The fourth quarter of 2025 closed out a remarkable year for US equities, marking the third consecutive year of double-digit gains for major large-cap indices. The S&P 500 advanced +2.7% in Q4 (‘SPY’ ETF Proxy), finishing the year up nearly +18%, supported by resilient corporate earnings, persistent enthusiasm for artificial intelligence (AI), and a Federal Reserve that shifted decisively toward easing in the second half of the year.

Yet the quarter was anything but calm. Markets contended with a record 43-day federal government shutdown, the longest in US history, creating a meaningful “data vacuum” as key agencies halted reporting and federal workers went unpaid. The shutdown contributed to bouts of volatility and complicated the interpretation of underlying economic momentum. Trade tensions also dominated headlines when the Trump administration threatened 100% tariffs on Chinese imports, triggering a sharp but brief selloff before a one-year truce helped to re-stabilize sentiment (Politico, “Trump’s 100% tariff threat sparks defiance from Beijing,” 10.12.25).

Monetary policy provided a counterweight to these shocks. The Federal Reserve delivered two 25-basis point rate cuts, bringing the federal funds rate down to roughly 3.6%, its lowest level in several years. However, recent minutes revealed deep internal divisions, with a rare 9–3 split vote, underscoring uncertainty about the appropriate pace of easing, along with selection of a new Fed chairman on the docket for 2026. Labor market data softened meaningfully as job creation slowed, and the unemployment rate rose to 4.6% in November, the highest level since 2021, reinforcing the Fed’s employment-first posture even as inflation remained slightly above target (CBS News, “We asked experts to rate the U.S. economy in 2025,” 12.24.25).

Sector leadership rotated sharply in Q4 with healthcare emerging as a standout performer, benefiting from a rotation into value and defensive growth as investors trimmed exposure to the year’s most volatile AI linked names. Conversely, real estate and utilities lagged amid concerns about home affordability, elevated financing costs, and shifting expectations around the sustainability of the AI driven data center build outs. Falling interest rates supported further bond gains, while commodities delivered some of the most dramatic moves of the year, with precious metals entering their strongest annual performances since the late 1970s.

As 2026 begins, the outlook remains constructive, but increasingly nuanced. Analysts expect earnings growth of roughly 15% (Factset, “2026 Earnings Preview,” 12.19.25), though the economy faces a “no hire/no fire” labor dynamic, ongoing debates over AI monetization, and lingering uncertainty around trade and monetary policy. We will thus remain on watch for any signs that the tracks ahead of last year’s economic momentum may be weakening.

Source: Index proxies based on dividend adjusted ETF time-series data from Unicorn-Data-Services. Data considered dependable, but not guaranteed. Past performance is no guarantee of future performance or profitability. Statements herein do not constitute individual investment advice – please speak with your advisor about your particular situation.