The fourth quarter ended 2025 much as the year began—with competing forces pulling markets in different directions. Fresh drama arrived via the longest government shutdown in history and a tech sector sell-off amid AI bubble fears. Yet when the dust settled, equity markets delivered their third consecutive banner year: the S&P 500 gained over 16%, the Dow almost 13%, and the NASDAQ surged past 20%. Bond markets matched the enthusiasm with excellent returns of their own.
The quarter opened with a government shutdown on October 1st and the now-familiar tit-for-tat finger pointing over which political party bore responsibility. Beyond the anxiety experienced by federal workers and concerns about safe air travel, the shutdown starved markets of their regular dose of economic data—leaving investors flying partially blind. Then in November, markets sold off on concerns about an AI bubble. Yet many of these highly valued companies also boasted solid earnings and expectations of continued growth that support their valuations. Ultimately, equity markets shrugged off both disruptions and held onto their gains throughout the quarter. Technology and communications companies emerged as the year’s best performers, driven by aggressive AI infrastructure building.
In terms of the bond market, interest rates declined from January highs, sending prices higher. The US Treasury yield curve steepened throughout the year, with short-term rates falling more dramatically than longer-term 10 and 30-year bonds.
The Federal Reserve faced its own tug-of-war. On one end of the rope: labor market weakness and declining consumer confidence. On the other: inflation expectations stubbornly above the Fed’s 2% target, solid Q3 GDP growth and continued consumer spending, though perhaps skewed toward higher-income households. The Federal Open Market Committee had to set interest rate policy with a murky view of jobs and inflation data thanks to the government shutdown. They opted for slow and steady, lowering rates twice in the quarter by 25 basis points each time, ending the year at a 3.5%-3.75% range.
In our client portfolios, we put money to work in fixed income markets before the significant interest rate declines. While we may have hit the high-water mark on interest rates, the cash flow in your portfolios is largely insulated from further rate declines.
Looking ahead to 2026, AI themes will continue dominating market attention, the economic tug-of-war between full employment and low inflation will persist, and geopolitical tensions will exert varying influence. What matters most is ensuring your portfolio accurately reflects your risk profile and cash flow needs. If you haven’t updated your financial plan in the past couple of years, we’re here to help when you’re ready.
