Quarterly Market Commentary – Q4 2025

Executive Summary

Summary

• Q4 2025 capped a strong year for diversified investors, with global stock and bond markets strong across the board.
• International diversification paid off in 2025. In the USD terms, non-U.S. equities delivered strong  gains, helped by a 9.4% decline in the dollar (DXY) during the year.
• Late-year policy easing supported risk assets, even as macro data stayed mixed: unemployment held at a higher but steady 4.4% in December, while inflation remained above the Fed’s target with headline CPI at 2.7% and core PCE at 2.8% year over year.

Positive Signals

• Fed easing resumed late in 2025, with cuts in Sep, Oct, and Dec, bringing the target range to 3.5%-3.75% by year-end, reflecting a growing focus on labor-market risks.
• Growth held up better than many expected – the most recent annualized real GDP reading for Q3 2025 was 4.4%, with consumption a major contributor.
• Breadth improved vs. the “only mega-cap” story – 5 of the “Mag 7” stocks underperformed the S&P500, where the majority of the Mag 7 had been driving returns in most of the previous several years.

Reasons for concern

• High market concentration: the S&P 500’s top 10 holdings are at 40.7% of the index.
• Unemployment remains higher than it has been for the past few years at 4.4%.
• Tariff policy uncertainty persists: average tariff rates were 15.6% as of 12/31/2025.
• Valuations elevated further, with the S&P500 forward P/E at 22.0x on 12/31/2025, and international valuations creeping above long-term averages as well.
• Geopolitical risk expanded late in the year with continued overseas turmoil culminating in the U.S. invasion of Venezuela in January.

Source: Morningstar; Russell, MSCI, Dow Jones, Bloomberg, ICE BofA ML; past performance is not indicative of future results

Macroeconomic Overview

The global economy closed Q4 2025 in a familiar, but still unusual, equilibrium: activity remained more resilient than many expected, even as momentum cooled and the inflation downshift continued unevenly across regions. Major institutions continued to frame the baseline as positive but moderating. In a September 2025 report the Organization for Economic Co-operation and Development (OECD) projected global growth easing from 3.3% (2024) to 3.2% (2025) and 2.9% (2026) as trade “frontloading” fades and higher tariffs and policy uncertainty weigh on investment and trade. In the same outlook, the OECD anticipated slower growth in key regions – the U.S. at 1.8% in 2025 and 1.5% in 2026, the Euro area at 1.2% and 1.0%, and China at 4.9% and 4.4% – highlighting how the expansion is continuing, but with less breadth and more policy sensitivity. In terms of inflation, the OECD projects further disinflation in the G20, with headline inflation projected at 2.9% to 3.4%.

In the U.S., the most recent GDP growth from the Bureau of Economic Analysis (BEA) shows third quarter growth coming in at an annualized rate of 4.4%, so accelerated relative to the OECD full year expectations – even as the labor market cooled, with unemployment rising to 4.6% in November (the highest level shown since 2021) before easing to 4.4% in December. Inflation continued to improve, but not decisively: CPI ended at 2.7% YoY and PCE at 2.8% (through November), both well below 2022 peaks yet still above the Fed’s longer run comfort zone.

Against that backdrop, the Fed eased again late in the year with a 0.25% cut in December, bringing the target range to 3.5%–3.75%. Importantly, longer-term rates remained influenced by more than policy: the 10 year Treasury yield ended around 4.2%, underscoring that growth expectations, inflation risk, and term premium can keep long yields elevated even as the Fed cuts.

Two structural themes remained central to the global macro-economic backdrop. First, trade policy: tariff measures stayed elevated, with sources citing an average tariff rate of 15.6% at 12/31/2025 and the OECD estimating an effective rate of 19.5% as of end August – keeping uncertainty around costs, supply chains, and inflation composition in the system. Second, AI investment: AI related capital expenditures (“capex”) continued at a scale large enough to matter for macro outcomes, increasingly shaping both growth narratives and market leadership.

Is This Sustainable?

Overall, the U.S. and global economy appear sustainable in the near term, but the balance becomes more fragile over the medium term as growth slows, policy uncertainty persists, and markets remain vulnerable to repricing.

Near term (6–18 months): broadly YES. The U.S. enters 2026 with strong recent headline growth, moderating inflation, and a labor market that is cooling but not breaking. Globally, major institutions still project continued expansion rather than contraction and reasonable levels of inflation.

Medium term (2–5 years): questionable and policy dependent. The key vulnerability is not simply slower growth, but policy driven uncertainty. The OECD flags risks that could materially weaken outcomes – additional tariff increases, renewed inflation pressures, increased concern about fiscal risks, and substantial risk repricing in financial markets.

Longer term (5–15 years): depends heavily on productivity – especially AI. In the U.S., rising fiscal pressures, elevated stock market valuations, and elevated long-term yields remain major constraints, while globally the OECD also highlights fiscal and financial stability risks as important swing factors. The upside case – also explicitly noted by the OECD – is that faster development and adoption of AI could strengthen growth prospects, but that outcome is not yet assured.

Bottom line: Sustainable today, more fragile over time – and increasingly dependent on whether policy risks (trade/fiscal) stabilize and whether AI productivity gains deliver enough real growth to validate current investment and market expectations.

Geopolitical Risks: Staying Disciplined

Geopolitical tensions today – ranging from great‑power competition to regional conflicts, trade fragmentation, cyber threats, and shifting alliances – are meaningfully shaping the global macro environment. These risks feel personal, immediate, and consequential. But a disciplined investment approach requires understanding how geopolitical shocks actually impact markets rather than relying on what headlines lead us to believe.

The IMF’s research shows that most geopolitical events produce modest and often short‑lived market reactions. The exceptions are large‑scale or systemic events – particularly military conflicts involving major powers or chokepoints – because they transmit through critical economic channels: energy and commodity supply, trade routes, supply chains, and sovereign financing conditions. These are the pathways through which geopolitical shocks can meaningfully affect markets, risk premiums, and macro stability. But because markets rapidly incorporate new information, emotional reactions often exceed actual portfolio impact.

Portfolio Construction Has Never Mattered More

In a market environment shaped by high geopolitical uncertainty, uneven policy signals, and stretched valuations, portfolio construction becomes the primary risk management tool – because predicting individual geopolitical or policy outcomes is exceptionally difficult, but preparing for a range of outcomes is entirely achievable.

A strong portfolio today emphasizes:

Diversification across multiple risk factors. Geopolitical and policy risks are not evenly distributed. Broad diversification reduces dependence on any single political regime, supply chain, central bank, or conflict sensitive region – and helps manage the high return dispersion we’ve seen across global markets.

Balanced mix of growth and preservation assets. High quality bonds and cash remain critical “shock absorbers,” helping cushion portfolios against volatility and providing flexibility to rebalance into dislocations. Preservation assets are not about pessimism; they create stability and optionality.

Focus on the actual economic transmission channels. The most important risks to price into portfolios are those that affect trade flows, commodities, supply chains, or sovereign financing conditions – not every headline. Sound construction centers on what moves markets, not what moves emotions.

Systematic rebalancing to maintain discipline. Rebalancing enforces a rules based approach: trimming what has outperformed and adding to what’s temporarily dislocated. This helps avoid the “panic trade” that often follows geopolitical shocks.

Valuation aware positioning and diversified return drivers. Elevated valuations in parts of the U.S. market increase the value of global diversification, quality tilts, and alternative or uncorrelated strategies that broaden the portfolio’s opportunity set.

Intentional alignment with tolerance for volatility. In a higher uncertainty world, the wrong level of risk leads to emotional decisions at the worst times. Strong construction calibrates both financial capacity and emotional comfort.

In short: today’s environment demands that portfolios be built for resilience rather than prediction. We cannot eliminate geopolitical risk, but we can design portfolios to absorb shocks, maintain balance, and stay positioned for long-term opportunity.

Investment Markets

Global Equity Valuations

After a strong year for markets, valuations ended 2025 on the higher side – especially in the U.S. The S&P 500 finished the year at 22.0x forward earnings, compared with a 20 year average of 16.8x. In plain English, that means investors are currently willing to pay more than usual for each dollar of expected earnings, which can make future returns more dependent on earnings growth. Strong international returns in 2025 pushed global valuations above their 20 years averages as well.

A second theme is concentration. The top 10 companies now represent 40.7% of the S&P 500, and they trade at meaningfully higher valuations (28.1x forward P/E) than the rest of the index (19.2x). This doesn’t automatically mean trouble – but it does mean that index level outcomes are unusually sensitive to how a relatively small group of mega-cap companies performs.

International valuations remain much lower than in U.S. markets, even after strong international returns in 2025, as shown in the chart below. Note that even with lower 20 year averages internationally versus the U.S., current international premiums relative to their 20 year averages are materially less than in the U.S. – ranging from 11%-18% internationally, versus a 31% premium in the U.S. market. That relative valuation gap is one reason international diversification still makes sense, particularly when paired with a disciplined rebalancing process.

Finally, the market’s “story” behind today’s premium valuations, particularly in the U.S., is increasingly tied to AI. Investment in AI infrastructure has scaled dramatically: J.P. Morgan data looks at the investment of “AI Hyperscalers” – which include Amazon, Microsoft, Alphabet/Google, Meta (Facebook), Oracle, and semiconductor companies such as Nvidia, Broadcom, and Micron – and estimates AI Hyperscaler capital expenditures (“capex”) rising to about $241 billion 2025, with even higher levels projected ahead. Beyond the “Hyperscalers,” estimates from J.P. Morgan and consultant McKinsey of potential total capex spending related to AI, including datacenter creation and energy supply, exceed $5 trillion through 2030… A huge investment of capital.

Encouragingly, adoption measures are moving too, with a large share of companies reporting AI use in business functions. The key issue for markets is the conversion of all of that investment into results: to justify premium valuations over time, AI will need to show up not just as spending, but as measurable productivity gains, margin support, and durable earnings growth.

Takeaway: valuations are elevated – most notably in the U.S. – and market leadership is more concentrated than normal. That doesn’t preclude further gains, but it does reinforce the value of broad diversification and staying disciplined, because with higher starting valuations the market becomes more sensitive to whether optimistic earnings expectations that factor in projected AI-driven benefits are actually delivered.

US Stocks

U.S. broad market stocks rose 2.4% in Q4, to end the year up 17.1%. While value stocks gained more ground during the quarter, growth still outperformed for the full year, with large cap growth at 18.6% versus large cap value at 15.9% for the year. Small cap stocks lagged the broad market for the year, at 12.8% versus 17.4% for their larger counterparts. All U.S. equity sectors posted positive returns. In terms of earnings, data through Q3 shows large cap earnings growth was led by the technology sector at 28%, with only the energy and communications services sectors seeing negative earnings growth for the year (see chart below).

Non-US Stocks

Developed and emerging non U.S. markets had another strong quarter in Q4 and a very strong year in 2025.

Aided by both strong local market results and a weak dollar, international stocks were up 31.9% for the year, with small international stocks taking the lead at 34.1% and emerging market stocks at 33.6% for year.

For international stocks held in local currencies (which is generally the case for U.S.-based funds that hold international stocks), a weak dollar in 2025 was a strong tailwind. As measured by the DXY index of six major currencies, the dollar lost 9.4% of value in 2025, a reversal over most of the past 15 years – the prior 14 years from 2011 through 2024 saw annualized appreciation in the dollar of 2.3% per year, which had been a significant drag on international stock returns for U.S. dollar investors until this year.

U.S. Stock versus International Over Time

The past 15 years have mostly seen a strong dollar and U.S. stock market outperformance. Over such a long period of time, it can be hard to keep an even longer-term term perspective and recall that these trends go in cycles, and sometimes long ones. The chart below demonstrates that U.S. stocks have not always outperformed – as was demonstrated dramatically in 2025, and over the two decades in the 70s and 80s – and with U.S. valuations remaining much higher than their long-term averages, there is a good chance the cycle could shift back towards international stocks. Not a prediction – but a good reason not to give up on global diversification.

Global REITs (Real Estate Investment Trusts)

Global REITs were basically flat for Q4, but turned in a solid 8.6% for 2025.

The environment remains positive for real estate stocks for the foreseeable future, with stable inflation and stable if not decreasing interest rates. After sharp losses in 2022 when yields spiked, REITs have recovered some ground, but with broad market equity valuations high and relatively low broad market dividend yields, REITs remain an attractive investment alternative, and a good diversifier within the growth allocation of portfolios.

High-Yield Bonds

High Yield (HY) bonds were up 1.3% for the quarter and turned in a solid 8.6% return for the year, versus 0.8% and 4.9% for investment grade bonds, respectively. The current yield spread over Treasuries for high yield stands at 2.8% as of year-end, based on the BofA  U.S. High Yield Index Option-Adjusted Spread Index. This is an historically tight spread, near the lows of the past thirty years, and the implication is that there is not a lot of upside from tightening spreads from here based on historical experience. However, these bonds can be expected to continue to add value in diversified portfolios as a source of returns and diversification over the long-term.

Global Fixed Income (Bonds)

Global bonds (hedged to USD) returned 0.8% in Q3 and are up and 4.9% for the year.

The chart to the right illustrates that while short- and intermediate-term Treasury rates have come down with Fed easing over the past year, long term rates have been sticky. As of 12/31/2025, the Treasury curve reflected expectations for lower short term policy rates, while longer term yields remained comparatively elevated – consistent with OECD and IMF cautions that fiscal concerns and rising sovereign issuance can keep long-term yields and term premia higher even as central banks ease.

Growth versus Preservation

At Integris we characterize investment portfolios in terms of an allocation between “growth” and “preservation” assets.   

The Role of Growth

The role of growth assets is to drive long-term returns in a portfolio and offset the effects of inflation. The growth asset allocation is made up primarily of stocks, but also includes asset classes such as high-yield bonds and emerging market bonds. The defining characteristic is higher expected long-term returns, and commensurately higher expected risk and therefore volatility.

The Role of Preservation

The role of preservation assets is to preserve capital, serving as a ballast in the portfolio during difficult times. The preservation asset allocation is made up of bonds with short- to intermediate-term maturities and high credit quality. The primary objective of the preservation allocation is to maintain a very low probability of decreasing more than 5% in any one-year period. The intention is that these assets can be available at any time with a low likelihood of locking in a material loss if selling.

The Final Word: Focus on what you can control!

In closing, we continue to reiterate what we see as the key components of long-term investing success:

1. Maintaining the “right” asset allocation between Growth and Preservation assets for your specific situation.

2. Maintaining broad global diversification to limit risk exposure to any particular security, industry, market, region, or asset class.

3. Sticking to your plan through thick and thin. Investment plans should be designed for the tough times.