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Fourth Quarter 2025 Insight
How markets are adjusting as the year winds down
After a year defined by big headlines and even bigger swings in sentiment, markets entered December with a more measured tone. Last week’s mixed results felt less like a shift in direction and more like a natural pause, an opportunity for investors to digest a strong year of gains while reassessing where leadership may emerge next. Rather than signaling stress, the recent pullback reflected a market that remains active, adaptive and increasingly selective as the calendar turns toward year-end.
Beneath the surface, resilience continues to shine through. While some of the year’s largest winners took a step back, other areas quietly advanced, reinforcing a familiar but important theme: Progress in markets is rarely uniform. As December unfolds, diversification, not concentration, once again helped smooth the path.
What drove market performance last week
From a performance standpoint, global equities edged slightly lower for the week, down 0.2%, though year-to-date gains remain robust at more than 21%. U.S. equities declined 0.6%, driven primarily by weakness in large-cap growth stocks, which fell 1.6% amid increased scrutiny of technology and AI-related valuations. Several of the largest names that led markets higher this year contributed to the pullback, weighing on headline returns.
In contrast, value-oriented segments continued to differentiate themselves. U.S. large-cap value rose 0.6% for the week, while small-cap value gained 2.0%. Small-cap growth also finished higher, up 0.5%. The divergence between growth and value highlights a broadening opportunity set relative to the narrowing leadership that characterized much of the year.
International markets provided additional balance. Developed international equities rose 0.9% for the week, supported by strength in international value stocks, which advanced 1.6%. Emerging markets also posted gains, rising 0.4% and extending their year-to-date advance to more than 32%.
Fixed income markets were little changed. Municipal bonds slipped modestly, while taxable bonds declined 0.2%; both remain positive contributors for the year with income playing a stabilizing role.
Is market leadership shifting from growth to value stocks?
One of the more notable developments as year-end approaches is the narrowing gap between growth and value. After spending much of the year trailing, value stocks closed the distance meaningfully in recent months. Quarter-to-date, the Russell 1000 Value Index has outperformed the Russell 1000 Growth Index by roughly 4%, bringing the two styles into a near photo finish. Growth stocks remain ahead year-to-date, up approximately 18%, while value stocks are close behind at around 16%.
This rotation has not been abrupt or disorderly. Instead, it reflects a healthy reassessment of valuations and fundamentals, with investors allocating capital more evenly across sectors tied to industrial activity, financials, materials and consumer staples. As shown in Figure 2, the share of S&P 500 companies outperforming the index has trended lower over time, highlighting how concentrated market leadership has become relative to earlier periods such as the late-1990s technology, media and telecommunications (TMT) era. While breadth remains subdued, the recent uptick suggests participation has begun to improve this year. In that context, continued broadening is important—greater contribution from a wider set of companies can help reduce reliance on a narrow group of market leaders and support a more resilient foundation for diversified portfolios.
Why markets and the Fed see the rate path differently
On the policy front, the Federal Reserve delivered a widely anticipated 25-basis-point rate cut last week, marking the third consecutive reduction this year. While the move itself was well telegraphed, updates to the Fed’s economic outlook were more notable. Policymakers modestly upgraded their 2026 growth forecast to 2.3% and lowered the projected path for core inflation to 2.5%, signaling cautious confidence that progress will continue on both fronts.
That said, a familiar disconnect remains. Fed officials currently project one additional rate cut in 2026, while markets are pricing in closer to three. This gap reflects ongoing uncertainty around the pace of inflation improvement, labor market dynamics and potential changes in Fed leadership next spring, factors markets will continue to weigh as the policy path unfolds.
How labor market and inflation trends are evolving
Looking ahead, attention turns squarely to incoming economic data. This week’s delayed November employment report is expected to show modest job growth of around 40,000, with the unemployment rate holding steady near 4.4%. Hiring has clearly cooled over the course of the year, reflecting trade-related uncertainty as well as structural shifts tied to automation, AI investment and announced government workforce reductions.
Inflation data later in the week will be equally important. November CPI is expected to show headline and core inflation running near 3% year-over-year, roughly in line with recent readings. Encouragingly, several underlying pressures have eased. Home prices are rising more slowly, and oil prices remain well below previous peaks this year, helping contain broader inflation risks.
What a year of change reinforced about portfolio resilience
In 2025, investors navigated shifting leadership, changing policy signals, and persistently heightened uncertainty. Yet, portfolios continued to adapt, often in quieter and more durable ways than the headlines suggested.
We’ve spent time with you helping interpret volatility, put short-term market moves into context and make thoughtful decisions when clarity felt scarce. Whether markets were reacting to inflation surprises, central bank shifts or rapid advances in technology, our focus remained the same: doing our best to help you stay confident and grounded in your long-term plan, emphasizing portfolio resilience and flexibility to evolve thoughtfully and unemotionally as conditions change.
The path into 2026 will bring its own set of questions and opportunities. We’ll share more perspectives during our upcoming Investing Outlook webinar on Jan. 22, where our Investment Team will discuss the forces shaping markets as we head into the new year. Additional details will be shared soon.
