Asset markets: US growth leads a broad-based rally
Almost all major asset categories ended 2025 in positive territory, with gold at the top of the leaderboard. International equities posted strong gains for Q4 and the full year across both developed and emerging markets (EM).
Equities: A historical weaker dollar provided a tailwind for non-US equities. By region, Latin America (+8.2%), Canada (+7.7%), and Europe (+6.2%) advanced strongly. Japan (+3.2%) lagged other global regions.
In the US, US value stocks led the way in the fourth quarter (+3.8%), compared with a 1.1% gain for growth stocks.
By S&P 500 Index sector, health care (+11.7%) and communication services (+7.3%) led the way in Q4, whereas real estate (-2.9%) and utilities (-1.4%) lagged the large-cap index return of 2.7%.
Fixed income: Fixed income performance benefited from lower Treasury yields and tighter credit spreads across all major fixed income categories. Credit spreads in the US Aggregate Bond Index and high-yield sector begin 2026 in the lowest decile of their historical range, providing limited compensation for taking on credit risk. Overall, many fixed income category yields ended Q4 around their 50th percentile, suggesting overall bond valuations are roughly in line with long-term averages and provide solid income within a balanced portfolio.
Nominal 10-year US Treasury bond yields finished Q4 effectively unchanged at around 4.2%, completing a relatively rangebound year. A number of crosscurrents continued to influence yield movements, including softer labor-market data, Fed easing, sticky inflation, and medium-term fiscal challenges.
Currencies: The US dollar stabilized versus foreign currencies in the fourth quarter. However, it dropped roughly 10% against major currencies during 2025, its worst calendar year since 2017.
Foreign investor enthusiasm for US assets, via massive capital inflows that serviced large US trade deficits over the past decade, may have reached a peak. Currency price movements sometimes occur in multiyear cycles, with the most recent dollar bear markets in the 1980s and early 2000s also beginning with extremely high valuations.
The dollar remains overvalued relative to both developed and emerging-market currencies. Historically, a weaker dollar has been a tailwind for the relative returns of DM and EM equities (versus US stocks). We believe owning assets denominated in foreign currencies is an important component of portfolio diversification for US investors.
Outlook: Although we believe US stocks should trade at premium valuations to other markets, cyclically adjusted price-to-earnings ratios for US stocks remain well above our secular forecasts and suggest non-US stock markets appear relatively attractive.
The AART team sees potential catalysts that could boost productivity over the next decade and could lead to greater active investment opportunities globally. Strategic opportunities may include investments tied to artificial intelligence, reshoring and near-shoring, and national security, among others.
