

The foregoing commentary was prepared by Strategic Advisers LLC, a registered investment adviser and a Fidelity Investments company.