Quarterly Performance Update

Quarterly Market Trends and Annual Equity Performance Overview

The S&P 500^® Index logged its third straight quarterly gain, returning 2.66% for the final three months of 2025. For the year, the index returned 17.88%, its third-consecutive double-digit annual gain.

Despite persistent inflation, mounting labor-market concerns and the longest-ever U.S. government shutdown, stocks maintained their upward march in the quarter. Resilient economic growth, upbeat earnings and two Federal Reserve (Fed) rate cuts bolstered the backdrop and fueled investor optimism.

Equity Style and Size Performance Highlights

Most size and style indices advanced for the quarter. Large-cap stocks outperformed small- and mid-cap stocks, while the value style outperformed growth across the board.

Large-cap value stocks (Russell 1000^® Value Index) were top fourth-quarter performers, up nearly 4%. Mid-cap growth stocks (Russell Midcap^® Growth Index) were the weakest, declining almost 4%.

Nine of the S&P 500 Index’s 11 sectors posted gains, led by health care, up nearly 12%, and communication services, up more than 7%. Real estate, down nearly 3%, and utilities, down more than 1%, were the weakest.

Interest Rate Adjustments Influenced by Economic Indicators

The 43-day government shutdown — the longest in U.S. history — created a data void for the Fed in the first half of the quarter. Nevertheless, persistent worries about a jobs-market slowdown prompted two Fed rate cuts in the quarter. The federal funds rate ended the period in a range of 3.5% to 3.75%.

The Bureau of Labor Statistics canceled October data, but November’s reading showed the unemployment rate rose to 4.5% from 4.4% in September. Similarly, inflation reports for October were incomplete. Available data showed a moderating trend, but core inflation remained well above the Fed’s 2% target.

By quarter-end, this backdrop tempered expectations for future rate cuts as the Fed navigated a competing backdrop. A labor market slowdown would likely require additional easing, but cutting rates further could add to persistent inflationary pressures.

How Did Non-U.S. Stocks Perform Versus U.S. Equities?

Non-U.S. developed markets stocks (MSCI World Ex-USA Index) also delivered another quarterly gain, outpacing the U.S. market with a return of 5.2%. For the year, the index returned nearly 32%. Valuation remained a key driver, as investors broadly pursued opportunities outside the U.S.

How Eurozone and U.K. Markets Responded to Economic Shifts

European stocks outperformed the index, with core and peripheral markets contributing to the results. Eurozone inflation eased, interest rates held steady and growth prospects improved.

U.K. stocks also outperformed the index. The Bank of England cut its benchmark interest rate to the lowest level since 2022, as headline inflation eased. Business activity expanded throughout the quarter, while manufacturing rebounded into expansion territory in November and improved marginally in December.

Japan’s stock market advanced but underperformed the index. Continued private sector expansion and improving manufacturing sector metrics helped support market gains. However, headwinds from currency volatility and a hawkish central bank broadly weighed on investor sentiment versus other markets.

How South Korea and Taiwan Contributed to EM Equity Trends

Emerging markets (EM) stocks (MSCI Emerging Markets Index) returned 4.73%, outpacing the U.S. market but lagging other developed markets. For the year, EM stocks were top performers, returning nearly 34%.

Markets in South Korea and Taiwan delivered notable performance due to strong semiconductor and artificial intelligence (AI)-related demand. Stocks in South Africa also rallied as the country received the first upgrade on its sovereign debt rating in two decades, which boosted investors’ confidence. Additionally, the central bank lowered its benchmark interest rate.

Meanwhile, stocks in China, the EM index’s largest component, declined, as falling profits at China’s industrial companies raised investors’ fears. China’s government has said it would provide fiscal stimulus to boost consumer demand. Nevertheless, stocks in consumer-oriented stocks still suffered as investors pondered the scope of the economic slowdown.

U.S. Bond Activity and Yield Movements During Q4 2025

The Bloomberg U.S. Aggregate Bond Index gained 1.1% in the quarter, its fourth consecutive quarterly gain. All index sectors advanced for the three-month period, led by the outperforming mortgage-backed securities (MBS) sector. For the year, the index returned 7.3%.

Q4 2025 witnessed the longest U.S. government shutdown in history, mounting job cuts, tepid consumer sentiment and growing division among Fed policymakers. Inflation, as measured by the headline and core Consumer Price Index (CPI), moderated versus the prior quarter. The third-quarter gross domestic product (GDP) report, released in December, showed growth expanded at a 4.3% annualized pace, up from 3.8% in the second quarter.

Treasury yields were volatile, and they ended the three-month period mixed. Labor market concerns and Fed easing contributed to a 0.14% decline in the two-year Treasury yield to 3.48%. Meanwhile, the yield on the 10-year Treasury rose slightly from 4.15% to 4.17%. The yield curve between two and 10 years steepened.

How Non-U.S. Bond Markets Compared to U.S. Bonds in Q4

Government bond yields in Europe rose for the quarter, while U.K. bond yields declined. Global bonds advanced but underperformed U.S. bonds. While the U.S. dollar appreciated slightly versus other currencies in the quarter, it declined sharply for the year. Bloomberg’s dollar-hedged global bond index returned 0.78% for the fourth quarter.

EM bond returns rallied for the quarter and outperformed U.S. and global bonds. Local currency-denominated EM bonds outperformed U.S.-dollar-denominated EM securities. Solid EM economic fundamentals, currency tailwinds, particularly in Latin America, and investor demand helped support the asset class.