Q4 2025 Market Update: Markets Hold Steady Despite Mixed Signals

Although unconventional at times, the new administration’s views on growth, tariffs, and taxes dominated headlines throughout the year. Early on, these policies left investors uneasy, resulting in volatility in the capital markets and concerns about their collective impact on consumer spending and business investment. As tariffs were renegotiated with multiple countries, the administration’s strategy became clearer. The passage of the One Big Beautiful Bill Act, which permanently extended tax rates, added tax credits, and introduced other growth initiatives, further boosted confidence. The economy rebounded, and capital markets pushed higher. Still, concerns remain. Inflation has moderated but continues to run above the Federal Reserve’s 2 percent mandate. The nation’s unemployment rate, while low by historical standards, has trended higher over the past year, and consumer confidence remains subdued. Yet the economy continues to grow above trend, both the trade deficit and federal deficit have contracted, and the Federal Reserve has lowered short‑term interest rates several times. While not perfect, there are meaningful tailwinds heading into 2026 that should support solid growth and modest returns in the capital markets.

Services Expand While Manufacturing Lags

Amidst this uncertainty, the economy appears somewhat bifurcated, with certain areas showing modest growth while others remain in contraction. The services sector, which includes travel, health care, construction, and other industries, expanded at the fastest pace in nine months. Twelve sectors reported growth, led by retail, entertainment, and travel, while five reported contraction, led by construction. Overall, services are growing modestly, supported by stronger employment, lower input prices, and growth in new orders. Manufacturing, by contrast, remains weighed down by trade policy uncertainty and elevated production costs. The manufacturing index, a key indicator of activity, has remained below 50 for three consecutive years, signaling contraction as companies hesitate to expand employment or production in the face of weak demand.

Employment, Consumers, and Housing Send Mixed Signals

Other areas of the economy show similar mixed signals. Employment has softened somewhat but remains generally healthy. The unemployment rate has inched higher to 4.6 percent from 4.1 percent a year ago, though jobless claims remain well below average. Personal income growth is positive, but consumers appear cautious and reluctant to spend beyond their means. This combination of restraint and solid wage gains has driven household debt relative to income to its lowest level in nearly eighteen years, a very encouraging sign. The housing market continues to struggle with high mortgage rates and elevated home prices, but there are signs of improvement. Mortgage rates have declined from around 7 percent earlier this year to about 6.3 percent today, and a drop below 6 percent could accelerate demand. Existing home sales rose to 4.1 million in the latest release, the fastest pace in eight months, while the median home price increased 2.1 percent over the past year. Builder sentiment, however, remains weak as they contend with rising inventory, high material costs, and regulatory challenges.

Capital Markets Respond to Improving Clarity

Against this backdrop, capital markets responded well. The S&P 500 Index returned 2.7 percent, while mid‑ and small‑cap stocks posted 1.6 percent and 1.7 percent, respectively. Foreign stocks, as measured by the MSCI All‑World Index, returned 3.2 percent. The Aggregate Bond Index gained 1.1 percent, while corporate bonds returned 0.8 percent for the quarter.

Our Outlook

Looking ahead, several factors should continue to support growth and modest returns. The Federal Reserve has already lowered interest rates multiple times and is poised to ease further in 2026, which will benefit borrowers, potentially reignite housing demand, and reduce costs for businesses. The One Big Beautiful Bill Act will provide ongoing support through lower taxes, child tax credits, and other stimulus measures. In addition, continued investment in artificial intelligence is expected to generate high‑tech jobs and attract trillions in new investment. In this pro‑growth, lower‑rate environment, equities, particularly small and mid‑cap stocks, should deliver modest gains, while bonds are likely to produce returns in line with their coupons.