Quarterly Report: Q4 2025

Q4 2025 – A Broader Path Forward

U.S. equity markets delivered strong results in the fourth quarter, with the S&P 500 ending 2025 at 6,845.50, slightly below all-time highs. The index posted a +2.71% return in Q4 and a robust +17.86% for the full year, marking its third consecutive year of double-digit gains. The Dow Jones Industrial Average rose +3.66% in Q4 and +14.92% for the year, while the tech-heavy NASDAQ led the pack with a +3.16% quarterly gain and an impressive +21.17% annual return. Despite this strength, international equities were the standout performers. In fact, 2025 marked the strongest year for non-U.S. equities in over three decades, effectively ending a long stretch of U.S. market leadership. The MSCI EAFE Index soared +31.90% on the year, while the emerging markets index rallied +34.40%, outperforming U.S. benchmarks by a wide margin. U.S. indices rallied on the back of resilient consumer spending, accelerating corporate earnings, and a dovish pivot from the Federal Reserve. Technology and communication services continued to lead, supported by strong margin expansion and optimism around AI-related investments. Meanwhile, international equities surged as a weaker U.S. dollar boosted foreign returns, and economic momentum improved in Europe, Japan, and select emerging and developed markets.

Source: JP Morgan, Guide to the Markets 12/31/2025.

Economic Developments: Softening, but Steady Foundation

The U.S. labor market showed clear signs of cooling in 2025. Over the full year, the economy added approximately 1.5 to 1.7 million jobs, a notable slowdown from 2.7 million in 2024 and 4.8 million in 2023. The slowdown became more pronounced in the fourth quarter, when October recorded a net decline of 173,000 jobs. However, this was driven largely by reductions in government employment and seasonal public-sector adjustments; the labor market still posted modest gains of 64,000 in November and 50,000 in December. Notably, the composition of hiring shifted away from government payrolls toward to private sectors, reflecting a more market driven labor market. While the unemployment rate ticked down to 4.4% in December from 4.5% in November, the broader trend pointed to a more cautious hiring backdrop. Employers responded to slowing demand, rising labor costs, and broader macro uncertainty by pulling back on payroll growth.

Source: JP Morgan, Guide to the Markets 1/9/2026.

The broader economic backdrop underscores surprising resilience. The Atlanta Fed’s GDPNow model estimates Q4 2025 real GDP growth at an annualized 5.4%, a strong figure fueled by solid consumer activity and business investment (AI capex). However, most forecasters expect growth to moderate in 2026. The IMF projects U.S. real GDP to expand by 2.0% next year, with JPMorgan aligning at the same pace and Goldman Sachs slightly more optimistic at 2.6%. Sustained consumer spending, robust investment in technology and infrastructure, and a weaker U.S. dollar are likely to support the current expansion.

Federal Reserve: Easing Continues

The Federal Reserve delivered its third consecutive 25 basis point rate cut at the December 10th FOMC meeting, bringing the federal funds target range to 3.50%–3.75%. The decision reflected mounting concerns over a softening labor market and stubborn inflation. The vote revealed division among policymakers, with one member favoring a 50 basis point cut and two opting to hold rates steady. Despite signs of disinflation, labor market uncertainty kept the Fed on a cautious easing path. The Fed also announced continued reserve management operations, including $40 billion in monthly Treasury bill purchases and $20 billion in MBS reinvestments. The December Summary of Economic Projections indicated one additional rate cut in both 2026 and 2027, with the long-run target rate holding steady at 3.00%. Looking ahead, monetary policy may be influenced by upcoming leadership changes. Chair Powell’s term ends on May 15, 2026. Potential successors include Rick Rieder, Kevin Warsh, and Christopher Waller.  Their appointment could significantly shape the Fed’s tone heading into the second half of 2026 and 2027.

Source: JP Morgan, Guide to the Markets, FOMC forecasts as of 12/31/2025.

Fixed Income Markets: The Return of a Steeper Yield Curve  

Fixed income markets ended 2025 on a strong note, helped by range-bound inflation, declining rate volatility, and central bank accommodation. The Bloomberg U.S. Aggregate Bond Index returned +1.1% in Q4 and +7.3% for the full year, its best year since 2020. Global bonds also rebounded sharply.  The Bloomberg Global Aggregate ex-USD Index gained approximately +2.0% in Q4 and +8.66% for the year, aided by a weakening U.S. dollar.  Across sectors, convertibles led with a +17.8% return, capitalizing on equity-linked upside in a strong risk-on environment. High yield bonds returned +8.6%, supported by tightening spreads. Investment-grade corporates saw steady demand while municipals finished the year with renewed momentum driven by attractive tax-adjusted yields. The 10-year U.S. Treasury returned +8.2%, but longer-dated 30-year bond lagged.  Mortgage-backed securities offered stability but underperformed Treasuries. Looking ahead, the bond market enters 2026 with a supportive backdrop. Markets are pricing in one additional Fed rate cut, the yield curve has begun to steepen, and credit fundamentals appear stable.

Source: JP Morgan Asset Management. Bloomberg U.S. Agg. Annual Returns 12/31/2025.

Beyond Borders: Opportunities in International Markets

As highlighted earlier, international markets outpaced U.S. equities in Q4 2025, outperforming major indices such as the S&P 500, Dow Jones, and NASDAQ. Despite this strong relative performance, international equities still trade at a meaningful discount to U.S. counterparts. The S&P 500 ended the year trading at 22x forward earnings, well above its 30-year average of 17.1x, placing valuations approximately +1.48 standard deviations above the long-term mean. This premium is underpinned by robust earnings expectations (consensus forecasts project S&P 500 EPS growth of 11.5% for 2025 and accelerating to 15% in both 2026 and 2027) paired with historically high profit margins of 13.9%.

In contrast, forward P/E ratios for global peers remain more modest: Japan trades at 16.1x, the Eurozone at 12.9x, Emerging Markets at 13.4x, and China at just 12.3x. This valuation gap highlights a persistent U.S. equity premium but also signals opportunity. With global profit margins expanding and a weakening dollar potentially boosting returns for international investors, global equities could continue their momentum into 2026. While U.S. fundamentals remain strong, diversification into international markets may offer attractive relative value and earnings growth at a more reasonable price. History shows there are prolonged periods of geographical outperformance, and the tide could be shifting toward international equities over U.S.

Source: JP Morgan Asset Management. Cycles of DM ex-U.S. Outperformance 12/31/2025.

Thoughts on Asset Allocation

 Markets maintained strong momentum in 2025, supported by robust earnings growth and the prospect of a more favorable interest rate environment. While we anticipate continued strength in equities, we encourage investors to review their portfolios to ensure balanced exposure across key opportunities, including international markets, small-cap equities and fundamentally valued companies.  As stewards of our clients’ capital, we diversify beyond mega-cap technology to pursue more consistent long-term performance. The Investment Committee remains constructive on international diversification and recently added additional inflation protection with a manager that focuses on commodities and TIPS.

The Trust Investment Committee remains confident in our active managers, who have delivered strong performance across asset classes. Their disciplined approach emphasizing company fundamentals, valuation rigor, and prudent risk management, has been instrumental in driving results. Above is a selection of our equity and fixed-income managers who have notably outperformed their mandates.

Investment Manager	*YTD 2025 Return	Manager Benchmark
Todd Asset International Intrinsic Value	47.61%	32.61% MSCI ACWI ex U.S. NR
Federated International Strategic Value	32.71%	27.20% MSCI World ex U.S. NR USD
Schafer Cullen High Dividend Value	18.32%	16.77% Russell 1000 Value TR
Federated Strategic Value	15.60%	12.12% Dow Jones U.S. Select Dividend
Pimco Income Fund	10.98%	7.30% Bloomberg Barclays Aggregate

*Returns are from actual portfolio results.  Results may vary.  Past performance is no guarantee of future returns.

We look forward to speaking with each of you about our investment philosophy and strategies and your portfolio’s performance.  

For additional information, please contact Mason Williams, Chief Investment Officer, at 786-497-1214, or Michael Unger, Vice President/Investment Officer, at 786-292-0310.