Q4 2025 Market Reflections: Resilience, Volatility, and the Power of Staying the Course

Fourth Quarter Market Review

The fourth quarter capped off a remarkable year, with international stocks leading the way. U.S. large-cap stocks (S&P 500) delivered 2.7% for the quarter, while international developed markets (MSCI World ex USA Index) surged 5.2%. Emerging markets (MSCI Emerging Markets IMI Index) gained 4.7%, and U.S. small-cap stocks (Russell 2000) rose 2.2%.

Bonds posted solid gains in the quarter, amid the Federal Reserve’s rate cuts. The broad U.S. bond market (Bloomberg U.S. Aggregate Bond Index) rose 1.1%, while global bonds (Bloomberg Global Aggregate, hedged to USD) gained 0.8%. The Federal Reserve cut rates twice during the quarter—in October and December—bringing the federal funds rate to 3.5%-3.75%, its lowest level in three years.

Source: Dimensional Fund Advisors. Data 9/30/2025 to 12/31/2025. Performance in USD.

Reflecting on 2025: A Year of Resilience Amid Uncertainty

We want to acknowledge the moment we were in last year and the dissonance you may have felt. If your lived experience, the headlines you read, and your portfolio’s performance didn’t seem to reflect one another, you weren’t alone. The challenges we faced in 2025, from ongoing wars and humanitarian crises to political upheaval, were real and meaningful. At the same time, many companies in the stock market continued to operate and pursue growth. The world could feel deeply unsettled, even as markets and businesses continued to perform.

We saw a strong year of performance across markets. Global equities (MSCI All Country World IMI Index) gained 22.1% in 2025, with the S&P 500 contributing 17.9%. Chart 2 shows strong performance across nearly all asset classes. US bonds delivered their best year since 2020, with the Bloomberg U.S. Aggregate Bond Index gaining 7.3%.

Source: Dimensional Fund Advisors. Data as of 12/31/2025. Performance in USD.

The year saw significant volatility. Trump’s “Liberation Day” tariff announcement on April 2nd triggered severe selloffs with markets dropping nearly 20% over 34 days. Yet when tariffs were paused, markets surged almost 10% in a single day, kickstarting a swift recovery. The government shutdown from October to November became the longest in U.S. history, reaching 43-days, yet markets kept posting gains. From April’s low through year-end, the S&P 500 rose about 39%.

Source: FactSet, Avantis Investors. Past performance is no guarantee of future results.

We often sound like broken records, but history goes to show us that being a patient investor proves wisest. An investor who checked portfolios monthly likely experienced less stress than an investor who tracked daily movements, even though both groups could have ended up with the same result. 

The pattern illustrated in Exhibit 3 of short-term turbulence smoothing out over longer horizons has repeated through history. 2025 reinforced this lesson: staying the course through turmoil can capture strong returns.

International Markets Finally Had Their Moment

International stocks dramatically outperformed in 2025. The MSCI World ex USA Index gained 31.9%, beating the S&P 500’s 17.9% by the widest margin since 1993. Emerging markets (MSCI Emerging Markets Index) rose 33.6%.

This answers the question we’d been hearing for years: “Why are we still invested internationally?” After years of U.S. market dominance, some investors questioned the value of global diversification. Yet 2025 demonstrated why this strategy matters. U.S. companies only represent 60-65% of the global stock market value. By maintaining exposure to international markets, diversified investors captured this significant outperformance.

Rather than trying to predict which market will lead in any given period, virtually impossible even for professionals, we recommend maintaining broad global diversification to capture returns wherever they occur. This approach proved its worth in 2025.

Value vs. Growth: Geography Made All the Difference

At Abacus, our investment philosophy includes a tilt toward value and small-cap stocks where possible, guided by academic research showing these areas have historically provided higher expected returns. Value stocks are basically companies trading at a discount to their peers, whereas growth companies trade at a premium to their peers. The value-growth story diverged by geography recently. In the U.S., growth continued to lead. But international value investors were rewarded over the past five years, as shown below. For clients with globally diversified portfolios tilted toward value, this meant the international portion of their portfolio likely outperformed.

Source: Dimensional Fund Advisors. Performance in USD.

Source: Dimensional Fund Advisors. Performance in USD.

AI, Big Tech, and the Bubble Question

Technology companies commanded attention again in 2025. The Nasdaq advanced 20.9%, and NVIDIA became the first company to reach a $5 trillion market cap. The “Magnificent 7” stocks (Apple, Microsoft, Nvidia, Meta, Alphabet, Amazon, and Tesla) remained influential, driven by AI excitement.

This growth fueled bubble concerns. Is AI the next transformative technology or an overvalued fad? Nobel laureate Eugene Fama, whose research informs our philosophy, notes that identifying bubbles before they burst is essentially impossible. Bubbles are only apparent after the fact. Trying to time your exit from a potential bubble often means missing gains if you’re wrong, or selling too late if you’re right.

Investors who avoided dramatic changes based on bubble fears benefited from strong returns across asset classes. Whether AI represents a bubble or genuine transformation, or both at different times, remains unknown at the moment.

2025 showed that diversified portfolios don’t need to chase or avoid a handful of big names. Technology and AI innovation touch many businesses, from healthcare using AI for drug discovery to financial firms deploying machine learning. Broad diversification is designed to capture these winners wherever they emerge while mitigating concentration risk.

What You Can Control as We Enter 2026

As we enter 2026, familiar uncertainties remain: the political landscape, Federal policy, technology sector dynamics, global economic conditions, and thousands of others. However, 2025 reminded us that predicting short-term movements often proves counterproductive. Markets delivered strong returns despite unexpected developments.

While we can’t control market volatility or global events, we can control our investment approach. Here’s what we focus on with you:

Stick with Your Long-Term Plan  – Markets will often cause reasons to worry. 2025 reminded us that staying invested through uncertainty, rather than reacting to headlines, tends to reward patient investors. Your Abacus advisor is here to help you maintain perspective when market turbulence tempts you to deviate from your plan.

Rebalance Strategically During Volatility – Market swings can create opportunities to rebalance back to your target allocation, potentially buying low and selling high. This disciplined approach helped some investors navigate 2025’s April selloff and subsequent recovery. Your advisor and financial team at Abacus can help identify these opportunities and execute rebalancing to help keep your portfolio aligned with your goals.

Align Your Portfolio with Your Values – As we’ve discussed, ensuring your money aligns with your principles is something you can control. We offer values-aligned investment options that screen out industries like private prison operators (nearly 90% of people in ICE custody are held in facilities run by for-profit, private companies). Many of our fund managers also actively engage companies on material issues affecting long-term value, from environmental impacts of AI infrastructure to just transition strategies at utilities. This stewardship work represents another way your investments can help drive positive change. Aligning your values more intentionally within your investment portfolio can be a tangible  way to lessen the dissonance you may be feeling in this moment we’re in.

2025 reinforced timeless principles: global diversification can help provide valuable protection and opportunity, short-term movements are unpredictable, and patient, disciplined investors focusing on long-term goals tend to achieve better results. As we navigate 2026, these lessons remain our guide.

Your Abacus advisor is here to discuss your investment strategy, review your progress toward your goals, and help to ensure your portfolio continues to align with both your financial objectives and what matters most to you.