Quarterly Investment Research Note – January 9th, 2026

2025 Market Recap Summary

• Driven by exceptional underlying earnings growth, global equities delivered a third consecutive strong year.  The S&P 500 rose +17.9% for the year, while International equities strongly outperformed US stocks by the widest annual margin since 2009.  The MSCI EAFE and MSCI Emerging Markets indices returned +31.2% and +33.6%, respectively, in 2025.  Small and Mid-cap stocks trailed Large-caps for the fifth consecutive year.  The Russell 2000 returned +12.8% during 2025.¹

• US investors in International stocks, benefitted from a weak US dollar and the relative attractive valuations abroad.  The Nominal US Dollar Index fell by over 9% during 2025, its worst weakening since 2017.²  International markets rallied broadly across regions, market caps and styles.

• Earnings momentum, led by Technology and artificial intelligence adoption, continues to underpin equity markets, with S&P 500 profits projected to rise +11.9% in 2025 (the strongest since 2021) and accelerate further to +15.6% in 2026.³

• Fixed income weathered intermittent interest-rate volatility to produce a strong year.  The Bloomberg US Aggregate Bond Index returned +7.3% for the year, as rates declined across the curve. The 10-year US Treasury yield fell from 4.58% to 4.18% in 2025, while the short end declined more sharply amid shifting expectations for monetary policy easing.⁴

• The Federal Reserve cut interest rates three times in the back half of the year as inflation concerns lessened while the labor market softened.  Chair Powell emphasized a balance in the dual mandate, easing policy to support employment as the risks shifted.

• The US economy is anticipated to have grown again in 2025 as markets navigated policy-induced uncertainty and a cooling labor market.   Real GDP rebounded and grew by an above-trend +4.3% in the 3^rd quarter of 2025.  Housing remains a drag due to elevated rates but this is offset by robust business investment, particularly in AI-related infrastructure, data centers and power generation.⁵     

4^th Quarter 2025 Market Recap

In the fourth quarter, equities navigated a prolonged government shutdown, a softening labor market, and ongoing concerns around valuation, sustainability, and return on investment within the AI-driven technology sectors.  The S&P 500 returned +2.7% during the 4^th quarter to finish the year up +17.9%.  The Dow Jones Industrial Average and Tech-heavy NASDAQ Composite also produced moderate returns in the 4^th quarter and broad-based gains for 2025.⁶

As the year progressed, volatility dissipated in the markets, although the S&P 500 experienced a  5.1% drawdown in November, largely due to the aforementioned fears, but rebounded swiftly to finish the year near all-time highs.  The CBOE Volatility Index (VIX) declined below 15 at the close of the year settling just above cycle lows.⁷

Value stocks outpaced Growth stocks in the 4^th quarter and performance was largely in-line during the year, a positive sign for breadth and balance after a long-run of outperformance from Growth stocks.  Performance of the “Magnificent 7” stocks was mixed for the year with only 2 of the 7 (Alphabet and NVIDIA) outperforming the S&P 500 on the year.⁸ 

The average S&P 500 stock gained 1.39% in the fourth quarter and 11.43% for the full year. Mid- and small-cap stocks lagged both during the fourth quarter and throughout 2025, despite lower interest rates and an easing monetary policy backdrop that is typically supportive of more leveraged companies. While modestly widening credit spreads contributed to the underperformance, the primary driver was the concentration of early AI-related earnings and investment benefits within mega-cap companies, leaving mid- and small-caps at a relative disadvantage.⁹

During the 4th quarter, only two of the eleven sectors, Real Estate and Utilities, posted negative returns.  Healthcare was the standout performer for the quarter, rebounding significantly after a challenging first 9 months of the year.  For the full year, Communication Services and Technology led sector performance, while 5 sectors overall delivered returns higher than 15%.  Industrials and Utilities were significant beneficiaries of elevated infrastructure spending and increased investment in power generation.¹⁰

International equities provided a material boost to globally diversified portfolios as the long-anticipated rotation between International and US markets took hold.  The MSCI EAFE Index (developed markets) returned +4.86% in the fourth quarter and +31.22% for the year, while the MSCI Emerging Markets Index performed even better, gaining +4.73% in Q4 and +33.57% for the year.  Investors who emphasized value-oriented strategies within International allocations were rewarded with additional outperformance, as the MSCI ACWI ex-US Value Index surged +42.23% for the year, materially exceeding US equity returns.  A notable decline in the US dollar was a tailwind for US investors, complementing the longer-standing thesis of attractive relative valuations and improving earnings and economic outlooks abroad.¹¹

This gap represents the widest one-year outperformance of International equities relative to US stocks since 2009, highlighting the importance of global diversification.  After years of frustration as International allocations trailed, the benefits of maintaining diversified global equity exposure were finally realized during the year.¹²

Overall, 2025 was another strong year for equity portfolios, led by International allocations, while core US exposures also performed well across sectors, market caps and styles, with many areas delivering double-digit returns.  Earnings growth once again played a significant role in driving returns, such that multiple expansion was relatively modest during the year; we view this as a constructive element for a market approaching historical valuation highs.  The S&P 500 currently ended 2025 at a forward P/E of approximately 22.3x, modestly below the levels reached at the end of 2021 and still firmly below the valuation extremes observed during the dot-com bubble of the late 1990s.¹³

In the bond market, interest-rate volatility continued to subside throughout 2025, with the 10-year US Treasury yield ending the 4th quarter basically unchanged.  Over the course of the year, cooling inflation expectations and signs of a softening labor market increased confidence in further Federal Reserve easing, driving yields lower.  As a result, the Bloomberg US Aggregate Bond Index returned +7.30% for the year, including a +1.10% gain in the 4th quarter.  The yield curve steepened during the fourth quarter, as the short end declined in response to Fed rate cuts and a more accommodative policy outlook.¹⁴

Corporate credit delivered additional return premium during the year, with investment-grade and high-yield corporates gaining +8.03% and +8.62%, respectively, supported by ongoing spread compression and falling interest rates.  Emerging markets debt also produced a strong year as a satellite credit allocation, aided by a weaker US dollar, improving fundamentals, and tighter credit spreads.  The Bloomberg EM Aggregate Index (US Dollar denominated) rose +11.11% for the year, while the Bloomberg EM Local Currency Index advanced +15.91%, reflecting the added tailwind from currency appreciation.¹⁵

Late in the 4th quarter, concerns surrounding private credit began to surface, driven by higher-for-longer financing costs, slowing refinancing activity, and early signs of stress among more highly levered borrowers.  While default rates remain contained, investors have grown more discerning around underwriting standards, leverage levels, and the potential for valuation lag in less liquid vehicles, particularly in segments reliant on aggressive add-backs or covenant-lite structures.  Spreads modestly responded to these concerns but the impact was largely contained.

The Economy and the Fed

The economy grew in 2025, despite a negative 1^st quarter driven by a rush of imports ahead of tariff implementation.  Growth has been driven by an ever-resilient consumer and a generational capital expenditure cycle focused on AI and the infrastructure and power generation needs required.   

Beyond these dynamics, the consumer continues to define the US economy.  Consumption has made up 68% of GDP growth since the year 2000.  Real Personal Consumption Expenditures have been a reliable foundation for economic growth in 2025, with increases of +0.42%, 1.68% and 2.39% in the first 3 quarters of the year.¹⁶

Today, US household net worth is at an all-time high- increasing by over $57 Trillion since the end of 2019.    What’s more, the household debt service ratio (debt payments as a % of disposable income) sits at 11.25%, below the 11.7% mark at the end of 2019 – a signal cash flows are abundant for the consumer to continue to consume and grow the economy.^17,18  

Regarding the contribution of Technology capital spending, JPMorgan estimates that 40-45% of US GDP growth in the first 3 quarters was driven by these expenditures, this is up from less than 5% in the first 3 quarters of 2023.  In their analysis, they estimate that US GDP growth over the last year would have been below-trend, +1.8% annualized with the benefit of Tech capital spending.  Declining imports and rising exports are aiding economic growth from a trade perspective as tariffs take effect.¹⁹ 

There are several ways to illustrate the scale and historical significance of Technology sector capital expenditures.  One such measure examines private fixed investment in information processing equipment and software as a percentage of US GDP.  Viewed through this lens, the ratio has now surpassed the levels reached during the last major technological investment cycle, the Internet era, highlighting the exceptional intensity of the current period.²⁰

While the Technology investment cycle continued to support economic growth through elevated activity and potential productivity gains, the broader economy showed clear signs of slowing in 2025, most notably in the labor market.  Job growth decelerated sharply over the year, with the 3-month moving average falling from 209,000 new jobs per month in December 2024 to a loss of 22,000 jobs per month by December 2025.  In total, the economy added just 584,000 jobs in 2025, a significant slowdown from more than 2 million jobs in 2024 and over 2.5 million jobs in 2023.

The unemployment rate rose to 4.6% in November 2025, marking its highest level since September 2021 and up from 4.1% in December 2024.  Unemployment ticked down to 4.4% in the just released December 2025 data.  Wage growth also moderated during 2025, while indicators such as job cuts and layoffs increased. This weakening labor-market backdrop was a key driver behind the Fed’s decision to continue cutting rates throughout the fourth quarter.^21,22

Moderating inflation was the other key factor that gave the Fed room to cut rates.  While inflation remains above the Fed’s 2% target, it has stabilized, with the latest Core PCE running at 2.8% year-over-year through September 2025, as the October and November releases were delayed by the government shutdown.  November Core CPI data was released and surprised to the downside, coming in at 2.6% year-over-year.  Housing disinflation remains the primary force containing inflation, as real-time housing cost data continues to signal a slowdown in costs for that segment.^23,24

Thus, during the 4th quarter, the Fed continued a cautious shift toward further easing, delivering rate cuts in October and December that lowered the federal funds target range to 3.50%–3.75%.  While the Fed’s dot plot signaled only one additional cut in 2026, policymakers’ views were notably divided, and Fed funds futures are currently pricing in roughly two rate cuts over the year.  Some argued inflation remained too persistent to justify further near-term easing, while others pointed to the cooling labor market as evidence policy was becoming overly restrictive setting the stage for a continued debate over the pace and extent of rate cuts heading into 2026.^25,26

With an exceptional 3-year run across markets and asset classes now behind us, it’s important to note that despite periodic volatility, drawdowns and substantial headline noise, disciplined, long-term investment strategies have continued to reward patient investors.  Later this month, we’ll share our forward-looking Market Outlook for 2026 and discuss how these dynamics inform portfolio positioning.  As always, please feel free to reach out at any time with questions or to discuss how these themes apply to your portfolio.

Footnotes:

1. Morningstar Direct data
2. Federal Reserve Bank of St. Louis FRED https://fred.stlouisfed.org/series/DTWEXBGS
3. Yardeni Research https://yardeni.com/charts/yri-earnings-outlook/
4. Morningstar Direct Data
5. Federal Reserve Bank of St. Louis FRED https://fred.stlouisfed.org/series/GDPC1
6. Morningstar Direct Data
7. Federal Reserve Bank of St. Louis FRED https://fred.stlouisfed.org/series/VIXCLS
8. Morningstar Direct Data
9. Morningstar Direct Data
10. Morningstar Direct Data
11. Morningstar Direct Data
12. Morningstar Direct Data
13. JPMorgan Guide to the Markets https://am.jpmorgan.com/us/en/asset-management/protected/adv/insights/market-insights/guide-to-the-markets/
14. Morningstar Direct Data
15. Morningstar Direct Data
16. Bureau of Economic Analysis https://www.bea.gov/data/gdp/gross-domestic-product
17. Federal Reserve Bank of St. Louis FRED https://fred.stlouisfed.org/series/BOGZ1FL192090005Q
18. Federal Reserve Bank of St. Louis FRED https://fred.stlouisfed.org/series/TDSP
19. Michael Cembalest’s Eye on the Market (JPMorgan) https://assets.jpmprivatebank.com/content/dam/jpm-pb-aem/global/en/documents/eotm/smothering-heights.pdf
20. Federal Reserve Bank of St. Louis FRED https://fred.stlouisfed.org/series/A679RC1Q027SBEA
21. Federal Reserve Bank of St. Louis FRED https://fred.stlouisfed.org/series/PAYEMS
22. Federal Reserve Bank of St. Louis FRED https://fred.stlouisfed.org/series/UNRATE
23. Federal Reserve Bank of St. Louis FRED https://fred.stlouisfed.org/series/PCEPILFE
24. Federal Reserve Bank of St. Louis FRED https://fred.stlouisfed.org/series/CPILFESL
25. Federal Reserve https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20251210.htm
26. CME Group FedWatch Tool https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

The views expressed herein are those of John Nagle on January 9^th, 2026 and are subject to change at any time based on market or other conditions, as are statements of financial market trends, which are based on current market conditions. This market commentary is a publication of Kavar Capital Partners (KCP) and is provided as a service to clients and friends of KCP solely for their own use and information. The information provided is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal or tax advice. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s investment portfolio. All investment strategies have the potential for profit or loss and past performance does not ensure future results. Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. The charts and graphs presented do not represent the performance of KCP or any of its advisory clients. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance results.  There can be no assurances that a client’s portfolio will match or outperform any particular benchmark. KCP makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information. The information is subject to change and, although based on information that KCP considers reliable, it is not guaranteed as to accuracy or completeness. This information may become outdated and KCP is not obligated to update any information or opinions contained herein. Articles herein may not necessarily reflect the investment position or the strategies of KCP. KCP is registered as an investment adviser and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by securities regulators nor does it indicate that the adviser has attained a particular level of skill or ability.