Article Summary: December 2025 Market Recap
This article reviews a volatile yet rewarding 2025 for investors, highlighting strong equity and bond returns, shifting leadership across factors and regions, and the impact of Fed rate cuts and a weaker U.S. dollar.
- Equities Extend a Strong Run: The S&P 500 posted an eighth straight positive month and one of several outsized annual gains since 2019, with broad sector strength and continued large-cap leadership despite less dominance from the “Magnificent Seven.”
- Momentum and Non-U.S. Outperformance: Momentum was a leading global factor, with non-U.S. markets outperforming U.S. equities by over 15% amid a 10% decline in the dollar, underscoring the role of currency moves in cross-asset returns.
- Bonds and the Role of Fixed Income: The Bloomberg U.S. Aggregate Bond Index delivered its best return since 2019 as Fed rate cuts steepened the yield curve, reinforcing fixed income’s value as portfolio ballast even as forward return expectations moderate.
Risk assets across the board closed out another remarkable year. Despite ending on a subdued note, December marked the eighth consecutive month of positive total returns for the S&P 500. Since 2019, the S&P 500 has delivered annual gains of 18% or more in six of the past seven years and has finished higher in 15 of the 17 years since 2009, with only 2018 and 2022 breaking the streak of annual gains.
In 2025, the market began with volatility but turned sharply and gained momentum. Market sentiment deteriorated early in the second quarter as President Trump’s April 3rd tariff announcement triggered sharp losses; April 3rd and 4th ranked as two of the worst days for the index since 1957. The S&P 500 dropped over 19%, approaching bear market territory. As we often emphasize, extreme daily moves, both up and down, tend to cluster. True to form, April 9th marked the 3rd best day for the S&P 500 index since 1957, with a single‑day gain of 9.3%, roughly equivalent to a full year’s return. Despite the rebound, April closed in negative territory before the index advanced steadily through year-end, setting 39 record highs, the last on December 24th.
Unlike 2024, when the “Magnificent Seven” dominated returns, only two, Alphabet and Nvidia, outperformed the S&P 500 in 2025. The other five stocks generated gains but trailed the index. All sectors of the S&P 500 finished higher in 2025 with top performers being communication services, tech, and industrials while real estate and consumer staples lagged behind. Large cap leadership persisted for a ninth consecutive year, as the Russell 1000 once again outpaced the Russell 2000. Within U.S. small caps, a low-quality rally was experienced during the post-April recovery with the Russell 2000 more than doubling the S&P 600’s return of 6%.
Looking back on 2025, the momentum factor was dominant leader on a global basis. The momentum factor only focuses on the best performing stocks over the prior 6-12 months. It removes fundamentals or macro data as inputs and simply looks at it from a trading perspective. The U.S. momentum factor has been sideways since September. However, in non-U.S. markets, the momentum factor just rose to another all-time high. In markets that are obsessed with momentum, non-U.S. markets are shining more than the U.S. Non-U.S. markets (MSCI ACWI Ex-US) outperformed their U.S. counterparts by over 15% from a USD perspective in 2025. With the USD falling over 10% in 2025, the U.S. dollar was one of the main cross-asset return drivers for the year impacting more than just non-U.S. equities. With the Federal Reserve currently cutting interest rates and inflation remaining above target, the USD has potential to fall further in 2026.
Bonds also enjoyed a strong year, with the Bloomberg U.S. Aggregate Bond Index up 7.3%, its best annual gain since 2019 (+10.8%). On December 10, the Fed cut rates by 0.25% to a 3.5%-3.75% target range (the third cut of the year), prompting a yield curve steepening amid ongoing inflation and debt concerns. As yields have fallen over the short-to-intermediate part of the yield curve, expected returns for fixed income may be lower than the strong 2025 we experienced. Even so, fixed income remains an integral diversifier in portfolios and plays its role well of being the ballast during times of uncertainty, as demonstrated in April 2025.
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