NWP Quarterly Investment Review
Stocks Surge to New Highs in 2025
The S&P 500 rose to an all-time high in the fourth quarter as economic data showed solid growth, the Fed cut interest rates as expected, and massive AI infrastructure investment continued, supporting expectations for economic and corporate earnings growth in 2026. The S&P 500 posted a modestly positive return for the fourth quarter and an annual return of nearly 20%, continuing a strong three-year run.
The S&P 500 started the quarter by hitting a new all-time high in early October, though volatility struck mid-month as trade tensions between China and the United States escalated. After several weeks of tit-for-tat trade restrictions and fee increases, President Trump threatened 100% tariffs on Chinese goods in mid-October, dramatically escalating tensions. This caused a short, sharp drop in U.S. stocks. However, the volatility proved short-lived due to a strong Q3 earnings season, rising expectations for a Fed rate cut, and de-escalatory rhetoric from President Trump. In the final days of October, the Fed cut rates another 25 basis points and Presidents Trump and Xi met and struck a trade deal that de-escalated tensions and reduced tariffs on Chinese imports. The S&P 500 rose to another all-time high in late October and finished the month up 2.34%.
Volatility returned in November as doubts grew about future Fed rate cuts and AI-related news disappointed. Stocks dropped early in the month as markets digested the Fed's decision, which delivered the desired rate cut but injected doubt about a December cut. Then, in mid-November, several headlines and corporate updates cast doubt on the expected return from massive AI infrastructure spending, while weaker-than-expected earnings from AI bellwether Nvidia further pressured tech stocks. These forces drove a nearly 5% pullback in the S&P 500 by mid-month. However, commentary by New York Fed President Williams stabilized markets around Thanksgiving. Williams, seen as one of the most influential Fed members, implied he expected the Fed to cut rates again in December. His comments sent expectations for a December rate cut surging, and that, combined with the end of the longest government shutdown in U.S. history, helped stocks rally and close the month up 0.25%.
Volatility remained elevated in early December due to the same forces: uncertainty over Fed policy and mixed AI news. Unlike November, however, none of the news triggered a sustained pullback. The Fed cut interest rates a third time in 2025 at the December meeting but signaled it did not plan to cut rates again in early 2026. The mixed message did not disrupt markets, and with a new Fed chair looming in 2026, markets still expect more rate cuts. Corporate AI results remained mixed, as underwhelming earnings from Oracle and Broadcom were offset by strong results from memory maker Micron. No further surprises emerged in 2025, and year-end momentum carried the S&P 500 to new all-time highs late in the month.
In sum, 2025 was another strong year for markets, as investor enthusiasm for artificial intelligence, additional Fed rate cuts, and stable economic growth offset decades-high tariff rates and policy volatility.
Q4 and Full-Year 2025 Performance Review
All four major U.S. stock market indices finished the fourth quarter with solidly positive returns, continuing strong year-to-date performance. The Dow Industrials outperformed the other major averages due to strength in financials and industrials, as that index was less impacted by mixed tech stock performance. For the full year, the Nasdaq was the best-performing major index, benefiting from its heavy tech weighting, followed by the S&P 500, where tech is also the largest sector. The Dow Industrials and Russell 2000 both finished the year with solid gains but underperformed the Nasdaq and S&P 500.
By market capitalization, large caps outperformed small caps in the fourth quarter and for the full year, driven by strong gains in large-cap tech stocks fueled by AI enthusiasm and solid earnings growth. Small caps still posted solid returns due to falling interest rates and generally solid economic growth.
From an investment-style standpoint, value outperformed growth in the fourth quarter as mixed tech earnings weighed on growth funds, while solid economic data and additional Fed rate cuts supported more cyclically oriented sectors that typically dominate value funds. For the full year, however, tech-heavy growth significantly outperformed value as strength in AI stocks drove growth styles higher.
At the sector level, performance in the fourth quarter was mixed, with eight of the 11 S&P 500 sectors finishing with positive returns. For the second straight year, all 11 sectors ended with gains. Healthcare was by far the best performer in the fourth quarter, driven by investor rotation toward more value-oriented sectors and because fears that the prolonged government shutdown would reduce federal healthcare spending went unfulfilled. For the full year, technology and communication services were the top-performing sectors, benefiting from substantial gains in AI-linked tech stocks.
Among sector laggards, utilities and real estate posted marginally negative returns in the fourth quarter. Utilities faced pressure from mild deterioration in sentiment toward the AI data center boom. Real estate experienced modest weakness due to lingering concerns about home affordability and as longer-dated Treasury yields rose to multi-month highs on fears that a "too dovish" Fed chair could reignite inflation in 2026. For the full year, consumer staples and real estate were relative laggards, as investors favored exposure to AI and cyclical sectors amid strong AI enthusiasm and stable economic growth. Real estate faced year-long headwinds from higher interest rates, while consumer staples were negatively impacted by higher tariffs.
S&P 500 Total Returns by Month in 2025
US Equity Indexes
Foreign markets outperformed the S&P 500 in the fourth quarter and, for the first time since 2017, also outperformed for the full year. Foreign developed and emerging markets posted nearly identical fourth-quarter returns due to solid economic growth in Europe and China and expectations for rate cuts in the United Kingdom. For the full year, emerging markets slightly outperformed foreign developed markets due to falling global interest rates and a resilient Chinese economy.
International Equity Indexes
Commodities posted mixed performance in the fourth quarter, mirroring full-year results. Gold finished both the quarter and year with substantial gains, driven by a weaker U.S. dollar, rising geopolitical tensions, stubborn inflation, and concerns about central bank independence. Gold reached a new all-time high in 2025 and delivered its best annual performance since 1979. Oil prices declined sharply in the fourth quarter, resulting in a negative return for the full year. Despite elevated geopolitical tensions, concerns about global oversupply weighed on oil prices throughout 2025.
Commodity Indexes
Turning to fixed income, the Bloomberg Barclays US Aggregate Bond Index delivered a solidly positive return in the fourth quarter, rounding out a strong year for bonds. Both long- and short-duration debt posted modest gains in the quarter, with longer-duration bonds outperforming due to better-than-expected inflation readings and easing concerns about the U.S. fiscal situation. For the full year, longer-duration bonds handily outperformed shorter-duration debt, supported by solid economic growth and robust foreign demand for U.S. Treasuries.
In the corporate bond market, high-yield bonds outperformed investment-grade debt in the fourth quarter and for the full year, as solid economic data and additional Fed rate cuts encouraged investors to reach for yield amid a stable economy and positive earnings outlook.
US Bond Indexes
Q1 and 2026 Market Outlook
Markets enter the new year riding an impressive three-year winning streak powered by rate cuts, solid economic growth, and strong investor enthusiasm for artificial intelligence. These positive factors remain in place as we begin 2026.
Despite major shifts in global trade policy and the longest government shutdown in U.S. history, the economy begins the year on solid footing. Consumer spending, service sector demand, business investment, and employment metrics all point to continued growth, providing important support for risk assets.
On monetary policy, the Federal Reserve has cut rates aggressively over the past 18 months. While uncertainty remains around the number of additional cuts in 2026, investors still expect a generally dovish Fed. Projections indicate another rate cut in the coming year, and a new Fed chair, expected to take office in May, is widely anticipated to be more dovish than current Chair Powell.
Investor enthusiasm for the productivity and profit potential of artificial intelligence remains a primary driver of this bull market. Major U.S. tech companies remain committed to spending hundreds of billions on AI infrastructure, which should continue to support economic growth and tech-sector earnings.
While the outlook remains positive, risks exist. The labor market has been losing momentum, with unemployment reaching a four-year high in late 2025 and hiring slowing materially. A rise in layoffs would represent a new headwind for markets. The Fed also remains divided, and if policymakers signal an end to rate cuts, markets could react negatively. Additionally, skepticism around AI investment returns is rising, and a deterioration in sentiment could remove a major market tailwind.
Geopolitical and policy risks also remain, including potential escalation in global conflicts and uncertainty around trade policy and tariffs.
Bottom line: while we remain optimistic as 2026 begins, we will not allow that optimism to breed complacency. We remain focused on managing both risk and return potential, recognizing that a disciplined, diversified, and long-term investment strategy is best positioned to withstand market volatility.
At Noble Wealth, we understand the opportunities and risks facing today's markets and remain committed to helping you navigate this environment successfully. Investing is a marathon, not a sprint. Staying invested, remaining patient, and sticking to your personalized plan remains critical to achieving your long-term goals.
Thank you for your continued confidence and trust. Please do not hesitate to contact us with any questions, comments, or to schedule a portfolio review.
