4th Quarter 2025 Market Commentary
We had another great year of stock market performance. This was the third year in a row where the S&P500 index rose by an amount in double digits.
(From Kwanti)
The S&P500 index is mostly US Large Cap stocks. But other indices also did very well and in some cases, even better. This was one year where international diversification really helped you as a US-dollar based investor. Here is a great chart I got from Avantis:
You can see that some (but not nearly all) international outperformance was driven by the US Dollar index dropping 9.4% in 2025. The drop in the dollar was certainly a factor in the outperformance of gold. The gold spot index was up 67.41% in 2025, far outpacing US or international stocks. Here is another view of 4 asset classes in 2025: S&P500 (representing US stocks), MSCI EAFE index (representing developed markets international stocks), Gold spot index, and the Bitcoin index.
(From Kwanti)
Gold marched up for the entire year. International stocks did quite well. The S&P500 was a bit of a laggard despite rising 17.88%, and poor Bitcoin jumped up and down, but had a terrible close to the year and dropped 6.02% to end. BUT it’s instructive to pull back and look at these same indices over the past 10 years.
(From Kwanti)
The S&P500 has been the winner over the past 10 years. Gold did quite well and international stocks were the laggard this time. I had to pull Bitcoin from the chart because when I included it, all the other indices looked flat. Bitcoin rose 27,612% over the past 10 years with lots of volatility in that rise.
In December of 2024, I wrote about the concentration of the Magnificent 7 in the S&P500. At the end of 2024, according to The Capital Group, the Mag 7 stocks (Apple, Amazon, Alphabet, Nvidia, Tesla, Meta, Microsoft) were 38% of the market capitalization of the S&P500. That means they were approximately that much of the index. At the end of 2025, according to First Trust, the Mag 7 capitalization had dropped to 32.9% of the index. While the concentration of the Mag 7 in the index did drop, it’s still 1/3 of the index. But this time, only the top two stocks: Nvidia and Alphabet performed better than the S&P500 overall. The good news is that the market broadened out in 2025 which indicates a healthier trend, although it’s still highly concentrated.
Let’s not forget fixed income. Fixed income investors made money in two ways this year: yield and the drop in rates. The Bloomberg US Aggregate Bond index gained 7.3% in 2025. At the end of the year, the yield on the index was approximately 4.35%, so the gain was a combination of the yield income plus additional gain which had to do with the movement of interest rates during the year. When interest rates drop, the price of existing bonds rises and that’s what happened last year. Municipal bond gains were more muted because tax-free yields are lower than the taxable bonds.
In summary, we had an excellent year for the markets and for the first time in many years, being in a diversified portfolio helped returns.
2026
Investors usually swing between greed and fear. If you’re greedy, you will want to go all-in on last year’s big gainers. But maybe all these gains have left you feeling nervous. After all consumer confidence is way down and maybe you’re feeling that. In that case you are fearful and may want to pull back in case next year is terrible. How you think investments will do in 2026 probably has everything to do with your feelings of greed or fear. Unfortunately, I can’t predict 2026, but I can talk about some of the important themes.
An interesting question is how many times in the past has the S&P500 index gained 4 years in a row. Does the past 3 years of gains mean it’s unlikely to do well in the 4th year? The answer is that there have been 7 winning streaks in history where the S&P500 has gained at least 4 years in a row. A couple of those times had some years that were barely positive:
1942 – 1945 (4 years)
- 1942: +20.34%
- 1943: +25.90%
- 1944: +19.75%
- 1945: +36.44%
1947 – 1952 (6 years)
- 1947: +5.71%
- 1948: +5.50%
- 1949: +18.79%
- 1950: +31.71%
- 1951: +24.02%
- 1952: +18.37%
1958 – 1961 (4 years)
- 1958: +43.36%
- 1959: +11.96%
- 1960: +0.47%
- 1961: +26.89%
1982 – 1989 (8 years)
- 1982: +21.55%
- 1983: +22.56%
- 1984: +6.27%
- 1985: +31.73%
- 1986: +18.67%
- 1987: +5.25%
- 1988: +16.61%
- 1989: +31.69%
1991 – 1999 (9 years)
- 1991: +30.47%
- 1992: +7.62%
- 1993: +10.08%
- 1994: +1.32%
- 1995: +37.58%
- 1996: +22.96%
- 1997: +33.36%
- 1998: +28.58%
- 1999: +21.04%
2003 – 2007 (5 years)
- 2003: +28.68%
- 2004: +10.88%
- 2005: +4.91%
- 2006: +15.79%
- 2007: +5.49%
2009 – 2017 (9 years)
- 2009: +26.46%
- 2010: +15.06%
- 2011: +2.11%
- 2012: +16.00%
- 2013: +32.39%
- 2014: +13.69%
- 2015: +1.38%
- 2016: +11.96%
- 2017: +21.83%
Just because we had 3 good years does not mean we can’t have a 4th good year. I will also point out that international stocks probably have more room to go up. Even after their excellent 2025 performance, international stocks are still much cheaper than the S&P500 on a Price-Earnings basis. So again, a diversified portfolio with good international exposure may be helpful in the coming year. It’s likely that the dollar will continue to be pressured because the US still has inflation above 2% and the government continues to run significant deficits. The sinking dollar will make international investments perform better. Despite gold’s stellar performance, the pressure on the dollar may provide more gains in the coming year.
I also must point out that the earnings of companies in the S&P 500 have continued to do well in 2025. S&P 500 earnings rose 11.5% in 2025 and are forecast to rise another 15% in 2026. The risk is that the forecast is too optimistic and stocks have already priced-in that 15% forecast. But robust earnings prospects might keep the S&P500 buoyant in 2026.
There are some risks moving forward. I already mentioned that earnings forecasts may be too robust. There is also political risk. The market has shrugged off the world turmoil in 2025, but that may make our political leaders too complacent. The market ignores risks until it stops ignoring them and then suddenly it matters. The Ukraine war continues and the situation in Venezuela may not end as benignly as the administration thinks. We also must worry about some domestic political turmoil. If President Trump follows through on his attacks on the independence of the Federal Reserve, then its likely long-term rates will rise significantly. That could be quite bad for the stock market. There also could be turmoil around the mid-term elections if the integrity of our election is challenged.
The economy has continued to grow, even though Americans don’t feel particularly good about it. Sometimes perception can become reality and if there is pullback in spending later in the year after the fiscal stimulus of the tax cuts wears off, then it could tip us into a mild recession. All these things could be bad for US stocks, but it’s a good reason to keep a diversified portfolio.
The other question is: are we in an AI bubble? My answer is maybe. But that also may not matter. You can make money in bubbles and they don’t always pop. The AI companies are highly profitable, unlike the internet companies of 2000. I’m not sure I would look for huge additional gains there, but I also think these companies will do just fine in the near future. Meanwhile AI will be adopted further into our economic and personal ecosystems. I find myself using it more and more.
I really can’t tell you how the markets will do in 2026. All I can tell you is that if you were invested, it’s likely you did very well in 2025 and its definitely possible that you will do well in 2026. Investing is about the long-term and your timeframe. The stock market has been an excellent wealth generator in the past and I believe it will be one in the long-term future.
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