Stocks Close Out Another Year With Strong Returns; Bonds Have Solid Gains as Well
HIGHLIGHTS:
- Stocks: Stocks delivered mixed results in December but finished Q4 with positive returns and posted solid gains for 2025.
- Bonds: Rates drifted higher in December causing a late-year headwind to bond returns, but bonds also had a solid year of gains in 2025.
- U.S. Economy: Government data has started to catch up, but gaps remain. While general economic readings continue to show solid U.S. growth, the job market has clearly slowed and is an area of caution entering 2026.
- Federal Reserve: The FOMC cut rates for a third consecutive meeting in December, as expected. However, rate cuts are expected to slow dramatically in 2026. The big news in 2026 will be who replaces Chair Powell when his term expires in May.
Equity Markets
Stocks bounced around in December and turned in mixed results for the month. However, the major stock indices gained ground in Q4 and had another solid year of gains in 2025. Several indices ended the year near all-time highs. See Table 1 for December 2025, Q4, and YTD returns.
Table 1 | Equity Markets
| Index | December | Q4 | YTD |
|---|---|---|---|
| S&P 500 | 0.06% | 2.66% | 17.88% |
| S&P 500 Equal Weight | 0.45% | 1.39% | 11.43% |
| DJIA | 0.92% | 4.03% | 14.92% |
| Russell 3000 | -0.02% | 2.40% | 17.15% |
| NASDAQ Comp. | -0.47% | 2.72% | 21.14% |
| Russell 2000 | -0.58% | 2.19% | 12.81% |
| MSCI ACWI ex U.S. | 3.00% | 5.05% | 32.39% |
| MSCI Emerging Mkts Net | 2.99% | 4.73% | 33.57% |
The large-cap growth pause that started in November continued in December with the Nasdaq dropping for the month. The equal-weight S&P 500 fared better than the widely followed market-cap weighted version for the second month in a row, reflecting the rally broadening beyond just the largest-cap tech names. With that said, small-cap stocks struggled in December and lagged the other equity indices for the month. Ultimately, large-cap growth was the best relative performer in U.S. stocks in 2025, but some broadening into small caps and value stocks occurred during the year. Table 1 shows that all major U.S. stock indices were up double-digits in 2025, marking a third straight year of those types of gains.
The broad measure of international stocks, the MSCI ACWI ex U.S., outperformed U.S. stocks for the month and quarter, adding to already strong outperformance for the year. Emerging market stock returns were virtually the same in December. The strong results of international stocks were one of the headline stories of 2025 after several years of lagging U.S. stocks. With gains exceeding 30%, foreign stocks surpassed U.S. stocks in a year that was good across the board for equities. Following April lows, stocks have had an impressive rally with little weakness along the way – only one modest 5% correction in November. It is imperative to remember that stocks can be volatile and pullbacks like we experienced in November are not unusual and would not be unexpected moving into a midterm election year, which historically experiences some weakness during the year.
Fixed Income
Bonds faced an uphill climb as rates rose in December. Outside of high yield and munis, bonds declined in December but still posted gains for the quarter and delivered solid returns across the board for 2025. See Table 2 for bond index returns for December 2025, Q4, and YTD.
Table 2 | Fixed Income Markets
| Index | December | Q4 | YTD |
|---|---|---|---|
| Bloomberg U.S. Agg | -0.15% | 1.10% | 7.30% |
| Bloomberg U.S. Credit | -0.19% | 0.87% | 7.83% |
| Bloomberg U.S. High Yld | 0.57% | 1.31% | 8.62% |
| Bloomberg Muni | 0.09% | 1.56% | 4.25% |
| Bloomberg 30-year U.S. TSY | -2.13% | -0.50% | 3.73% |
| Bloomberg U.S. TSY | -0.33% | 0.90% | 6.32% |
The 10-year U.S. Treasury yield closed 2025 at 4.18%, a notable increase from November’s close at 4.02% but also meaningfully lower compared to the end of 2024 at 4.58%. Although munis lagged other bond sectors for the year, they outperformed on a relative basis for the fourth quarter as this pocket of bonds came on strong late in 2025. Returns of the Agg, Credit, and Treasury indices were all solid in 2025. High yield bonds led the way in December and led for the year with returns north of 8.5% (not surprising in another year of solid stock market gains). In general, bonds did their job in 2025 with solid gains, helping to offset some of the equity market volatility during 2025.
We maintain our longstanding position favoring credit versus pure rate exposure in this interest rate environment. Credit spreads have remained near historic lows as corporate bonds have outperformed Treasuries so far this year. We also believe the role bonds play in a portfolio, to provide stable cash flow and to help offset the volatility of stocks in the long run, has not changed. As the Fed resumes its rate-cutting cycle, we believe having an active bond management approach makes sense. Furthermore, we believe rates remain elevated and provide attractive opportunities for bond investors. There could be some volatility in store for bonds in the first half of 2025 as the market prepares for and then digests a new Fed Chair. However, with rate cuts likely continuing during the year, a positive backdrop still exists for bonds in 2026, in our opinion.
Economic Data Highlights and Outlook
Economic data remains somewhat clunky, but more current readings are becoming available following the government shutdown. The Consumer Price Index was released through November, but monthly changes were not included. The core and headline year-over-year increases through November came in at 2.6% and 2.7%, respectively. Both readings were better (lower) than expectations of 3.0% and 3.1%, respectively. The Personal Consumption Expenditures (PCE) price index (the preferred inflation measure of the Fed) is a few months behind, and September data was released in December. Both the core and the headline PCE indices showed a year-over-year increase of 2.8% as expected. (The October release of the Producer Price Index has been cancelled, and November data is scheduled to be released on January 14, 2026, per the BLS website.) Inflation continues to look contained at this point, albeit above the Fed’s target inflation rate of 2%.
Payroll data for October and November were released at the same time in December. Nonfarm payrolls fell by -105,000 in October, worse than expectations of -25,000. The measure recovered somewhat in November with 64,000 additions. November job additions surpassed expectations of 50,000, but the unemployment rate rose to 4.6% for the month, which was above the 4.5% estimate. This reading was the highest unemployment rate since coming out of the pandemic in 2021. Please see Chart 1 below showing the rising unemployment rate through October during the post-pandemic period.
Chart 1
The Institute for Supply Management (ISM) Manufacturing Index continued to reflect contraction with a reading of 48.2 in November on the heels of a disappointing 48.7 reading in October. Expectations called for a modest increase in this index to 49.0. The ISM Non-Manufacturing Index, which covers the much larger service industries in the U.S. economy, rose modestly to 52.6 in November from the 52.4 level in October, surpassing expectations of 52.0. Recall for the ISM indices, readings above 50 represent expansion and below 50 reflect contraction.
The preliminary University of Michigan Consumer Sentiment survey for December showed modest improvement after hitting its lowest level in over three years in November. At 53.3, this reading improved from the multi-year low of 51.0 and exceeded estimates of 52.0. The final December reading for this sentiment survey moderated to 52.9. After recovering in the summer from very pessimistic levels following the tariff announcements, consumer sentiment has slid lower through most of the fall and winter and stands near the lowest readings on record for this survey. Please see Chart 2 below but note that the data on this chart is delayed by one month. The November reading of 51.0 is the final data point represented here
Chart 2
A December release shared the first glimpse of Q3 GDP, and it came in much stronger than expected at a 4.3% annualized growth rate, surpassing the 3.3% expectation. The personal consumption component of GDP was better than expected and helped propel this initial estimate of GDP higher. This reading will continue to be revised in the months ahead. The GDPNow forecast from the Atlanta Fed for Q4 GDP is estimated at 3.0% as of December 23, 2025.
The Federal Reserve met December 9-10 for the final time in 2025 and cut rates as expected by 25 basis points. This meeting was marked by division among policy makers. The vote to cut rates was ultimately 9 to 3 with two dissenting votes for no cut and one dissenting vote for a 50-basis point cut. This division is surprising considering the FOMC tends to be more of a consensus group. The focus now seems to be turning to who will be named the next Fed chair and whether the independence of the Federal Reserve will be maintained. Per the CME FedWatch tool on December 31, 2025, the market is pricing in the next rate cut in April, which would be the last of current Chair Powell’s term. At this point, only two rate cuts are priced in for all of 2026, but the Fed “world” could change meaningfully with the new Chair talking the reins when current Chair Powell’s term expires in May.
Clearly, markets have proven to be strong for most of the year. Although not quite a third consecutive year of 20%+ gains, the S&P 500 was not far off it with gains over 17%. Furthermore, 2025 was marked not only by continued large-cap growth leadership, but also by small caps hitting new highs for the first time since 2021, and international stocks outpacing the U.S. stocks for the first time in years. From tariff uncertainty to a record-long government shutdown, equity markets have been able to climb the “wall of worry” and ascend to close the year just off all-time highs. Stock valuations in the U.S. have crept higher and sit at elevated levels. However, valuations have not grown too alarming in our opinion and are supported by record high earnings and accelerating earnings growth expectations for 2026. We still see opportunities in the stock market as we move into 2026. As always, we believe it is imperative for investors to stay focused on their long-term goals and not let short-term swings in the market derail them from their longer-term objectives.
Please Note: Items highlighted in blue in the table below have not been updated since the month indicated due to the government shutdown and updates to those prior readings not being available.
Economic Data
| Event | Period | Estimate | Actual | Prior | Revised |
|---|---|---|---|---|---|
| ISM Manufacturing | Nov | 49 | 48.2 | 48.7 | — |
| ISM Services Index | Nov | 52 | 52.6 | 52.4 | — |
| Change in Nonfarm Payrolls | Nov | 50k | 64k | -105k | — |
| Unemployment Rate | Nov | 4.50% | 4.60% | — | — |
| Average Hourly Earnings YoY | Nov | 3.60% | 3.50% | 3.70% | — |
| JOLTS Job Openings | Oct | 7117k | 7670k | 7658k | — |
| PPI Final Demand MoM | Sept | 0.30% | 0.30% | -0.10% | — |
| PPI Final Demand YoY | Sept | 2.60% | 2.70% | 2.60% | 2.70% |
| PPI Ex Food and Energy MoM | Sept | 0.20% | 0.10% | -0.10% | — |
| PPI Ex Food and Energy YoY | Sept | 2.70% | 2.60% | 2.80% | 2.90% |
| CPI MoM | Sept | 0.40% | 0.30% | 0.40% | — |
| CPI YoY | Nov | 3.10% | 2.70% | — | — |
| CPI Ex Food and Energy MoM | Sept | 0.30% | 0.20% | 0.30% | — |
| CPI Ex Food and Energy YoY | Nov | 3.00% | 2.60% | — | — |
| Retail Sales Ex Auto and Gas | Oct | 0.40% | 0.50% | 0.10% | 0.00% |
| Industrial Production MoM | Nov | 0.10% | 0.20% | -0.10% | — |
| Building Permits | Aug P | 1370k | 1312k | 1362k | __ |
| Housing Starts | Aug | 1365k | 1307k | 1428k | 1429k |
| New Home Sales | Aug | 650k | 800k | 652k | 664k |
| Existing Home Sales | Nov | 4.15m | 4.13m | 4.10m | 4.11m |
| Leading Index | Sept | -0.30% | -0.30% | -0.50% | -0.30% |
| Durable Goods Orders | Oct P | -1.50% | -2.20% | 0.50% | 0.70% |
| GDP Annualized QoQ | 3Q Initial Est. | 3.30% | 4.30% | 3.80% | — |
| U. of Mich. Sentiment | Dec P | 52 | 53.3 | 51 | — |
| Personal Income | Sept | 0.30% | 0.40% | 0.40% | — |
| Personal Spending | Sept | 0.30% | 0.30% | 0.60% | 0.60% |
| S&P Cotality CS 20-City YoY NSA | Oct | 1.10% | 1.31% | 1.36% | 1.39% |
Source: Bloomberg; P=Preliminary, T=Third Reading.
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