Quarter 4
January 2026
The 2025 calendar year marked the third consecutive year of double digit gains for the S&P 500. Once again, the Communication Services and Technology sectors led the charge, and the index finished the year up 17.9%. The artificial intelligence (AI) theme buoyed these sectors throughout much of the year, with Communication Services and Information Technology delivering 33.6% and 24.0% returns respectively, significantly outpacing the broader market.
Despite this strength, 2025 was far from a smooth ride. Markets navigated a series of tariff shocks in the spring, including the introduction of ultra high “reciprocal” tariffs on trading partners. The resulting volatility contributed to a sharp equity drawdown early in the year before a powerful recovery took hold. From the April lows, the S&P 500 rallied nearly 39% on a total return basis through year end as trade tensions eased, earnings rebounded, and investor confidence improved.
Beyond the U.S., global markets saw even more impressive performance. International equities surged as a weaker U.S. dollar and supportive fiscal conditions boosted foreign returns. Developed markets gained 31.2% and emerging markets returned 34.4%, outperforming U.S. equities for the first time in two decades.* Commodities also posted broad gains, supported by strong precious metals performance.
Fixed income markets provided solid support as well, benefiting from moderating inflation and multiple central bank rate cuts. Global bonds returned 8.2% in U.S. dollar terms, while U.S. fixed income returned 7.3% and posted positive gains across most major segments.** Lower Treasury yields and a steepening yield curve reinforced this tailwind.
While AI-driven enthusiasm and large cap strength dominated headlines, one of the quieter stories of 2025 was the broadening of market leadership late in the year. As valuations in mega-cap tech stretched and investors sought diversification, participation widened across sectors and geographies. This was particularly evident in the fourth quarter, where global equities continued to advance even as U.S. leadership cooled.
Looking ahead to 2026, market participants enter the year with cautious optimism. Tailwinds include moderating inflation, the lagged impact of 2025’s rate cuts, strong corporate earnings momentum, and continued investment in AI infrastructure. However, risks remain: a cooling labor market, potential fatigue in AI capital spending and development, and ongoing geopolitical and trade uncertainties. We’re seeing that most strategists expect volatility to remain elevated but believe the fundamental backdrop supports continued—though possibly uneven—growth in risk assets.
Overall, 2025 underscored the market’s resilience in the face of significant macroeconomic and policy headwinds. Despite early volatility, equities posted another strong year, leadership broadened, and diversified portfolios benefited from simultaneous strength across stocks, bonds, and commodities. The year ultimately reinforced a key theme for long term investors: staying disciplined through uncertainty continues to be rewarded.
* Developed markets as measured by the MSCI EAFE. Emerging markets as measured by the MSCI EM.
** Global bonds as measured by the Bloomberg Global Aggregate. US fixed income as measured by the Bloomberg Aggregate.
Securities offered through M Holdings Securities, Inc. a registered Broker/Dealer, Member FINRA/SIPC. Investment advisory services offered through Cornerstone Advisors Asset Management, LLC which is independently owned and operated.
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