Monthly Market Update – December 2025

STOCKS AND BONDS END A VOLATILE 2025 ON STRONG FOOTING

Despite tariff scares, rate-cut uncertainty, and a historic government shutdown, global markets powered higher in 2025—rewarding diversified investors and setting the stage for a cautiously optimistic 2026.

Key Takeaways

• US STOCKS BY THE NUMBERS It was another great year for the S&P 500. The index rose nearly +18% in 2025 and set 46 new all-time highs! And despite a nearly -19% drawdown from 2/18 to 4/8, it recovered those losses in just 54 trading days and overall had 59% positive days in the year to only 41% negative days.
• GENTLEMEN, START YOUR ENGINES In stark contrast to the deep fears amid the tariff rollouts in the Spring, US automakers just reported a surge in sales for the year. Ford posted their best annual US vehicle sales since 2019, and General Motors sales were up +5.5% in 2025. Stellantis’ Jeep saw its first increase in seven years. 
• FIRST TIME, LONG TIME No market review of 2025 would be complete without discussing the meaningful outperformance of non-US stocks. Not only did non-US stocks best their US peers for the first time since 2022, but they beat US stocks by more than +14 percentage points – the largest outperformance since 2009.
• WHAT’S DRIVING STOCK RETURNS The S&P 500 notched a third consecutive double-digit calendar year return in 2025, making some investors anxious about the future. Encouragingly, 2025 returns were underpinned by robust profitability, not multiple expansion like 2023 and 2024, providing a sturdier foundation for stocks.
• TELL ME SOMETHING I DON’T KNOW Valuations are historically high across most asset classes, making it difficult for some investors to stay invested or put new money to work. But the same dynamic existed at this time one year ago, and yet most major asset classes had solid subsequent returns in 2025.
• AI ADOPTION ACCELERATES Artificial Intelligence (AI) could be the most significant technology trend of the next decade. Fidelity Investments forecasts AI revenue to compound by more than 30% per year as organizations transition from pilot programs to production. Adoption of AI online services is happening fast, with services like ChatGPT reaching 100 million users in months, not years, like other popular online services. 
• DON’T CALL IT A COMEBACK The 1990 rap lyric “Don’t call it a comeback, I’ve been here for years” is an apt description for diversification. After double-digit losses in 2022 for the S&P 500 (-18.1%) and the US Aggregate Bond Index (-13.0%), many articles were written about the ‘death of diversification’ and proclaimed the end of the 60/40 portfolio. But since then, a well-diversified 60/40 portfolio has delivered three straight years of double-digit gains, and double-digit gains in 6 of the last 7 years.

Market Summary

Asset Class Total Returns

Source: Bloomberg, as of December 31, 2025. Performance figures are index total returns: US Bonds (Barclays US Aggregate Bond TR), US High Yield (Barclays US HY 2% Issuer-Capped TR), International Bonds (Barclays Global Aggregate ex USD TR), Large Caps (S&P 500 TR), Small Caps (Russell 2000 TR), Developed Markets (MSCI EAFE NR USD), Emerging Markets (MSCI EM NR USD), Real Estate (FTSE NAREIT All Equity REITS TR).

A Choppy Finish Caps a Strong Year

December delivered mixed market results, but global stocks and bonds still posted solid fourth-quarter gains, closing out a strong year for investors. The road, however, was anything but smooth. Markets swung between optimism and anxiety as investors navigated tariff turbulence, enthusiasm over artificial intelligence (AI) and the longest US government shutdown on record, as well as ongoing questions about how fast—and how far—the Federal Reserve would cut interest rates.

Even so, robust corporate earnings and steady economic growth helped markets hold their ground during the final quarter, reinforcing the broader resilience seen throughout 2025. Non-US stocks outperformed US equities not only in December, but also over the quarter and for the year—a notable shift after years of US dominance. As for bonds, US bonds lagged global peers for the month and year, though they outperformed international bonds during the fourth quarter.

Tariffs, Central Banks, and Inflation Shape the Global Picture

Much of the year’s volatility began in April, when tariff threats rattled expectations for global growth. The result was a worldwide stock selloff and a rally in overseas bonds. That disinflationary shock gave central banks in Europe, the UK, and Canada room to begin easing policy, providing support for international markets.

As the year progressed, looser monetary and fiscal policies—along with selective trade deals—helped global equities recover and pushed bond yields higher. In the fourth quarter, the Federal Reserve cut rates twice, while the Bank of England eased once. The European Central Bank held rates steady. Inflation trends also improved: US inflation slowed, Eurozone inflation stabilized near target, and inflation in the UK moderated.

All the S&P 500 News in 2025 that can Fit on One Page

S&P 500’s 2025 Journey: Resilience Amid Headlines and Volatility

Source: Avantis Investors, FactSet.

AI Dominates US Stocks—But the Rally Broadens

In the US, large-cap growth and technology stocks once again set the tone, driven largely by AI, cloud computing, and semiconductor companies. Technology-related stocks accounted for roughly 60% of the S&P 500’s total return and earnings growth in 2025, underscoring how concentrated market leadership remained for much of the year.

Still, there were signs of broader participation as 2025 came to a close. AI-driven capital spending lifted industrial and energy stocks, while financials benefited from stronger capital markets activity. At the same time, traditional defensive and interest-rate-sensitive sectors—such as utilities and real estate—lagged behind.

The fourth quarter brought a modest rotation. Health care emerged as the top-performing sector, and value stocks finally outpaced growth, offering some balance after years of growth-stock leadership.

Bond Market Delivers Best Year Since 2020

For bond investors, 2025 marked the strongest year since 2020, fueled by falling yields and three quarter-point rate cuts from the Federal Reserve. The Bloomberg US Aggregate Bond Index returned +1.1% in the fourth quarter and +7.3% for the year, providing welcome relief after the challenges of recent years.

Riskier credit sectors—including high yield bonds, leveraged loans, and asset-backed securities outperformed safer bonds, supported by resilient economic growth and low default rates. Another milestone: the yield curve normalized, with long-term Treasury yields once again higher than short-term rates, further easing recession concerns.

What 2025 Taught Investors

For long-term investors, 2025 reinforced a key lesson: diversification worked. Trying to trade every tariff headline or interest-rate rumor often meant missing the sharp rebounds that turned bouts of volatility into a broadly positive year for balanced portfolios.

Perhaps most notably, international stocks finally provided diversification without sacrificing returns, while bonds once again played a stabilizing role during equity drawdowns—helping smooth returns across portfolios.

Looking Ahead to 2026

The outlook heading into 2026 remains broadly constructive. Two themes dominate: continued AI-related investment—albeit at a slower pace—and potential economic reacceleration supported by fiscal stimulus and accommodative Fed/monetary policy.

While markets are near all-time highs and valuations look stretched in some areas, analysts see low recession risk. Earnings are still growing, with forward earnings expected to rise 14%–15%, and hard economic data continues to point to a solid expansion.

If inflation continues to cool, markets could enter a “Goldilocks” environment, where both stocks and bonds perform well. Moderation in expectations may be prudent—but with earnings growth, AI innovation, and supportive monetary and fiscal policy, the potential for sustained gains remains firmly in place.

Source: Bloomberg. Data as of December 31, 2025.
Price Returns for Equity, Total Returns for Bonds.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

US STOCKS BY THE NUMBERS

It was another great year for US stocks, with the headline S&P 500 Index rising nearly 18% while setting 46 new all-time highs! Seeing those numbers might lead one to believe it was an easy year for investors, but it fails to tell the full story that investors experienced. Like in most years, the strong cumulative return of the S&P 500 occurred despite numerous examples of concerning news and uncertainty, including a global tariff tantrum and the longest US government shutdown in history. As always, those bouts of volatility are the price an investor pays to earn these returns. Consider that during the tariff tantrum between late February and early April, the S&P 500 fell nearly -19% (based on end-of-day closing prices). On April 7, the index briefly dipped into bear market territory (traditionally defined as a -20% drawdown from the market high), with an intraday decline of more than -21% from its February 19 high. During that drawdown period, the index declined -6% in a single trading day, following the announcement of new tariffs on nearly all US trading counterparts on April 3. When most of those new tariffs were paused less than a week later, the market surged almost +10% in one day, kick-starting a recovery that took just 54 days to claw back losses from the drawdown.

The S&P 500 By the Numbers in 2025

Stocks, Bonds, Bitcoin, and Commodities Staged a Synchronized Rally

Source: Avantis Investors, Bloomberg.

GENTLEMEN, START YOUR ENGINES

Ford and GM are an excellent case study of the extremes that markets witnessed in 2025. With tariffs dominating the year, Ford and GM were down -9.4% and -20.1%, respectively, at their lows on April 8. And as seen in the nearby chart, they went on a relentless and steady climb for the remainder of the year (and have continued higher in early 2026). Ford finished 2025 with a total return of +42.2%, and GM returned +54.2%. And in stark contrast to the deep fears amid the market depths during the tariff rollouts in the Spring, US automakers just reported (Jan. 6, 2026) a surge in sales in 2025. Ford posted their best annual US vehicle sales since 2019, and General Motors sales were up +5.5% in 2025. Meanwhile, Stellantis’ Jeep brand saw its first increase in sales in seven years. Not many people in mid-April would have expected US automakers to have a banner sales year and more than double the return of the S&P 500, but that’s the kind of year it was.

Despite ‘Year of the Tariffs’, US Automakers Soar

2025 Sees Best Sales in Years and Stocks Performance for US Automakers

Source: Bloomberg, CNBC.

FIRST TIME, LONG TIME

No market review of 2025 would be complete without discussing the meaningful outperformance of non-US stocks (the MSCI ACWI ex USA Index, which includes both non-US developed and emerging markets equities). Not only did non-US stocks best their US peers (the S&P 500) for the first time since 2022, but they beat US stocks by more than +14 percentage points – the largest outperformance since 2009. The next closest year was a little more than +5% outperformance by non-US stocks in 2017. Moreover, the outperformance of non-US stocks wasn’t driven exclusively by developed or emerging markets or individual countries within these regions. Many segments of non-US stocks outperformed the S&P 500 by posting significantly higher returns during the year. The chart below shows many non-US country & region indexes and their returns in 2025, compared to the US market. The US Dollar Index is also included, showing its decline (-9.4%) during the year (a declining dollar aids the returns of non-US market investments held in USD). The data indicates that the USD aided the outperformance of non-US markets, but not all of it… the USD’s decline was mostly concentrated in the first half of the year, with a modest rise in the second half. Overall, the results on the chart are another reminder of the potential benefit of globally diversified portfolios.

For the First Time in a Long Time

Many Non-US Equity Markets Outperformed in 2025

Source: Bloomberg. Total Returns, 1/1/2025 – 12/31/2025.

WHAT’S DRIVING STOCK MARKET RETURNS

With the S&P 500 notching its third consecutive double-digit calendar year return, some investors are getting anxious about the future. Yet, compared to the prior two years, 2025 returns were underpinned by robust profitability, not multiple expansion, providing a sturdier foundation for stocks. Stated simply, profits are driving returns. In 2025, 79% of the S&P 500’s +18% return was driven by earnings growth. In comparison, earnings growth only contributed 27% and 55%, respectively, in 2023 and 2024. Multiples (i.e., the price-to-earnings ratio) are taking a backseat. After the -19% correction in 2022, markets rebounded to end 2023 +24% higher. But the vast majority of that return was driven by multiple expansion. In other words, the gains came from investors paying more for earnings rather than earnings themselves growing. A full 73% of the return in 2023 came from multiple expansion but was just 21% of the 2025 return. And the good news about earnings growth doesn’t stop at our borders. Corporate profits are expected to grow in overseas markets, particularly for emerging markets equities.

Increasingly, Profits are Driving Returns in this Bull Market

Contribution To Annual S&P 500 Price Return

Source: FactSet, S&P Global, J.P. Morgan Asset Management. Data are as of December 15, 2025.

TELL ME SOMETHING I DON’T KNOW

Stocks and other major asset classes are expensive. Valuations are historically high across most asset classes, making it difficult for some investors to stay invested or put new money to work. Investing in markets at all-time highs and with historically high valuations can be psychologically challenging. However, looking at historical data can help ease concerns. As the chart below shows, a broad sample of various asset classes are currently at historically high valuations (see the dark blue bars indicating at or near top percentile levels). But the same dynamic existed at this time one year ago (as shown by the light blue circles that were also mostly at, or near, top percentile levels one year ago). In January and February of 2025, the S&P 500 set 6 all-time highs while also being at historically high valuations. And although the index subsequently dropped about -17% in March and April during all the tariff turbulence, it still went on to set an additional 40 new all-time highs on the way to a +17.9% total return for the year. Investment firm Schroder’s analyzed nearly 100 years of data and found that the market is actually at an all-time high more often than you might think. Of the 1,187 months since January 1926, the market was at an all-time high in 363 of them, or 31% of the time! And, on average, 12-month returns following an all-time high being hit have been better than at other times: +10.4% above inflation compared with +8.8% when the market wasn’t at record highs. Two- and three-year subsequent returns were similar regardless of whether the market was at an all-time high or not. The bottom line is that it is normal to feel nervous about investing when the stock market is at an all-time high or at high valuations, but history suggests that investing over the long-term was still rewarded despite all-time highs or stretched valuations. While history shows that markets can continue to climb to new highs, it also shows that high valuations tend to result in lower, but still positive on average, long-term future returns. So investors may want to moderate expectations rather than avoid investing entirely because of high valuations and all-time highs.

Investing in Expensive Markets

Current and Year-Ago Valuation Percentile Ranks for Various Asset Classes

Source: Bloomberg and Goldman Sachs Asset Management.
As of January 2, 2026. Valuation percentiles are since 2005, earliest common inception.

AI ADOPTION ACCELERATES

Artificial Intelligence (Al) could be the most significant technology trend of the next decade. Fidelity Investments forecasts Al revenue to compound by more than +30% per year as organizations transition from pilot programs to production. Adoption of AI online services is happening extremely fast, with services like ChatGPT reaching 100 million users in months, not years, like other popular online services. This has supported higher corporate spending and the potential for a multi-year growth path for AI. AI winners, currently primarily Technology firms like chipmakers and software developers, should expand to other sectors as AI adoption increases. Utilities will benefit from higher demand and improved efficiencies. Financial Services should be able to lower costs and boost margins from automating routine tasks and improving compliance tools and credit analytics. Communication Services firms can enhance engagement through chatbots and ad personalization. Health Care organizations can benefit from AI diagnostics/screening, automation of administrative tasks, and insurance fraud prevention. Overall, the broadening of AI-driven efficiencies and winners beyond traditional Technology companies should enhance investment opportunities for diversified investors.

Source (left): Fidelity Investments, Worldwide Artificial Intelligence Spending Guide 2024.
Source (right): Fidelity Investments, International Data Corporation, IDC.

DON’T CALL IT A COMEBACK

‘Old school’ rapper LL Cool J probably wasn’t referring to diversification in stating “Don’t call it a comeback, I’ve been here for years” in the opening line of his 1990 hit “Mama Said Knock You Out.” But it is an apt statement after a historically bad double-digit loss in 2022 for stocks (the S&P 500 Index fell -18.1%) and bonds (the Bloomberg US Aggregate Bond Index lost -13.0%) led to many articles being written about the “death of diversification” and the proclamation of the end of the 60/40 portfolio (i.e., a 60% stock / 40% bond moderate risk allocation). Since the brutal losses of 2022, a well-diversified 60/40 portfolio has delivered three straight years of double-digit gains and produced double-digit gains in 6 of the last 7 years. Don’t call it a comeback indeed! Every month, we end this publication with the ‘asset class periodic table’ of returns for the just-concluded month. But below we are also sharing the longer-term perspective of a dozen calendar years, plus standard trailing periods, to show the efficacy of a well-diversified moderate-risk portfolio for long-term investors.

After Historically Bad 2022, Diversified 60/40 Portfolios Have Excelled

Calendar Year and Trailing Period Returns for Assets Classes and a 60/40 Portfolio

Source: Bloomberg. Descriptions of the asset classes and hypothetical 60/40 portfolio can be found below under the following “Asset Class Performance” section.

Asset Class Performance

The Importance of Diversification. Diversification mitigates the risk of relying on any single investment. It offers many long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different from the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (Vanguard Total International Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “60/40 Allocation” is a weighted average of the ETF proxies shown as represented by: 24% US Bonds, 10% International Bonds, 6% High Yield Bonds, 14% Large Growth, 14% Large Value, 4% Mid Growth, 4% Mid Value, 1% Small Growth, 1% Small Value, 17% International Stock, 4% Emerging Markets, 2% Real Estate.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Chris Bouffard is CIO of The Retirement Planning Group (TRPG), a Registered Investment Adviser. He has oversight of investments for the advisory services offered through TRPG.

Disclaimer: Information provided is for educational purposes only and does not constitute investment, legal or tax advice. All examples are hypothetical and for illustrative purposes only. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. Please contact TRPG for more complete information based on your personal circumstances and to obtain personal individual investment advice.