AAF Wealth ManagementQ4 2025 Market Insights

In an ongoing commitment to keep you abreast on a range of issues that might affect your financial planning, AAFCPAs is pleased to share Q4 2025 Market Insights published by AAF Wealth Management, a wholly owned subsidiary of AAFCPAs. This provides investors with an understanding of what’s driven market performance of late.

Markets closed 2025 with broad gains across all major asset classes for the first time since the pandemic. Returns held firm even as markets experienced bouts of volatility, underscoring the importance of a long-term perspective. For many investors, the year reinforced that short-term fluctuations may tell only part of the story.

As we look ahead to 2026, the economic landscape begins to take shape—defined less by a single direction than by competing forces. Household finances remain relatively strong, and continued investment in artificial intelligence infrastructure may help sustain economic activity. At the same time, trade policy and the direction of monetary policy remain key variables. Expectations for Federal Reserve easing, including potential interest rate cuts, and a reduced economic drag from trade and tariff changes introduced in 2025 point to a more supportive environment for growth, even as risks remain.

Within this mixed backdrop, several areas warrant close attention. Inflation is expected to remain above the Federal Reserve’s two percent target for much of the year, driven by tight labor markets and fiscal stimulus. This environment continues to pressure affordability. At the same time, elevated equity valuations, especially in the technology sector, suggest more moderate long-term returns and highlight the value of maintaining diversified portfolios.

Aggregate economic forecasts as of December 31, 2025, indicate moderate U.S. GDP growth, reaccelerating to approximately 2.2% in 2026. This outlook reflects both the strength of ongoing technological innovation and the continued risks tied to inflation and policy uncertainty.

2025 4th Quarter Recap

The final quarter of 2025 reinforced the year’s overall gains, with markets holding up well despite significant challenges, including a federal budget impasse that briefly shut down the government. Confidence among investors supported broad gains across asset classes. While the shutdown was projected to cause a temporary drag on Q4 growth, this impact is largely expected to be reversed by a corresponding boost in the first quarter of 2026.

Key market performance indicators for the quarter ending December 31, 2025, were:

• U.S. Equities: Delivered a solid 2% return for the quarter.
• International Equities: Outperformed their U.S. counterparts, posting a 5% gain.
• Fixed Income: Major bond categories generated positive returns of approximately 1%.
• Balanced Portfolios: A traditional 60/40 stock/bond portfolio returned 2%, bringing its full-year return to a strong 13%.

2025 Full-Year Recap

Markets in 2025 delivered broad gains, even as underlying volatility tested investor resolve. For those who maintained discipline and a diversified approach, the year proved rewarding, reinforcing the importance of a long-term perspective. Several themes stand out in shaping this performance.

Volatility and Resilience

The year included notable swings. Trade concerns pushed developed market equities down 16.5% in the spring, and the S&P 500 briefly neared a bear market, falling 19% from its peak. Still, the market staged a broad rally, allowing the S&P 500 to finish the year up 16%.

A Shift in Market Leadership

After years of U.S. dominance, 2025 brought a notable change in market dynamics. International and emerging markets led returns, with emerging market equities rising 34.4% in dollar terms. For the first time in 20 years, the S&P 500 was the worst-performing major equity market. Within U.S. markets, a small group of mega-cap technology companies—often called the Magnificent Seven, including Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla—have driven a substantial portion of overall market performance in recent years. In 2025, the influence of this group lessened, with only Alphabet and NVIDIA outperforming the S&P 500 for the year.

Broad-Based Asset Performance

The second half of the year saw gains across nearly every major asset class, the first time this has occurred since the pandemic. Precious metals stood out, rising more than 80%, while global bonds returned 8.2% in dollar terms, aided in part by a softer U.S. dollar.

The Currency Effect

Currency movements were an important factor in 2025. The trade-weighted U.S. dollar fell 7%, its largest decline since 2009, giving unhedged international investments a meaningful lift. European and emerging market assets, likewise, performed well for U.S. investors, showing how global diversification can provide additional opportunities during a year of market swings.

Factors to Watch in 2026

While the baseline outlook for 2026 remains constructive, certain factors warrant attention, as they may influence growth or market activity.

Our base-case outlook assumes inflation may remain above the Federal Reserve’s 2% target, potentially peaking slightly above 3% in the first half of 2026 before easing, though the timing and pace remain uncertain. Tariffs, a tight labor market, and ongoing fiscal stimulus contribute to this persistence, which may limit real wage growth and present affordability challenges for some households.

The economy may also continue to feel the delayed effects of prior monetary tightening. Combined with current labor-supply and cross-border trade dynamics, these factors could slow growth. Recent signs of labor market cooling, including layoffs and hiring pauses, suggest unemployment may rise toward 4.5 to 4.7%, according to consensus forecasts, providing a test of household and business resilience.

Valuations in U.S. equities remain elevated even as earnings grow, pointing to the potential for more moderate long-term returns of roughly 3.5 to 5.5% annually over the next decade. Leverage in private credit and private equity adds complexity should liquidity conditions tighten, reinforcing the importance of careful portfolio positioning.

Ongoing policy and geopolitical uncertainty—including the possibility of changes to the Federal Reserve’s leadership when Jerome Powell’s term ends in May 2026—could influence business investment and consumer activity. Even so, a disciplined, diversified approach can help investors navigate these dynamics while positioning portfolios to capture growth opportunities as they emerge.

Opportunities to Watch in 2026

Despite ongoing uncertainties, several factors suggest a constructive environment for 2026. U.S. economic resilience and continued investment in transformative technologies are expected to support activity, providing opportunities for investors who maintain a diversified and disciplined approach.

Artificial intelligence is poised to be a key driver of growth. Ongoing capital expenditures in AI infrastructure are contributing to productivity improvements across industries. Should adoption accelerate more quickly than anticipated, these developments may support additional economic growth, underscoring AI’s expanding role in business and market activity.

The U.S. consumer continues to provide a source of stability. Household balance sheets remain healthy and wealth levels are rising, fueling consumer spending and contributing to overall economic activity. GDP is projected to rise to an above-trend 2.2% in 2026, aided in part by the diminishing effects of tariffs introduced in 2025. These factors help reduce prior economic drags and support a foundation for growth.

Monetary and fiscal policy are also likely to influence conditions. With inflation moderating from its peak, the Federal Reserve may have scope to ease interest rates, with forecasts suggesting the policy rate could reach a range of 3.0 to 3.25%, potentially supporting financial conditions and encouraging business investment. Expansionary fiscal measures, such as full expensing for capital investments, are expected to complement these developments.

Globally, economic activity shows signs of broadening. Fiscal stimulus in Europe is anticipated to translate into stronger activity across the continent, supporting a more stable and diversified backdrop for global growth. While the U.S. remains a central driver, these international developments offer additional opportunities for investors.

How We Help

As we enter 2026, AAF Wealth Management approaches the year with measured confidence. The current economic environment presents both promising opportunities and notable risks that demand strategic navigation. While developments like AI-driven productivity improvements, stable consumer financial health, and accommodative monetary policy may boost market performance, we’re also tracking challenges including ongoing inflation pressures, stretched market valuations, and evolving policy landscapes.

This mixed backdrop reinforces our focus on disciplined investment strategies and broad diversification. The strong performance of international markets in 2025, following years of U.S. market leadership, demonstrates how quickly investment trends can shift. The widespread positive returns across different asset types also highlights why maintaining exposure to varied investment sources remains valuable.

Throughout 2026, our investment team will closely track economic data and emerging trends that could influence market dynamics. We make strategic portfolio adjustments for clients when conditions warrant, always prioritizing long-term wealth building and preservation goals.

The firm deeply values the trust our clients place in us to manage their financial assets. This responsibility shapes our decision-making process, and we remain dedicated to helping navigate whatever developments the coming year may present.

These insights were contributed by Kevin Hodson, CMT, CAIA, AIF, Director of Investments & Wealth Advisory, AAF Wealth Management.

Questions? Reach out to Kevin directly or your AAFCPAs partner.

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*AAF Wealth Management is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where AAF Wealth Management and its representatives are properly licensed or exempt from licensure. This blog is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by AAF Wealth Management unless a client service agreement is in place.