Aldrich Wealth’s Nicole Rice, Partner + Chief Growth Officer, and Darin Richards, Partner + Chief Investment Officer, share their latest market commentary, reflecting on Q4 2025 market performance and what to expect as we move into 2026.

The S&P 500 rose 2.7% in Q4, finishing 2025 up 17.9% and marking the third consecutive year of double-digit gains for the index. Gains were modest amid slowing labor conditions, valuation concerns, and shifting expectations for monetary policy. Developed international markets, as measured by the MSCI EAFE, grew 4.9% supported by easing inflation, more accommodative central bank policy, and attractive valuations relative to the US, despite lingering trade uncertainty. Emerging markets, as measured by the MSCI Emerging Markets Index, gained 4.7%, with mixed underlying returns as China struggled amid soft domestic demand and deflation, while AI-related demand supported outperformance in South Korea and Taiwan. In fixed income, the Bloomberg US Universal Index increased by 1.2%, benefiting from declining short-term yields and improving risk sentiment as the Federal Reserve (Fed) cut interest rates. Q3 GDP surprised to the upside, driven primarily by consumer spending concentrated among higher-income households, even as labor market conditions softened and inflation continued to moderate heading into year-end. 

The S&P 500 grew 2.7% during the fourth quarter, closing 2025 up 17.9% as investors navigated a complex backdrop marked by slowing labor conditions, shifting expectations around interest rates, and mixed economic signals. Labor market data pointed to continued cooling, with unemployment rising to its highest level since 2021, job creation slowing, and layoffs accelerating, particularly across the technology and media industries. Weekly jobless claims increased sharply, while broader measures of labor underutilization climbed to multi-year highs. Against this backdrop, the Fed cut interest rates by 25 basis points in October and December, though officials emphasized a more measured path forward. While December’s cut marked the third consecutive meeting with a rate cut, several policymakers signaled that further reductions in 2026 may not be warranted, citing conflicting signals between inflation and employment data. Economic data sent mixed messages throughout the quarter as well. Consumer confidence weakened as households grew more cautious about income prospects and job security, and investor sentiment deteriorated as questions emerged around the sustainability of elevated equity valuations in large-cap technology companies. Sentiment fell to one of the lowest levels on record, with views of household finances reaching their weakest point since 2009. Still, spending proved resilient, with consumers purchasing a record amount on Black Friday. In December, delayed third-quarter GDP data released following the end of the longest government shutdown in history showed growth of 4.3%, well above earlier estimates and indicative of solid underlying economic momentum. Additionally, inflation readings came in below expectations, though data quality concerns left some investors skeptical of the improvement. Risk appetite softened late in the quarter, reflected in heightened volatility across speculative assets, including Bitcoin falling over 17% and logging its worst single-day decline since March. 

Nine of the 11 underlying sectors of the S&P 500 rose in Q4 as the leading sectors broadened out. Healthcare was the frontrunner, gaining 11.7% as weight loss drugs and biotechnology innovation propelled earnings. Communication services was next, rising 7.3% on the heels of Alphabet’s and Meta’s continued investment in AI-driven platforms. Conversely, real estate and utilities were the only sectors to fall in the quarter, down 2.9% and 1.4% respectively, as higher long-term interest rates pressured rate-sensitive sectors.  

The fourth quarter closed with large cap stocks modestly outpacing small cap stocks, as smaller companies struggled to gain traction amid weakening economic data and lingering uncertainty around the path of interest rates. Value stocks bested growth stocks during the quarter, with investors rotating toward more defensive areas of the market amid cooling labor conditions and elevated valuation concerns. 

International developed markets, as measured by the MSCI EAFE Index, gained 4.9% over the fourth quarter, pushing the year’s return to 31.2%. In the eurozone, economic conditions showed modest improvement but remained uneven. Business activity strengthened slightly, supported by steady services demand, while manufacturing continued to struggle, highlighting the fragile nature of the recovery. Inflation eased throughout the quarter, allowing the European Central Bank (ECB) to hold interest rates steady while reiterating that future policy decisions will remain data dependent as inflation trends toward its 2% target. Consumer sentiment stabilized as lower energy prices and improving services activity helped offset ongoing manufacturing weakness. Domestic demand remained relatively resilient, supported by steady employment conditions and firmer services-sector activity, even as industrial output remained subdued. Markets expect the ECB to remain on hold in 2026 as policymakers balance progress on inflation with lingering softness in output. In the United Kingdom, inflation continued to ease but remained above the Bank of England’s (BoE) target, while signs of labor market cooling weighed on growth prospects. After holding rates steady earlier in the quarter, the BoE cut interest rates by 25 basis points in December in a narrow 5–4 vote, citing softer wage growth and weakening household demand despite still-elevated inflation. Manufacturing activity improved modestly, moving into expansion territory for the first time in over a year, supported by firmer domestic demand. In Japan, the Bank of Japan (BoJ) maintained its accommodative stance, keeping its benchmark rate unchanged as inflation moderated for a third straight month. Even so, Tokyo-area core inflation remained above the BoJ’s target, reinforcing expectations that policy normalization may be approaching. Economic data surprised to the upside late in the quarter, pointing to a resilient domestic economy, while bond yields rose toward multi-year highs as speculation grew that the BoJ could begin tightening policy in early 2026. However, currency movements remained a headwind, as the yen weakened against the dollar. 

Elsewhere, the MSCI Emerging Markets Index rose 4.7%, finishing the year with a 33.6% gain. China, which makes up the largest share of the index, was the quarter’s weakest performer as economic momentum remained uneven. Manufacturing activity spent much of the quarter in contraction, with the Manufacturing Purchasing Managers’ index declining for a seventh consecutive month and non-manufacturing activity also softening, signaling broad-based slowing. Ongoing stress in the property sector continued to weigh on sentiment, as new home prices posted only modest gains while resale prices declined further. Deflationary pressures remained entrenched, with producer prices posting their 37th consecutive monthly decline. The People’s Bank of China left key policy rates unchanged but injected additional liquidity into the banking system to support credit growth. In December, China’s trade surplus surpassed $1 trillion for the first time, reinforcing the economy’s dependence on external demand at a time when domestic consumption remained weak. On the other hand, South Korea was the top-performing country of the quarter, surging 27.3% thanks to stronger-than-expected export growth and a rebound in semiconductor demand. While exports reached a record high for the year, rising input costs driven by currency weakness and higher raw material prices remained a headwind. Taiwan also delivered solid gains, rising 10.4% during the quarter, lifted by continued demand for AI-related technologies and sustained foreign investor inflows, which helped offset softer domestic demand. 

Over the fourth quarter of 2025, the Bloomberg US Aggregate Index increased by 1.1% and the broader Bloomberg US Universal Index rose 1.2%. The Fed cut interest rates twice during the quarter, for a total reduction of 50 basis points. Yields moved lower across the short end of the Treasury curve, while intermediate- and long-term yields rose modestly. The yield on the 10-year US Treasury rose six basis points throughout Q4, ending at 4.18%. Conversely, short-duration yields declined, with the 2-year Treasury falling eight basis points.  

Credit spreads tightened modestly during the fourth quarter as risk sentiment improved following the Fed’s rate cuts and inflation readings eased late in the year. Higher-yielding sectors outperformed, with emerging market debt posting the strongest gains, up 3.3% as lower US interest rates and improved global risk appetite supported demand. Municipal bonds rebounded as well, rising 1.6% in Q4 after lagging earlier in the year, supported by strong demand and attractive tax-equivalent yields. 

US GDP grew at an annualized rate of 4.3% over the third quarter of 2025, the latest period for which data are available, reflecting stronger-than-anticipated economic momentum. The delayed release showed growth well above earlier estimates, driven primarily by resilient consumer spending, though gains were increasingly concentrated among higher-income households. Spending by the top income brackets continued to support overall activity, while consumption among lower- and middle-income households showed signs of moderation, highlighting an uneven distribution of economic strength. This dynamic helped sustain headline growth even as broader confidence measures weakened and pockets of the economy softened.  

Labor market data suggested that conditions continued to lose steam during the fourth quarter. Unemployment rose to its highest level since 2021 as job growth slowed and layoffs increased, particularly across the technology and media industries. Weekly jobless claims moved sharply higher over the quarter, signaling increasing pressure in employment conditions. Broader measures of labor underutilization also deteriorated, with the number of discouraged workers and unemployed high school graduates reaching multi-year highs, reinforcing concerns that momentum was fading even as overall employment levels remained relatively elevated. 

The Fed continued easing during the fourth quarter, cutting interest rates by 25 basis points in both October and December. While the October cut was widely expected, officials emphasized that further easing was not assured, citing conflicting signals from inflation and employment data. December’s rate cut marked the third consecutive meeting with a reduction, though policymakers signaled a more measured approach heading into 2026, with three officials dissenting and several suggesting that additional cuts may not be warranted next year. Inflation data provided some support for the Fed’s actions, with December readings coming in below expectations and pointing to continued disinflation across several categories. However, lingering concerns around data quality following earlier government shutdown left some investors cautious about declaring a clear and sustained improvement. Taken together, the combination of cooling labor conditions, moderating inflation, and persistent uncertainty reinforced the Fed’s data-dependent stance as it balances weakening labor market risks against slow progress on bringing down prices. 

US markets enter 2026 with a cautiously optimistic tone, supported by expectations for continued earnings growth but tempered by valuation and policy uncertainty. Analysts currently project double-digit earnings growth for a third consecutive year, providing a fundamental tailwind for equities if economic conditions remain supportive. At the same time, elevated valuations and mixed economic signals suggest that returns may be more dependent on underlying earnings and broader market participation than further increases in stock valuations. Markets are pricing in additional rate cuts over the coming year, which could provide support for equities, though the timing and extent of easing remain dependent on inflation and labor market trends. This continued easing may favor smaller, more rate-sensitive companies, positioning small cap stocks to perform better if borrowing costs continue to decline. As the cycle matures, market leadership may continue to broaden beyond the largest mega-cap stocks, with investors placing greater emphasis on fundamentals and diversification across the market rather than reliance on a narrow group of market leaders. 

Developed international markets remain on relatively stable footing, supported by improving inflation trends, more accommodative monetary policy, and attractive valuations compared to US equities. In Europe, easing inflation has given central banks greater flexibility to support growth, even as economic momentum remains uneven across countries and sectors. Ongoing trade and tariff uncertainty remains a headwind, particularly for export-oriented economies, though recent policy clarity has helped reduce some near-term risks. While a weaker US dollar provided a meaningful tailwind to international returns in 2025, further dollar depreciation is expected to be more limited. Even so, international markets may continue to benefit from valuation support, improving fundamentals, and a more balanced policy backdrop relative to the US. In the United Kingdom, cooling labor conditions and easing inflation are expected to allow for further rate cuts, which could help support household demand over time. In Japan, improving domestic activity and sustained inflation above target have increased expectations for policy normalization, though currency weakness remains a key variable for foreign investors. Overall, developed international markets remain positioned to perform well relative to US equities if global growth stabilizes and market leadership continues to broaden. 

Emerging markets enter the year ahead with a more mixed outlook after a strong year of gains, shaped by uneven growth dynamics across regions and continued sensitivity to global policy and trade conditions. China remains the primary driver, with the outlook dependent on the balance between targeted policy support and persistent structural challenges. While liquidity measures and fiscal support may help stabilize activity, ongoing property-sector stress, soft domestic demand, and deflationary pressures continue to weigh on confidence, suggesting that any recovery is likely to remain uneven and reliant on external demand. Elsewhere, select emerging markets tied to global manufacturing and technology cycles, such as South Korea and Taiwan, may remain better positioned amid resilient demand for semiconductors and AI-related investment. However, emerging markets overall remain sensitive to shifts in global growth, currency movements, and trade policy, reinforcing the likelihood of uneven performance and the importance of diversification within emerging market allocations. 

Fixed income markets head into 2026 on relatively stable footing, supported by attractive starting yields and a less restrictive policy backdrop. While markets are pricing in additional rate cuts, the timing and magnitude of further easing remain uncertain, suggesting that interest rate volatility could persist. In this environment, bonds are likely to continue serving an important role in diversified portfolios by providing income and potential downside protection, even if price appreciation is more limited. As rates move lower, investors may increasingly look to higher-yielding segments of the market, such as high yield bonds and emerging market debt, in search of additional income, though these areas carry greater sensitivity to economic and credit conditions. Overall, fixed income remains positioned as a stabilizing component of portfolios, particularly as investors balance income needs with elevated uncertainty across equity markets.   

This information is for educational purposes and is the opinion of Aldrich Wealth LP (Aldrich Wealth). Facts and figures are believed to be from reliable sources, but no liability is accepted for any inaccuracies. Indices are unmanaged, unavailable for direct investment, and do not include any transaction, management or other fees or costs. Nothing in this commentary should be construed as an investment recommendation. Forward-looking statements reflect current views and are not guarantees of future performance. Past performance does not guarantee future results.