The fourth quarter of 2025 tested market resilience amid political disruption and growing concerns around AI company valuations. Despite these headwinds, major equity indices still delivered gains as investors navigated a shifting Federal Reserve policy landscape. The quarter opened with stocks reaching new highs, even as a 43-day federal government shutdown — the longest in U.S. history — forced more than one million federal workers to labor without pay and left investors relying heavily on private-sector data to assess economic conditions.
Early optimism surrounding AI’s transformative potential gradually gave way to investor questions about sustainability, as concerns mounted over elevated valuations, infrastructure spending requirements, and uncertain long-term returns on investment. That narrative evolved through November and December as investors reassessed concentrated AI-related positions and increasingly sought opportunities across a broader set of industries. At the same time, trade tensions with China resurfaced before easing under a temporary one-year truce, while corporate earnings highlighted the dual nature of AI investment — strong revenue growth offset by rising costs, capital intensity, and execution risks. To illustrate the scale of the AI boom, OpenAI grew from roughly $200 million in annualized revenue in early 2023 to about $13 billion by August 2025, with projections exceeding $20 billion by the end of 2025.
The Fed continued its easing cycle, reducing the federal funds rate to a target range of 3.50%–3.75%. Internal divisions and cautious forward guidance signaled a more measured path ahead, with only one additional rate cut projected for 2026. Labor-market data painted a mixed picture, as unemployment rose to 4.6% — its highest level since September 2021 — while delayed reporting from the government shutdown complicated interpretation. Inflation data in November provided welcome relief, with headline CPI declining to 2.7%, marking meaningful progress toward the Fed’s 2% target.
Overall, the quarter underscored the market’s ability to absorb political turbulence, valuation concerns, and shifting monetary policy expectations. Despite heightened volatility and uncertainty, long‑term portfolio fundamentals continued to demonstrate resilience, reinforcing the enduring value of a disciplined and diversified investment approach.
U.S. stocks, as measured by the Russell 3000 Index, delivered modest gains during the fourth quarter. Market movements were marked by sector rotations and evolving Fed policy expectations. Markets sold off in the first half of November amid concerns over stock valuations and debt levels before stabilizing and setting new highs throughout December. Notably, market leadership rotated away from mega-cap technology names, with healthcare emerging as the quarter's leading sector. Additionally, previously underperforming sectors, including financials and materials, attracted renewed investor interest. This demonstrates how diversified allocations may help investors capture opportunities that concentrated positions might miss. By quarter’s end, large-cap stocks (S&P 500) outperformed small-cap stocks (S&P SmallCap 600), followed by mid-cap stocks (S&P MidCap 400).
Factors are enduring drivers of risk and return, rooted in economic theory and consistently observed across different markets and time periods. Factor performance reversed in the fourth quarter, with value leading, followed by quality and growth, while momentum lagged. Value stocks outperformed as investors gravitated toward more reasonably priced equities in response to worries over elevated valuations. Quality’s strong performance reflected a shift toward companies with solid fundamentals, as volatility and uncertainty around AI monetization pushed investors toward companies with durable balance sheets and reliable cash flows.
Source: Planning Alternative, YCharts data
International stocks (MSCI All Country World Index ex-U.S.) outperformed U.S. stocks (Russell 3000) during the fourth quarter. Developed international markets (MSCI EAFE) posted the quarter's strongest returns, supported by a shift toward attractively valued overseas markets and easing-policy tailwinds. Emerging market stocks (MSCI EM) also had a strong showing, but performance was notably uneven. While broader emerging market indices gained ground, Chinese stocks declined more than 7% as investors weighed concerns about economic growth momentum, property sector challenges, and ongoing geopolitical tensions despite government stimulus efforts. International exposure remains a diversifier, offering access to different economic cycles and policy environments that can help reduce concentration risk.
Bonds (Bloomberg US Aggregate Bond Index) finished the quarter higher, marked by shifting Fed expectations, with short‑term rates moving lower, intermediate maturities holding steady, and the long end of the curve drifting higher. The Fed delivered quarter-point rate cuts in both October and December, bringing the target rate to 3.50%-3.75%, but the December meeting proved pivotal as Fed officials projected only one additional cut in 2026, a signal that policymakers expect borrowing costs to remain higher for longer — a stance that can reshape investor expectations for growth, valuations, and risk appetite.
Shorter-duration bonds (Bloomberg US Government/Credit 1-5 Year Index) outperformed the broader market, benefiting more directly from the Fed's rate cuts while remaining less exposed to the rising term premium that pressured longer maturities. Municipal bonds (Bloomberg Municipal Bond 1-10 Year Blend Index) also delivered positive returns over the period. During the quarter, Treasury Secretary Scott Bessent indicated that the U.S. Treasury will keep the amount of debt issuance the same and avoid increasing longer‑maturity supply, aligning with market demand for shorter‑dated bills — a technical backdrop that has helped support the municipal market. The quarter highlighted a tug‑of‑war in the bond market: Fed rate cuts pushed short‑term yields down, while worries about stubborn inflation, government deficits, and a still‑strong economy kept long‑term yields higher, weighing on longer‑term bond performance as the year closed.
Source: Planning Alternative, Treasury.gov
Alternative assets delivered mixed results in the fourth quarter, reflecting shifting rate expectations, moderating inflation, and continued volatility across real-asset markets. Natural resources equities (S&P Global Natural Resources Index) led the way, supported by metals and mining companies benefiting from higher commodity prices and resilient global demand. Commodities (Bloomberg Commodity Index) also posted solid gains, with precious metals leading the charge as global supply dynamics and geopolitical tensions supported prices. In contrast, global real estate (S&P Global REIT Index) modestly declined during the quarter, as higher-for-longer financing costs and regional property-market challenges offset the supportive impact of easing monetary policy.
Source: Planning Alternative, YCharts data
Source: Planning Alternatives, YCharts data
“The investor’s chief problem — and even his worst enemy — is likely to be himself.”– Benjamin Graham
The fourth quarter of 2025 underscored how quickly market narratives can shift. A quarter that began amid political disruption, AI-valuation concerns, and elevated volatility evolved into a broader reassessment of leadership and risk. Despite a record-long government shutdown, shifting trade dynamics, and growing skepticism around AI, markets continued to advance.
The defining feature of the quarter was not uncertainty; it was the market’s adaptability. Leadership broadened as investors moved away from narrow mega-cap concentration toward a wider mix of sectors, factors, and geographies. This dispersion reinforced a familiar truth: markets seldom move in straight lines, and shifts in leadership are natural dynamics of financial markets.
Looking ahead, several crosscurrents remain. The Fed’s more cautious stance points to a less supportive policy than anticipated earlier in 2025. Unemployment has risen to its highest level since September 2021, raising questions about labor market resilience. Meanwhile, equity valuation concerns persist, with the S&P 500 Shiller CAPE Ratio remaining elevated at 39.42 at the end of 2025 — leaving limited room for disappointment.
Source: Planning Alternatives, YCharts data
Markets will continue to evolve, but disciplined investing can remain constant. 2025 showed that a threat to long-term success is not external shocks but can be the temptation to react to short-term noise. Durable outcomes often result from maintaining discipline when conviction is tested. Strategic asset allocation, global diversification, and long-term orientation can remain prudent anchors as we begin 2026.
Our strategic positioning remains aligned with the adjustments implemented earlier in 2025, reflecting our commitment to a balanced approach in a complex environment. We maintain a neutral equity allocation relative to benchmarks as a response to competing market forces. While markets have shown resilience through political and policy uncertainty, we remain mindful of elevated valuations and the lagged effects of policy decisions. This neutral stance is intended to allow portfolios to participate in gains while remaining prepared for volatility.
Within this strategic framework, we retain flexibility to express conviction through targeted exposures when supported by research. Within U.S. equities, our dividend-oriented exposure added value during the quarter amid a period of concentrated leadership, complementing our momentum-focused allocation and broad market-cap representation, which positioned portfolios to benefit from the late‑quarter broadening. Internationally, we maintain exposure to emerging markets excluding China. This positioning was beneficial in the fourth quarter, as Chinese equities underperformed amid concerns around growth, property-sector stress, and geopolitical tensions.
The fourth quarter reinforced that markets tend to reward preparation over prediction. Across portfolios, we remain committed to avoiding impulse-driven adjustments. Our decisions are grounded in research and aligned with clients’ long-term objectives. We continue to monitor evolving conditions and will make thoughtful adjustments as opportunities emerge. Strategic asset allocation, diversification, and long‑term discipline continue to remain the foundation of our process — guiding portfolios through uncertainty and supporting the pursuit of True Wealth for our clients.
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