Alert

Key Economic Takeaways from Q4 2025

• Stock Market. Despite early concerns, the effects of new tariffs were largely muted. Strong corporate earnings and renewed confidence following the Fed’s rate cuts fueled gains across most major asset classes.
• Improving Breadth. Most major asset classes ended the year up at least 5%—the broadest strength since 2019.
• Economic Indicators. US growth remained steady, supported by resilient consumer spending and improved business investment, though the labor market showed early signs of cooling.
• Federal Reserve. The Fed delivered three rate cuts, signaling a pivot toward supporting employment and growth. Markets now anticipate the possibility of additional rate relief in 2026.
• Fiscal Policy. Continued federal infrastructure spending, targeted deregulation, and pro‑growth corporate tax provisions under the new tax plan are expected to provide an additional tailwind for US expansion heading into 2026.

Q4: The Market Broadens

The S&P 500 finished the fourth quarter with a modest but positive gain of roughly 2.5%, closing out a strong year supported by robust corporate earnings, resilient economic growth, and renewed confidence following the Fed’s initiation of rate cuts.

Importantly, market leadership broadened in Q4. Cyclical sectors such as financials, industrials, and small caps led the final leg of the rally, while technology underperformed for the quarter.

International Exposure 2025 Market Recap

International and emerging markets outperformed US equities for the first time in over a decade, aided by a 9% decline in the dollar and improving global economic conditions.

Fixed Income

In fixed income, 2025 marked a turning point. The Fed’s three rate cuts lowered the Fed funds rate to 3.5–3.75%, steepening the yield curve and producing the strongest year for core US bonds since 2020.

Investment grade credit, high yield, and municipal bonds all contributed meaningfully, underscoring the benefits of a balanced portfolio across asset classes.

Economic and Policy Landscape

Despite significant political noise and a historic government shutdown, the US economy demonstrated resilience. Real growth maintained a moderate pace, supported by steady consumer spending, AI driven capital investment, and improved financial conditions. Inflation cooled into the 2.3–3.0% range—a welcome moderation, though still above the target—affording the Fed flexibility to pivot toward supporting growth.

The employment picture softened modestly: job growth slowed, labor participation edged lower, and wage pressures eased, signaling normalization rather than deterioration in labor conditions.

Fiscal initiatives continued to shape the landscape. Infrastructure spending, targeted deregulation, and new pro-growth tax provisions further bolstered private investment.

Entering 2026, these measures could act as tailwinds—especially as fiscal momentum intersects with a more accommodative monetary stance.

2026 Market Outlook

Economic Backdrop

• The One Big Beautiful Bill fiscal package is expected to deliver roughly $150 billion in consumer refunds, providing near‑term stimulus. It also includes expanded funding for transportation, renewable energy, and AI‑related digital infrastructure—initiatives designed to enhance productivity and regional job creation.
• A new Federal Reserve Chair will face early challenges balancing credibility, employment, and inflation objectives but is likely to maintain an accommodative bias.
• The upcoming US midterm elections could introduce additional policy uncertainty in the second half of the year.

Together, these dynamics suggest an environment of fiscal support, cautious monetary easing, and potential regulatory relief—conditions that may extend the expansion, even as political uncertainty and the election cycle keep volatility elevated.

From a market perspective, this backdrop may favor broader participation. Earnings growth and productivity trends remain supportive, particularly as companies continue to deploy AI to manage costs and enhance margins.

Portfolio Context and Positioning for 2026 Markets

After three strong years for equities, elevated valuations warrant thoughtful review.

The S&P 500 now sits within the top 8% of historical valuation ranges. These levels can remain sustainable if earnings growth continues and productivity gains help anchor inflation, as we expect.

Staying Disciplined Amid Uncertainty

2025 again demonstrated markets’ abilities to climb a wall of worry—from political gridlock to inflation concerns. Diversified investors were rewarded for patience and discipline.

As 2026 progresses, we’ll continue to emphasize global diversification and a balanced mix of growth and income assets across both public and private markets, making opportunistic, data-driven adjustments as conditions evolve.

Our team remains focused on navigating change and positioning your portfolio for sustainable, long-term success.

We’re Here to Help

For more information about the economic landscape and what it means for investors, contact your Moss Adams Wealth Advisors firm professional.

Additional Resources

• Private Clients Practice
• Individual Wealth Management Services