2025 Q4 Market Review

A Quarter of Transitions

The final three months of 2025 marked a definitive shift in market leadership. While the artificial intelligence (AI) frenzy that dominated the first half of the year faced a “reality check,” broader market participation improved. The U.S. Federal Reserve and other major central banks continued their pivot toward monetary easing, cutting interest rates to support slowing labor markets. This environment created a tailwind for fixed-income assets and value-oriented equities, while commodities saw a stark divergence between surging precious metals and a bear market in crude oil. Conversely, digital currencies experienced a “mini-winter,” ending the year on a defensive note following a leverage-fueled selloff.

U.S Equities

US equities posted modest but positive gains in the fourth quarter of 2025, extending a three-year bull market but with clear signs of slowing momentum and narrower leadership. Large caps advanced, small caps continued to benefit from the rate cut backdrop, and sector performance rotated away from the prior AI-led leadership toward more cyclically and defensively balanced drivers.

Index performance

The S&P 500 delivered a total return of roughly 2.7% in Q4 2025, bringing its full year gain to just under 18% and leaving the index near all-time highs by year end. The Nasdaq 100 gained about 2.5% for the quarter and roughly 21% for the year, reflecting still solid but moderating returns from the mega-cap technology complex that had dominated prior phases of the cycle.

Beneath the headline indices, small caps and broader benchmarks reflected a continuing “catch-up” dynamic. The Russell 2000, after breaking out to new highs earlier in 2025, outperformed the S&P 500 since the lows of April by one of the widest margins in over a decade, supported by sharply improved earnings expectations. For the overall U.S. equity universe, Q4 represented another leg higher in price levels but with lower quarterly returns than in the second and third quarters, consistent with a maturing, rather than accelerating, advance.

Style, Size, and Breadth

Market breadth in Q4 remained relatively narrow at the sector level, even as leadership rotated modestly away from the most crowded AI beneficiaries. Only a couple of S&P 500 sectors outpaced the index, underscoring that the incremental upside in the quarter came from a limited set of groups despite the broader market’s positive tone.

From a size perspective, the environment continued to favor a broadening beyond the largest growth franchises. Small cap stocks, particularly in domestic and rate sensitive industries, benefited from expectations that ongoing Federal Reserve easing would alleviate financing pressures and improve relative earnings growth. Style dispersion was more muted than earlier in the year, with growth still ahead on a full year basis but value oriented and more cyclically leveraged segments narrowing the gap as the economic outlook stabilized.

Sector and Thematic Dynamics

Health care emerged as the top performing S&P 500 sector in Q4, helped by renewed investor interest as AI-related enthusiasm cooled somewhat and as the group’s defensive characteristics and earnings stability became more attractive. This outperformance occurred without a broader “risk off” shift, indicating that sector rotation was driven as much by earnings and valuation considerations as by macro anxiety.

In contrast, the traditional defensive trio, real estate, utilities, and consumer staples, lagged the broader market, suggesting limited concern about an imminent downturn despite ongoing macro and political uncertainties. Technology and other long-duration growth areas continued to face bouts of volatility tied to “AI fatigue” and questions about the near-term payoff from large capital expenditure cycles, but they remained critical contributors to overall index earnings and return profiles.

International Markets

For the first time in several years, international developed markets outperformed the U.S. by a wide margin.

• Canada and the UK: The Canadian market surged 7.95% in Q4, while the UK’s FTSE 100 Index rose 8.51%, driven by strong performance in traditional value sectors like banking and energy.
• Europe: The Eurozone posted a 4.95% gain as the ECB maintained a steady path of rate normalization.
• Asia: Performance was mixed. Japan’s Nikkei finished up 2.8%, supported by corporate governance reforms. However, China saw a sharp reversal, with stocks falling 6.8% after a massive policy-driven rally in the third quarter failed to sustain momentum.

Fixed Income: Lower Rates, Higher Returns

Fixed income was one of the stronger asset classes in Q4 2025, as the bond market benefited from a series of interest
rate cuts by the Federal Reserve, which lowered the federal funds rate target to a range of 3.50%–3.75%.

Treasury Performance and Yield Curve Dynamics

The U.S. Aggregate Bond Index returned 1.1% for the quarter, ending 2025 with a healthy 7.30% gain.

• Yield Movements: The 10-year Treasury yield ended the year at 4.18%. While yields fell at the short end of the curve, long-dated yields (20+ years) remained stubborn due to concerns over long-term fiscal deficits and terminal inflation.
• Curve Steepening: The yield curve continued to steepen throughout the quarter. This favored intermediate-duration bonds, while long-duration Treasuries actually fell 0.62% in the final three months as “term premium” returned to the market.

Credit and Emerging Markets

• Corporate Bonds: Investment-grade corporates outperformed Treasuries, returning 7.56% for the full year. Tightening credit spreads indicated that despite the economic slowdown, default risks remained low.
• Emerging Market Debt: This was the standout performer. Local-currency EM bonds gained 3.38% in Q4, ending the year with an exceptional 19.58% return. A weakening U.S. dollar, triggered by shifting trade policies and the Fed’s dovish stance, provided a significant boost to these assets.

Commodities: Precious Metals Rise While Oil Slides

The commodities market was a tale of two extremes in Q4, with precious metals reaching historic highs while energy prices faced structural pressure.

The Historic Gold and Silver Rally

Precious metals served as the premier hedge against policy uncertainty and currency devaluation in late 2025.

• Gold: Prices continued their record run, with analysts eyeing the $4,500 mark as 2026 began. Gold benefited from central bank buying and its status as a safe haven during the October U.S. government shutdown.
• Silver: Silver was the “surprise of the year,” more than doubling its value in 2025. In Q4, it surged past $65, driven by industrial demand for energy and AI data center infrastructure.

Energy and Industrial Metals

• Crude Oil: Brent crude fell toward $60 per barrel by year-end. A projected supply glut for 2026 and OPEC+’s decision to prioritize market share over price levels kept energy prices subdued.
• Copper: Copper remained volatile. While it faced a “neutral” Q4, it ended the year up 30% overall, supported by massive stockpiling in the U.S. ahead of new tariff implementations.

Digital Currencies: The Q4 Correction

After a bullish start to the year, the cryptocurrency market entered a sharp correction in the fourth quarter. Analysts characterized this as a “mini-winter” or a leverage-driven flush.

• Bitcoin (BTC): The premier digital asset plummeted 24% in Q4. Despite reaching new highs earlier in the year, Bitcoin struggled to maintain its “digital gold” narrative as liquidity tightened in the crypto ecosystem.
• Ethereum (ETH): Ethereum fared worse, dropping nearly 29% during the quarter. Even with steady ETF flows, the lack of a major catalyst and competition from other Layer-1 networks weighed on its price.
• Market Sentiment: Corporate holders of Bitcoin, such as MicroStrategy, disclosed significant unrealizedlosses in Q4.

Conclusion

The fourth quarter of 2025 closed the book on a year of extreme volatility and surprising resilience. The transition from a “high-for-longer” interest rate environment to a steady cutting cycle has redefined the investment landscape. As we enter 2026, the focus shifts to whether the “Great Rotation” into value and international stocks will persist, and if the bull market in precious metals has more room to run.

Economic and Policy Trajectory for 2026

The outlook for global financial markets in 2026 is cautiously optimistic, with expectations for corporate earnings growth driven by supportive monetary policies. The macroeconomic environment for 2026 is projected to be one of modest global growth and continued policy normalization.

U.S. Growth and Inflation: The U.S. economy is expected to see resilient GDP growth, with forecasts around 1.8% to 2.2%. This growth is anticipated despite sticky inflation, which is expected to remain above the Fed’s 2% target, potentially averaging 2.7% (PCE inflation). The labor market is projected to cool further, with the unemployment rate rising modestly.

Monetary Policy: The Federal Reserve is expected to continue its easing cycle, with forecasts anticipating one to two more rate cuts in the second half of the year, bringing the policy rate closer to 3%. However, the path is uncertain, and stronger-than-expected growth or persistent inflation could lead to fewer cuts than currently priced in by the markets.

Global Context: Global GDP growth is projected to moderate to around 3.0%. China’s growth is expected at around 5%, while Europe may see more moderate growth of 1.1%. The U.S. dollar is expected to be volatile, potentially. weakening in the first half before rebounding later in the year, which would impact international asset returns.

Key Risks

The positive baseline scenario for 2026 is subject to several risks:

Stubborn Inflation: If inflation proves more persistent than expected, the Fed might be forced to slow or halt rate cuts, which could pressure equity valuations and bond markets.

Geopolitical Instability: Ongoing conflicts and the potential for new trade disruptions could increase market volatility and pressure corporate earnings.

AI Returns on Investment: A key risk is that the massive capital expenditures by tech companies on AI infrastructure might not yield sufficient returns on capital, which could impact the broader market rally that has been heavily concentrated in these names.

Consumer Weakness: A weakening labor market and affordability concerns for consumers pose a downside risk to consumer spending, a key driver of U.S. economic growth.

In summary, 2026 is shaping up to be a year where investors navigate between the tailwinds of technological innovation and accommodative policy, and the potential headwinds of inflation and economic fragility.

The Nature and Rarity of Asset Bubbles

Excess enthusiasm in asset prices can manifest in many forms, including overly bullish sentiment, mispricing, overvaluation, speculative excess, booms, manias, and frenzies. One particular term, “bubble,” is often used too casually, though true bubbles are relatively rare events and do not happen routinely or annually; rather, they tend to occur only a few times per century.

Consider the infrequency of historic bubbles:

• Tulip Mania (1637, Netherlands)
• Mississippi and South Sea Bubbles (1720, Britain and France)
• Railway Mania (1840s, Britain)
• Florida Land Boom (1920s, USA)
• US Stock Market Crash (1929, USA)
• Japanese Asset Bubble (1989, Japan)
• Dot-Com Bubble (2000, USA)
• Global Housing Credit Bubble (2008-09)

Despite differences in context, these episodes share broad similarities. Typically, bubbles follow familiar patterns:

1. Technological Innovation – A new advancement becomes commercialized (railways, internet, crypto, AI).
2. Easy Capital Accessibility – Speculators benefit from cheap, abundant capital and leverage.
3. Leverage and Credit Expansion – Borrowing serves to further inflate values.
4. Compelling Narratives – Rationalizations justify high prices despite weakening fundamentals.
5. Psychological Amplification – Media coverage accelerates and intensifies market behavior.
6. Herding Behavior – Widespread adoption leads to contagion and mass participation.

Not every speculative episode ticks every box above. For example, some periods are marked by excess but do not reach the level of a full-blown bubble: Canal Mania (1790s), Nifty Fifty equities (1960s), the lengthy bond bull run (1980–2021), the Bitcoin and crypto booms starting in 2015, the SPAC and meme stock mania (2020–22), and the green-tech ESG boom (2018–21).

In the more recent era, market factors such as mass social media influence and the financialization of the economy appear to foster more frequent bubbles and excesses. The Nikkei bubble of the 1980s, the Dot-Com mania of the 1990s, and the Global Financial Crisis of the 2000s were the defining bubbles of their decades rather than their centuries.

Spotting Bubbles: Criteria and Real-Time Challenges

Bubbles are best described, as Cliff Asness does, by the principle that “no reasonable future outcome can justify current prices.” Importantly, crowds, the media, and Wall Street rarely identify bubbles in real time, because wide participation is needed to reach truly extreme valuations—it is inherently difficult for speculators or bystanders to recognize a bubble while contributing to it.

Distinguishing a genuine bubble from rapid price appreciation is fundamentally difficult, even for experts. For example, a sharp rise in the share prices of companies only tangentially linked to AI would be concerning, as would be another double-digit (20+%) annual surge for the fourth consecutive year. Nevertheless, if non-AI companies on earnings calls credibly discuss implementing AI solutions that increase efficiency and profits, this could potentially justify elevated valuations. Vanguard’s Joe Davis emphasizes the “idea multiplier”—the process by which new technologies are broadly and successfully adopted in multiple stages across the economy.

With the above as background, we turn to arguably the best long-term (150 years) research into US stock market valuation which was done by Professor Robert Shiller of Yale and presented in his book titled “Irrational Exuberance¹” and first published in early 2000. Dr. Shiller’s research compared the price of the S&P 500 to the average of the prior ten years of earnings per share (of the S&P 500) in order to “smooth out” cyclical fluctuations. This data was presented both as a price/earnings ratio or as Dr. Shiller called it, CAPE for “Cyclically Adjusted Price/Earnings” and as an Equity Risk Premium calculation, which subtracts the US 10-year government bond yield from the ratio of: (1 / CAPE). At least for this author, the latter presentation is better suited for long term comparisons because it adjusts for changes in investor perceptions of risk as it should be read as the premium investors demand above the return provided by a “risk-free” asset, i.e., a US 10-year government bond. The chart above shows the calculations both ways, though I will admit, the CAPE calculation provides a more dramatic representation.

Source: Online Data Robert Shiller, econ.yale.edu

While the absolute valuation is indeed elevated, the equity risk premium has yet to turn negative (currently, +1.69%), which in the past, has been a strong indicator that the party was about to end. On the chart above, I’ve highlighted both the Crash of 1929 and the Internet Bubble as examples of this that didn’t end well. For now, we remain vigilant in this regard, as we’ve always viewed overall market valuation not as a timing tool but a risk management tool. In the chart below, we’ve taken the same data but presented it in a slightly different way. The blue line represents the CAPE multiple we discussed above but combined that with a look at its predictive value in terms of forward rolling 10-year real returns. In other words, if we look at the CAPE multiple at the end of 1999 (Internet Bubble), we can see that the multiple was extremely elevated at 44X (note: the right axis scale is inverted). The real return on the S&P 500 over the period from December 1999 to December 2009 was -3.3%. Looked at another way, investing in the S&P 500 for those ten years resulted in a loss of purchasing power over that period.

Source: Online Data Robert Shiller, econ.yale.edu

“Artificial intelligence is widely regarded by many experts and business leaders as potentially the greatest invention since electricity, and possibly even more transformative. While AI is still building upon foundations laid by electricity and the digital revolution, many view it as a true inflection point for civilization and compare AI’s impact to that of electricity: just as electricity enabled countless new inventions and industries by providing a flexible, universal source of power, AI is seen as a “universal tool” for amplifying and automating intelligence across nearly every domain. The transformational nature of AI lies not only in its ability to replicate or augment human skills, but also in its potential to serve as an endlessly improving, self-teaching agent— something that could alter the pace of innovation, economic growth, and even societal organization. The reason: AI fundamentally changes how decisions are made, tasks accomplished, and knowledge discovered.”

At least according to the hype. There have been a great number of technological innovations over the last 175 years that have had enormous impact on the human condition. I thought it might be informative to list some of them and how they’ve impacted our economy from a productivity standpoint:

What stands out to me is that the last five years have been remarkably unremarkable in this regard.

Macro Context: Media, Monetary Policy, and Market Dynamics

Source: International Monetary Fund

Source: Bank of America

The past two years have seen extensive monetary easing: central banks worldwide made 313 interest rate cuts, matching the extraordinary stimulus seen after the 2008 crisis. This surge in liquidity is a major reason for the frequent mention of booms, bubbles, and currency debasement in market commentary. As we have noted in prior letters, asset prices have surged across the board due to this global wave of monetary stimulus. One notable recent trend is the surge of capital into gold. In just the four months through October 2025, $50 billion flowed into gold markets, exceeding cumulative gold inflows over the previous fourteen years. Even as gold is sometimes viewed as a “bubble” asset, its ownership among private and institutional investors remains low, supporting its role as a hedge against broad asset price inflation, AI-led booms, risks of dollar debasement, and policy-driven market dislocations. Despite these bubble characteristics and its mostcrowded trade status, we would argue that gold is still structurally under-owned at just 0.5% of private client assets and 2.4% of institutional weightings. Beyond recent history, most investors would be surprised to learn that since the world went off the gold standard in the early 1970s, the yellow metal has actually outperformed the S & P 500 over that time period (see chart below). We continue to own gold (and silver) for our clients to hedge against Fed and White House policy mistakes.

Source: Factset

“Double, double toil and trouble; Fire burn and cauldron bubble”²

While investors remain in search of bubbles across various asset classes as illustrated by the chart above from Google Trends which shows the frequency of the search term “Stock Market Bubble” over the last three years (i.e., Is there a bubble in the search for bubbles?), we are more concerned by the possibility of a “Lost Decade” for equity and fixed income investors. The decision to combine stocks and bonds in the same portfolio is predicated on the belief that each asset class does not move in the same direction at the same time – that is, when stocks go down, bonds go up and vice-versa. In fact, the entire investment strategy known as Target Date Funds, is based on this belief, (e.g. 60% in the S&P 500 and 40% in the Bloomberg US Aggregate Bond Index – the 60/40 portfolio). As of 2025, the total assets invested in target date funds (TDFs) in the United States are about $4.7 trillion. The market includes a substantial portion held in collective investment trusts (CITs), which have recently overtaken mutual funds as the dominant vehicle for these assets. Target date funds play a major role in retirement planning, due to factors such as being the default investment options in 401(k) plans among their diversified investment strategies. While stocks and bonds often move in opposite directions, one need look no further back than to 2022, when both stocks and bonds fell approximately 20%. At the start of the year, high valuations for stocks, negative interest rates for bonds and a spike in global inflation upset this ideal relationship between stocks and bonds – in other words, the starting point in terms of valuation, does matter to effectiveness of that relationship to provide diversification and reduced volatility. The chart above from Grantham, Mayo, Van Otterloo & Co. LLC (“GMO”) illustrates how the 60/40 portfolio has succeeded in providing real returns over the last 125 years (averaging 4.7%). The numbers on the chart below the years are valuation metrics for stocks (Total Return CAPE) and bonds (Real Yield). As you can see, when valuations are high as they are now, it becomes much more difficult for the 60/40 portfolio to provide positive real returns (after inflation). Since 1900, there have been six periods, averaging 11 years in length, in which real returns on the 60/40 have been near or less than zero. The bottom line is that we include other asset classes such as gold or infrastructure investments which both further diversify our client’s portfolios, as well as, help us to generate positive real returns over time.

Strategic Observations

• True bubbles require multiple reinforcing factors and develop over many years.
• Not all market exuberance signals a bubble—technology adoption, improved efficiency, and
  monetary policy can justify high prices in some instances.
• Precious metals retain a unique place as an under-owned hedge despite bubble-like sentiment.
• While other investors are focused on bubbles, we are focused on positive real returns over time.

We at Twelve Points Wealth wish you all a Happy New Year and hope you and your families had an enjoyable Holiday Season. Please call or email if you have any questions

Steve Bruno, CFA

Chief Investment Officer

January 8, 2026

¹Robert J. Shiller, Irrational Exuberance (Princeton, NJ: Princeton University Press, 2000)

²Shakespeare, William. Macbeth, Act IV, Scene I, Line 10.

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