Market summary: Stocks gained amid Fed easing and earnings momentum
Global equities rallied in the fourth quarter of 2025 amid a constructive expansionary backdrop and strong corporate fundamentals. The US Federal Reserve once again cut rates amid signs of softer employment conditions, and the US fiscal package provided an additional tailwind for corporate earnings growth.
See our interactive chart presentation for an in-depth analysis.
The near-term outlook appears favorable for continued economic and business expansion, although policy uncertainty, inflation persistence, and elevated asset valuations warrant continued emphasis on portfolio diversification.
Artificial intelligence (AI) continued to be a powerful market theme, driven by increased capital spending on AI-related projects. While elevated valuations for stocks tied to AI may not be a near-term impediment, they provide little cushion amid a medium-term backdrop of policy, economic, and geopolitical concerns. Diversification in fixed income and inflation-resistant assets remains attractive to hedge risks.
The global and US business cycles remain constructive, with US monetary and fiscal easing likely to continue in 2026. Partly as a result, the prospects for continued dollar weakening increase the attractiveness of diversification in non-US assets.
Economy/macro: Continued business cycle expansion
The US demonstrated a mix of cycle dynamics, with solid mid-cycle activity amid some areas of continued weakness in housing and labor markets.
Globally, the economy remains in a solid, albeit unsynchronized, expansion against a backdrop of policy crosscurrents. While China displayed signs of slowing cyclical momentum, Europe and Canada exhibited early signs of strengthening, though further improvement may depend on progress in economic policy implementation. The share of countries reporting improved manufacturing conditions rose, suggesting global industrial activity may be improving after a 3-year soft patch.
US jobs weigh on consumer sentiment: The US labor market stalled during Q4 as businesses slowed hiring. While most labor indicators showed a modest and orderly weakening, Fidelity's proprietary data on 20 million payroll jobs indicated growth was weaker than reported in the official data. This may help explain why consumer sentiment dropped dramatically during the second half of 2025. However, slower labor force growth and improving hiring plans suggest labor markets are not deteriorating rapidly.
US consumer spending remained stable during Q4, supported by positive real wage growth and strong household balance sheets. However, spending has been supported by higher-income consumers, with lower-income cohorts experiencing slower real wage growth and less exposure to asset appreciation. An aging population, with a higher concentration of wealth among older households and in stocks, has made the economy relatively less sensitive to labor markets and more sensitive to swings in asset prices than in the past.
Rising goods prices added to inflation: After 2 years of near-zero goods inflation, tariff hikes triggered a rise in US goods prices over the second half of 2025. Inflation remained sticky in housing and services, keeping headline consumer inflation elevated and well above the Fed's 2% target.
While the market expects inflation to slow in 2026, we believe stable US economic growth and the upside risk of businesses passing through tariff-related price increases may keep inflation rangebound around 3%.
Long-term rates remain stubbornly high: The Fed eased monetary policy during the second half of 2025, cutting its short-term policy rate by 75 basis points and ending quantitative tightening (after reducing its balance sheet by $2.5 trillion since 2022).
The market and Fed expect 2 more rate cuts during 2026 due to expectations for soft labor markets and short-lived inflation.
The yield curve steepened significantly in 2025 amid concerns of elevated fiscal deficits and political influence on Fed decision-making, which could challenge the Fed’s ability to reduce longer-term yields. As of the end of 2025, short-term rates fell meaningfully year-over year, although 30-year yields stood at 4.83%, roughly where they were at the end of 2024.
Asset markets: US growth leads a broad-based rally
Almost all major asset categories ended 2025 in positive territory, with gold at the top of the leaderboard. International equities posted strong gains for Q4 and the full year across both developed and emerging markets (EM).
Equities: A historical weaker dollar provided a tailwind for non-US equities. By region, Latin America (+8.2%), Canada (+7.7%), and Europe (+6.2%) advanced strongly. Japan (+3.2%) lagged other global regions.
In the US, US value stocks led the way in the fourth quarter (+3.8%), compared with a 1.1% gain for growth stocks.
By S&P 500 Index sector, health care (+11.7%) and communication services (+7.3%) led the way in Q4, whereas real estate (-2.9%) and utilities (-1.4%) lagged the large-cap index return of 2.7%.
Fixed income: Fixed income performance benefited from lower Treasury yields and tighter credit spreads across all major fixed income categories. Credit spreads in the US Aggregate Bond Index and high-yield sector begin 2026 in the lowest decile of their historical range, providing limited compensation for taking on credit risk. Overall, many fixed income category yields ended Q4 around their 50th percentile, suggesting overall bond valuations are roughly in line with long-term averages and provide solid income within a balanced portfolio.
Nominal 10-year US Treasury bond yields finished Q4 effectively unchanged at around 4.2%, completing a relatively rangebound year. A number of crosscurrents continued to influence yield movements, including softer labor-market data, Fed easing, sticky inflation, and medium-term fiscal challenges.
Currencies: The US dollar stabilized versus foreign currencies in the fourth quarter. However, it dropped roughly 10% against major currencies during 2025, its worst calendar year since 2017.
Foreign investor enthusiasm for US assets, via massive capital inflows that serviced large US trade deficits over the past decade, may have reached a peak. Currency price movements sometimes occur in multiyear cycles, with the most recent dollar bear markets in the 1980s and early 2000s also beginning with extremely high valuations.
The dollar remains overvalued relative to both developed and emerging-market currencies. Historically, a weaker dollar has been a tailwind for the relative returns of DM and EM equities (versus US stocks). We believe owning assets denominated in foreign currencies is an important component of portfolio diversification for US investors.
Outlook: Although we believe US stocks should trade at premium valuations to other markets, cyclically adjusted price-to-earnings ratios for US stocks remain well above our secular forecasts and suggest non-US stock markets appear relatively attractive.
The AART team sees potential catalysts that could boost productivity over the next decade and could lead to greater active investment opportunities globally. Strategic opportunities may include investments tied to artificial intelligence, reshoring and near-shoring, and national security, among others.