Don’t Stop
Fleetwood Mac
Don’t Stop

Don’t stop thinking about tomorrow /

Don’t stop, it’ll soon be here

December is often a difficult month for many people as they juggle the often-unrealistic expectations of the impending holiday season, the challenges of meeting deadlines or goals, and the burden of getting the work done before year-end. Layer on the stress and anxiety that may come from awkward family gatherings or the first holidays without a loved one and it is not surprising that some dread the “festive season” and look forward to the start of the new year. For other people, December is their favorite month of the year, filled with joy and anticipation of the holidays. They look forward to holiday parties, exchanging gifts and merriment with friends and family, and soaking in all that the festive atmosphere has to offer.  Their enthusiasm for the month carries them into the new year, ready to “get after it” when the calendar turns. Most people probably say they fall into the middle of this spectrum and try to focus on the more positive parts while managing through the stress, knowing that even Scrooge found some good in the end of the Dickens’ A Christmas Carol.

Looking at the mood of the investment markets in December, there were reasons to be less than excited about how the month was playing out matched by reasons to be optimistic and what these may signal for the start of 2026.  Following a big equity rally from “Liberation Day” in April to the end of October and a November that had its own twists and turns, December markets looked like a shopper overburdened with too many bags, tired and exhausted, and hoping to just get home. A little bit of catching its breath was to be expected after all that occurred in 2025.

During the month, there was considerable debate regarding the enduring strength of the AI driven boom – has it peaked or has it shifted into a second phase, pulling in more sectors and companies that may benefit from continued growth.  Additional questions focused on the ability to keep funding capex spending with increasing debt loads, though investors do not appear to be closing the spigot to new capital at this point.  Another area of focus was on the renewed strength in many overseas markets, particularly in Europe, as governments recognized the need to invest in their infrastructure, defense, and industrial base in the face of shifting geopolitical alliances.  A stronger global economy that is not driven solely by AI spending should benefit investors looking to maintain diversified portfolios.

Finally, December brought another Fed rate cut, again well anticipated and largely priced into market expectations.  What was of interest was the wider range of views around what the Fed will do in 2026.  With a new Fed Chair likely to be announced in Q1, the Federal Open Market Committee (FOMC) members may have been more emboldened to express their views about rates and inflation. Investors may prefer more consensus but having a wider range of views could be positive as it reflects that the path forward is not set in stone. 

A few observations about 2025 overall: U.S. equity markets had another strong year, delivering 18% for the S&P 500.  This is the third straight year of above-average returns and five of six years since the start of the decade of 18% or higher returns for the S&P.  Overseas markets significantly outperformed the U.S., with Morgan Stanley Capital International – Europe, Australasia, and Far East (MSCI EAFE) up 31% and MSCI Emerging Markets up 34%.  2025 was the first year in this decade that non-US stocks outperformed the U.S. U.S. fixed income markets also performed well, with the Bloomberg Aggregate index delivering 7% returns, its best year since 2020. 

Here are observations on what occurred across the investment markets in December:

Broad Market Performance¹

Domestic Equity²

• U.S. equity market returns were mixed as investors digested updated economic data, another Fed rate cut, and shifting expectations about the sustainability of the AI rally.
• For the second month in a row, value outperformed growth across market caps and the equal weighted S&P 500 beat the cap weighted S&P, highlighting greater market breadth.  

International and Global Equities³

• Non-U.S. developed market stocks beat U.S. equities again as European stocks pushed higher on improved earnings expectations and better valuations.
• Emerging market stocks bounced back with Korean stocks benefiting from the AI infrastructure theme. Chinese stocks fell again, leading to a (-7%) return in Q4.   
•  

Fixed Income Markets⁴

• U.S. bond market returns were negative in the month despite the rate cut.  Longer Treasury yields rose 15-20bps reflecting forward looking rate expectations.

Specialty Markets⁵

• Commodities were mixed with energy-related sectors down while gold and silver rallied into the year end.   

Sectors⁶

• Only 5 of 11 sectors were positive in December, with Financials the best performer (3%) and Utilities the worst (-5%). In Q4, Healthcare led (+12%) while Real Estate lagged (-3%).

The start of each year typically brings new optimism and a fresh start. For the investment markets, the end of the year and the start of the next year are somewhat false markers for measuring results. The themes, trends, and risks that exist at the end of the year do not get discarded like old Christmas trees and wrapping paper. They persist and shape the outlook for investors going into the new year. After three consecutive strong years for stocks, it is not unreasonable for investors to be nervous about the likelihood of a down period. Four consecutive years of 10+% S&P 500 returns have only occurred 3 times since 1926, with the last period being 1995-1999. Though this may seem to portend a poor 2026, note that there have been 7 periods of at least four consecutive years of positive returns. The long-term record of the U.S. equity markets is quite favorable and 2026 begins with good tailwinds and a strong economic environment. Staying invested and focused on the long-term nature of a well-designed investment portfolio should provide the basis for a good 2026. Don’t stop thinking about tomorrow / Don’t stop, it’ll soon be here. 

^1-6 All data referenced in the table and comments supplied by Morningstar as of 12-31-2025

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