Setting the Score
It is generally true that markets tend to go up rather than down. However, the last three years have felt somewhat fairytale-like as it relates to
performance (S&P 500 returns for 2023: +24.2%, 2024: +23.3%, 2025: +16.6%). As competitive as our domestic markets felt in 2025, the U.S. cannot
expect to come out on top every time, as demonstrated by the University of Alabama’s football team in the Rose Bowl. Despite giving it the good ol’
college try, domestic markets were outmatched by international markets this year (MSCI EAFE +31.5%), with emerging economies trouncing the
field. Equities were not the only team with strong rankings. Gold and silver climbed to all-time highs due to concerns over global fiscal deficits as
well as increasing industrial demand from EVs and data centers. Even the defensive line (bonds) performed well as interest rates fell and prices
rose. Lower rates also helped stimulate private market activity, allowing the door for the IPO market to re-open and should continue to boost merger
& acquisition activity into the next season.
Making the Plays
Under Trump 2.0’s refereeing, coaches (company CEOs) were initially perplexed on whether to run or pass the ball with the announcement of tariffs in April. They soon fell into a cadence, however, as they continued to reconstruct their supply chains. The game has certainly swung from a story of globalization to one of reshoring and of a domestic manufacturing renaissance. Scouts (investors) had all eyes on the flashy quarterbacks (AI hyperscalers), with the Mag 7 driving most of the season. There were a few stumbles and injuries late in the fourth quarter, as spectators questioned whether their summer training (Capex spending on data centers) was paying off. This led to some substitutions (market rotation), allowing for more defensive, value, and small cap names to deepen the bench and improve the overall breadth of the market. After years of dominance, the old powerhouse programs—mega-cap growth stocks—are still in the playoff picture, but they are no longer winning every game by two field goals. If the markets are to pull off a four-peat in 2026, it seems it will require a broader offensive effort.
Third and Long?
The 2025 season was a whirlwind both on and off the field. The first quarter of Trump’s second term was played at a rapid pace. The President signed 225 Executive Orders in a single year (Biden signed 162 over his total four-year Presidency), resulting in volatile trading sessions as players tried to interpret the signals from the sidelines (headlines). There were multiple sacks and tactical drives, including the interception of Venezuelan oil tankers along with the ousting of President Maduro and his wife, ongoing pass interference in the Middle East, national safety issues with China, and Russia’s constant violation of the line of scrimmage in Ukraine. On the home front, there were ongoing locker room skirmishes about the direction of interest rates as Chairman Powell attempted to get all Fed Governors in a huddle of agreement. Rates dropped by another 25 bps at the December meeting, to 3.5-3.75%, despite three dissents and a lack of data due to the government shutdown. It appears that concerns over the health of the job market are becoming more heavily weighted versus the previous focus on inflation. This may have been the correct audible as the November unemployment report, which was released a week later, surprised to the upside at 4.6%, the highest since 2021. This has led many prognosticators to refer to our current field positioning as a “K” shaped economy that is bifurcated between strong GDP growth (Q3: +4.3%) and rising negative pressures in the labor force.
Closing Thoughts – Keep a Championship Mindset
While some may question the possibility of a four-year bull run, similar to questioning the change in the College Football Playoffs, there are many tailwinds to suggest continued expansion. Rate cuts generally have a lagged effect and we are certain to get a dovish new Fed Chairman in May. AI spending continues to stimulate the economy along with fiscal stimulus from the One Big Beautiful Bill. Tariffs have appeared to be less taxing than initially thought, however, other risks still exist. Inflation is still above target and while AI can enhance productivity, it may also have negative impacts to the labor market. At Ulrich, we believe one should not chase the highlight reel but focus on consistent execution, running a balanced offensive, managing the clock, and trusting the investment process. Diversification and adhering to a long-term asset allocation are key to avoiding a fumble.
Equity Markets
U.S. equities advanced in 4Q25, extending gains from earlier in the year as investors navigated a more mixed macro backdrop while continuing to reward earnings resilience. The S&P 500 rose 2.7% for the quarter, finishing the year up 17.9% and completing a historic recovery following the volatility of 1H25, when tariff announcements around Liberation Day weighed heavily on sentiment. Late in the year, performance leadership shifted as losses in technology stocks reflected growing scrutiny of AI-related valuations. Sector dispersion increased, with Health Care (+11.7%) delivering strong gains following earlier underperformance, while Information Technology posted more modest returns (+1.4%) as momentum in the AI trade slowed. Real Estate (–2.9%) and Utilities (–1.4%) lagged amid higher long-end yields, profit-taking, and increased uncertainty around AI-driven power demand. The style rotation of the last year continued, with Value (Russell 3000 Value: +3.8%) outperforming Growth (Russell 3000 Growth: +1.1%), while large cap equities (Russell 1000: +2.4%) slightly outpaced small caps (Russell 2000: +2.2%).
Market valuations remained elevated with the Shiller P/E ratio ending 4Q at its second highest level on record, only exceeded by the Dot-Com Bubble, while the market-cap-to-GDP Ratio (the “Buffett Indicator”) climbed to roughly 220%, underscoring the extent to which market gains have continued to outpace U.S. economic growth. Non-U.S. equities extended their lead over U.S. markets in 4Q (MSCI ACWI ex-USA: +5.1%) and posted their strongest annual performance relative to U.S. stocks (+32.4%) since 2009. The U.S. dollar was broadly flat against a basket of major currencies during the quarter and remained meaningfully lower year to date (DXY: -9.4%), marking its worst annual performance since 2017. European equities advanced broadly (MSCI Europe: +6.2%), with banks and defense
stocks lifted by improving fundamentals and government spending measures. Japanese equities (+3.2%) also posted gains, despite a weaker yen, on strong earnings, continued AI-related demand, pro-growth economic policy signals, and ongoing corporate governance reforms.
Emerging market equities also delivered solid performance in 4Q (MSCI EM: +4.7%) and finished the year up 33.6%. Korean and Taiwanese equities led the index, driven by strength in semiconductor-related industries. Chinese equities declined during the quarter, including losses among large technology firms, as economic data pointed to slowing retail sales and industrial activity and President Xi Jinping signaled limits on future government stimulus.
Fixed Income Markets
Fixed income markets posted positive but more subdued returns in 4Q as Treasury yields were broadly stable and volatility declined. The Bloomberg US Aggregate Bond Index gained 1.1% for the quarter, bringing full-year returns to 7.3%. The yield curve ended the quarter slightly steeper with front-end yields declining and longer maturities rising, following two 25 bps Federal Reserve rate cuts during the quarter. Inflation expectations edged marginally lower, with the 10-year breakeven rate declining modestly.
Credit sectors continued to benefit from supportive technicals and steady demand. Investment-grade corporates were up 0.8% in 4Q, underperforming Treasuries, while MBS (+1.7%), ABS (+1.3%), and CMBS (+1.3%) outperformed. High yield corporates advanced 1.3% (+8.6% YTD), with lower-quality segments lagging late in the quarter. Leveraged loans gained 1.2%, supported by stable short-term rates and continued CLO issuance. Municipal bonds continued their rebound following a challenging first half of the year, with the Bloomberg Municipal Index up 1.6% in 4Q and 4.3% for 2025. Despite
historically heavy issuance, demand remained supportive, allowing municipals to finish the year in positive territory after a volatile start.
Global fixed income returns were mixed. The Bloomberg Global Aggregate Index returned 0.8% in 4Q and 4.9% for the year on a USD-hedged basis, while unhedged investors (+0.2% QTD, +8.2% YTD) benefited from currency effects. Central bank policy paths diverged with the Fed and BOE cutting rates while the ECB held steady, and the BOJ raising their policy rate to the highest level in three decades. Emerging market debt outperformed developed markets, led by hard-currency sovereigns (JPM EMBI: +3.3% QTD, +14.3% YTD), supported by spread tightening and improving risk sentiment.
Alternatives
Liquid alternatives delivered strong results in 4Q, led by commodities and precious metals. The Bloomberg Commodity Total Return Index rose 5.8% in the quarter and finished the year up 15.8%. Gold prices surged roughly 12.1%, capping a standout year (+64.4% YTD), as geopolitical uncertainty, central bank demand, and a weaker U.S. dollar bolstered safe-haven appeal. The S&P Global Natural Resources Index advanced 6.7% (+28.9% YTD), supported by strength in metals and mining, while the S&P Global Infrastructure Index was flat but delivered a strong annual return (+14.1%). REITs declined (FTSE Nareit: –1.6%) as higher long-term yields weighed on valuations, while MLPs gained 3.8%.
Source: Callan
The views expressed represent the opinion of Ulrich Investment Consultants. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only.It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from sources that have not been independently verified for accuracy or completeness. While Ulrich Investment Consultants believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Ulrich Investment Consultants’ view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements.