U.S. stocks delivered another strong year.
The U.S. stock market advanced 17.1%1 in 2025, marking the third consecutive year of above-average returns. Enthusiasm about artificial intelligence’s potential to boost productivity and corporate profits continues to drive valuations. While the market’s momentum resembles the internet-driven tech enthusiasm of the late 1990s—which saw five consecutive years of 20%+ returns—it’s worth remembering that the U.S. stock market has experienced 11 negative-return years over the past 46 years. With eight of the most valuable public companies heavily concentrated in AI, even modest earnings disappointments could trigger significant market volatility.
International markets outperformed U.S. equities.
Developed markets outside the U.S. returned 31.2%2 last year, while emerging markets gained 33.6%3. Several factors contributed to this outperformance: a weakening U.S. dollar and increased defense spending across many nations. While this strong performance reduced the valuation gap with U.S. stocks, international markets still ended the year trading at more attractive prices. Higher U.S. tariffs did not create as dramatic a drop in global trade as initially feared, though the long-term effects remain uncertain.
Major economies face rising uncertainty.
The U.S. economy benefited from substantial capital investments in AI infrastructure during 2025, while inflation remained at manageable levels. The Federal Reserve responded by lowering short-term interest rates. Despite real wage growth, a growing share of Americans express concerns about declining affordability. Meanwhile, China—the world’s second-largest economy—achieved growth by expanding exports to markets beyond the U.S., though domestic consumer spending remained subdued.
Fixed income markets provided attractive returns as rates declined.
Interest rates fell during the year but remain appealing relative to inflation. The yield on 2-year U.S. Treasuries dropped from 4.3% at the start of 2025 to 3.5% at year-end. Longer maturities, which are less influenced by Federal Reserve actions, declined more modestly—the 10-year Treasury yield fell from 4.6% to 4.2%. Across most client portfolios, we maintained a balanced approach: holding short maturities for both liquidity needs and inflation protection, while positioning intermediate maturities to capture the attractive yields.
Balancing opportunity with prudence in an uncertain environment.
After three consecutive years of strong returns, the foundation for sustained portfolio success rests on maintaining appropriate diversification and liquidity reserves. The convergence of geopolitical tensions—including U.S. actions in Venezuela, Russia’s war in Ukraine, demonstrations in Iran, the Gaza ceasefire, and China’s approach to Taiwan—alongside rapid technological transformation creates a complex risk landscape. Artificial intelligence’s trajectory remains particularly uncertain: it may enhance corporate profitability, or it could disrupt employment patterns and consumer spending that drive two-thirds of U.S. GDP.
Our approach balances participation in long-term growth with protection against near-term disruptions. We continue to recommend maintaining liquid, fixed income assets equivalent to at least five years of anticipated spending needs—more if you have a lower risk tolerance or face potential employment changes or unexpected expenses. This disciplined framework positions portfolios to weather volatility while capturing opportunities across global markets. As always, we remain committed to adjusting allocations as conditions evolve, ensuring your portfolio aligns with both your financial goals and risk capacity.
1 Russell 3000 Index. 2 MSCI EAFE Index. 3 MSCI EM Index.