Wealth Management Insights - Q4 2025

By Daniel Kern and Matthew Martino, CFA

2025 was a strong year for global stocks, with major market indices overcoming significant obstacles during a year of trade tensions, geopolitical conflict, and a US government shutdown. The S&P 500 delivered a total return of 17.9%, with the “Magnificent 7” group of highly influential technology stocks continuing to be the dominant influence on index performance. Foreign stocks outpaced the US, with the MSCI World and MSCI Emerging Markets indexes both rising more than 30%. This marks a significant shift from recent years, when non-US equities, despite appearing attractively valued, consistently underperformed US stocks.

Watch highlights from our Q4 2025 Wealth Management Insights webinar

Global trade was a policy focus for the Trump administration, with tariffs on major trading partners Canada, Mexico, and China announced, then delayed, then followed by a comprehensive tariff plan launched on the April 2 “Liberation Day.” Equities initially fell sharply, then rebounded in the fastest recovery in history from a drop of more than 15% when tariff reductions and implementation delays provided hope that worst-case scenarios would be avoided.

Despite the turbulent year, US corporate earnings were strong in 2025. Double-digit earnings growth for the S&P 500 was helped by AI and AI-related themes. Semiconductors, AI hyperscalers, and AI infrastructure enablers were among the year’s best performers, while managed care, apparel, and grocers were among the lagging performers.

The strong performance of foreign stocks reflects robust performance by foreign companies and the weaker US dollar, which boosted returns for US investors in foreign stocks. Government spending initiatives, particularly on defense, helped boost European stocks. The AI boom boosted global technology beneficiaries in Asia and Europe, while China’s advances in AI showed meaningful progress despite US restrictions. Industrial activity in China has also been resilient, drawing strength from high value-added production at home and leveraging China’s success in growing trade relationships with countries such as Vietnam and Thailand.

Bonds were up for the year, with the Bloomberg Aggregate returning 7.3%. Two-year Treasury yields—which move inversely to their prices—declined 0.77% to 3.47% during the year; ten-year yields fell 0.40% to 4.17%. The Fed kept rates on hold for the first half of 2025 before cutting rates three times during the second half of the year.

Gold was a standout performer, with gains of more than 60%, the strongest annual performance since 1979. In contrast, oil had its worst year since 2020. The market remained focused on forecasts for an oversupply of oil in 2026, with global growth concerns weighing heavily and rising production expected from OPEC+ (the 12 OPEC members and 10 of the world’s major non-OPEC oil-exporting nations) and potentially Venezuela. It is too early to have much insight into the future of oil production in Venezuela, but it is likely to take years as well as tens of billions of dollars of capital expenditures for production to significantly increase. US refiners are well-positioned with the capacity and expertise to benefit if Venezuelan production increases.

		Q4	2025
Equity
MSCI All Country World Index		3.4%	22.9%
S&P 500 Index		2.7%	17.9%
NASDAQ Composite Index		2.7%	21.2%
Russell 2000 Index		2.2%	12.8%
MSCI World ex-US Index		5.2%	32.6%
MSCI Emerging Markets Index		4.7%	34.2%
Fixed Income
Bloomberg Aggregate Index		1.1%	7.3%
Bloomberg 1–5 Year Gov/Credit		1.2%	6.1%
Bloomberg Municipals		1.6%	4.2%
Bloomberg 1–3 Month T-Bill		1.0%	4.3%

Tariffs

The Supreme Court may soon issue its ruling on the use of the International Emergency Economic Powers Act (IEEPA) to impose tariffs. Although the Court may strike down or limit the use of IEEPA to impose tariffs, it is our view that the ruling will influence how tariffs will be imposed rather than if they will be imposed. If the use of IEEPA to impose tariffs is struck down by the Court, analysts expect the president to quickly pivot to reimpose tariffs under different statutes. Ongoing tensions between the US and China are not going away. Investors are hoping for a lasting transition from hot trade war to fragile peace.

Employment and consumer spending

Conditions in the labor market changed dramatically during the second half of 2025, with US payroll growth slowing dramatically from the jobs boom that followed the end of the pandemic. An important counterweight to slowing jobs growth is that immigration policies have reduced the size of the labor force, which makes it likely that the monthly rate of job creation needed to maintain stability in the unemployment rate is much lower than previously thought. We assess the labor market as cooling but not collapsing today. The risks going forward are two-sided: if the economy slows and labor demand declines, the unemployment rate could rise quickly; conversely, if economic growth picks up strongly, labor supply could be insufficient to meet the added demand, creating capacity limitations and wage pressures particularly in industries such as construction and hospitality.

Consumer dynamics tell a nuanced story. Although consumer sentiment surveys generally reflect a downbeat view, consumer spending remains reasonably strong. Higher-income households are increasingly driving consumption, with high-income households benefiting from equity and home price appreciation and near-record household wealth. In contrast, lower-income households face pressure from elevated prices for everyday goods, tighter credit conditions, and higher interest rates. Consumer activity in aggregate remains healthy, but we will carefully monitor pockets of weakness.

Inflation and Fed policy

Inflation remains above the Fed’s 2% target, with tariffs, housing-related costs, and wage trends among the areas of scrutiny for the Fed. Forward expectations for inflation, as measured by market-implied rates and survey data, remain under control, giving the Fed some justification for last year’s rate cuts. However, inflation has historically come in waves, so the Fed is on alert for signs of a renewed surge in inflation.

The Fed faces a conflict between its dual mandate to achieve the goals of maximum employment and stable prices. With the labor market weakening but inflation remaining above the Fed’s long-term target, the Fed made the decision to prioritize employment during the latter part of 2025. With an increasingly divided Fed as demonstrated by recent dissents, the path forward is uncertain. Economic data has been less comprehensive and more stale given the government shutdown, so data releases in the coming weeks will have even more import.

US budget

US public-sector debt has risen in relation to economic output. Despite the boost to government revenue from tariffs, the US budget deficit remains unusually high for a period in which economic growth is strong and the labor market is close to full employment. Although we continue to strongly believe in the creditworthiness of the US government, investors may eventually demand more compensation for investing in government bonds. Mounting interest costs to support accumulated government debt may hurt the government’s ability to spend on other priorities, though the impact of government debt and deficits is likely to be gradual rather than immediate.

AI

The massive capital expenditures associated with AI are expected to continue in 2026. Hyperscalers such as Google, Amazon, Microsoft, and Oracle were initially expected to spend $250 billion in 2025, an estimate that proved far too conservative. This surge in spending helped boost the earnings of companies building AI infrastructure, including semiconductor manufacturers, heating, ventilation, air conditioning (HVAC) providers, and electrical contractors. Although AI spending has created opportunities, it also carries risks. Large-scale infrastructure cycles, such as in the buildout of telecommunication infrastructure in the 1990s and the shale revolution in the oil and gas industry, often ends in oversupply. The AI buildout appears to be in the early stages, but we will be vigilant for signs of oversupply or changes in expectations about the returns from the capital spending.

We are also attentive to the funding sources for capital spending. Although much of the AI spending to date has come from the substantial operating cash flows generated by the big AI spenders, we’re seeing increased reliance on debt-financed spending, which may create elevated risks for the more highly indebted companies in the AI race. With our expectation that there will be big winners and big losers in AI, we’ll be working to distinguish between the two and emphasizing the investments we think will be the most resilient.

Portfolio Positioning

We expect equity returns to remain positive albeit less exuberant in 2026. However, given the potential for a growth scare and the likelihood that investors will take profits on some of the more highly appreciated stock holdings, it would not be a shock if there is a 10% correction at some point in the year. Bonds continue to offer attractive yields and are a viable source of income today, a welcome change after many years of underwhelming returns.

We enter the year with relatively low odds of recession. Corporate profit growth is expected to stay strong, private sector balance sheets remain healthy, and real estate markets appear to be stabilizing as Treasury yields and mortgage rates come down from last year’s highs. The US tax bill should provide a boost, generally, to corporate capital spending and to middle-income consumer spending as higher refunds are received. Deregulation should also support increased economic activity.

We advise against making any material asset allocation changes in response to market volatility, though we understand it can be tempting to try to time the market. Unless there is a change in your goals, cash needs, income, or obligations, it is prudent to stay the course with your long-term asset allocation.

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Daniel Kern
Chief Investment Officer
+1 617.345.1044
dkern@nixonpeabody.com

Matthew Martino, CFA
Senior Director of Portfolio Strategy
+1 617.345.1122
mmartino@nixonpeabody.com