Quarterly Market Update

The fourth quarter of 2025 saw US and global markets continue their rally to end the year on a high note, even amid numerous sources of uncertainty. Tariff and trade policies, which dominated headlines for most of the year, calmed in the final quarter. Stronger than expected economic growth and trade resiliency helped support investor sentiment going into the new year.

Continued enthusiasm, supported by large capex commitments and resilient earnings from AI-connected companies pushed the S&P 500 to multiple record highs during the quarter. Investor focus has increasingly shifted towards cash flows and returns on investment as valuations reach near-record levels.

Third quarter corporate earnings reports were stronger than expected, reinforcing confidence in US corporate fundamentals despite policy, rate, and labor uncertainty. The end of the year also saw President Trump intensify a pressure campaign on the Fed to cut rates more aggressively, fueling discussion over central bank independence.

In Q4 2025, the Fed implemented two rate cuts, bringing the target federal funds rate to the 3.50%-3.75% range as inflation continued to cool and the labor market softened in an orderly way. CPI inflation remained sticky, with prices increasing 2.7% YoY, whilst jobs reports showed very weak hiring.

Despite this, the low level of layoffs moderated concerns around lower hiring levels. Going into Q1 2026, the Fed remains focused on growth and progress on inflation as they determine their rate path going forward.

During the quarter, equity markets continued to post strong absolute returns, supported by the dual Fed rate cuts, strong earnings, easing inflation, and a cooling but resilient labor market. This comes even as valuations remain elevated, with S&P 500 price to forward earnings remaining in the top 5% of observations over the last 15 years. US large caps marginally outperformed small caps during the period. Within US equities, value outperformed growth in Q4, led by a global market broadening with investor rotation away from highly valued US technology towards other cyclical investments.

Outside the US, emerging markets outperformed, supported by a moderately weaker US dollar and strong growth. Non-US developed equities benefitted particularly from accommodative monetary policy and multiple expansion that shrunk the multi-year discount to US equities. Gains were driven mainly from the technology-oriented markets of Korea and Taiwan, with strong demand for AI memory technology and industrials being catalysts.

During the quarter, global fixed income delivered positive returns helped by attractive absolute yields. Weaker labor market data and cooling inflation reinforced expectations for the Fed to cut rates, causing the front end of the curve to fall, with the 2-year Treasury yield declining from 3.61% to 3.48%.

Further out on the curve, the 10-year Treasury yield rose from 4.15% to 4.17%, while the 30-year treasury yield rose from 4.73% to 4.85%. Municipal bond yields declined across the curve, with longer-duration municipals outperforming.

From a credit perspective, US IG spreads narrowed roughly 9-10 bps towards historical tights, supported by strong demand and resilient fundamentals. Tightening spreads, combined with attractive starting yields helped drive investment-grade credit outperformance relative to Treasuries.

Q1 2026 has begun with significant geopolitical shocks that have increased volatility in markets as the VIX broke above 20 at its highest level. The capture of Nicolas Maduro from Venezuela, significant protests in Iran, and threats by President Trump towards Greenland have heightened uncertainty in markets. Tensions have pushed WTI crude futures to gain over 3.5% YTD while gold has continued its strong run of performance into 2026. Other commodities have also benefitted, driven by increased resource demand from the AI buildout. Geopolitics and trade are likely to continue to impact markets in 2026, with the looming US midterm elections and continued threats to Fed independence top of mind for investors.

Markets are likely to continue to focus on the broadening out of the AI growth story in Q1 2026.

Despite concerns around current valuations, strong fundamentals centered around earnings and profitability provide a level of comfort in markets.

The aggressive AI-centric capex commitments made around the world, along with continued AI infrastructure growth, are set to sustain demand for a range of other industries including natural resources, energy, and industrials.

After non-US outperformance in 2025, investors will be looking at non-US markets to grow into their multiples via strong fundamentals and robust earnings or potentially see pullbacks in the market if earnings disappoint.

Despite current uncertainties, the market has tended to be able to look past geopolitical risks, and it is important to maintain a longer-term investment mindset in such conditions.

Given these considerations, diversification is key to avoid overexposure in certain sectors or markets if earnings disappoint.

Diversification across asset classes and regions can help insulate investors from any single market shocks. Looking ahead, there are a number of tailwinds supporting the market, including strong earnings growth, more accommodative central bank policies, and increased AI capex, but there is also a heightened level of uncertainty around geopolitical headlines at a time when valuations run high.

Given this backdrop, it is important to maintain a sound investment process with experienced management teams to help navigate through this environment.