CAPITAL MARKETS REVIEW - January 2026

Jay Ratterman, CFA
Private Wealth Advisor/Partner

2025 US Market Year-End Review: AI Enthusiasm Cools as Market Risks Mount

US equity markets reached record peaks in the fourth quarter of 2025, though momentum decelerated as investors confronted mounting structural risks. Enthusiasm for the artificial intelligence trade waned as skeptics questioned whether leaders like Nvidia and Oracle could sustain their aggressive growth targets. These "hyperscaler" firms now face significant financial exposure due to the massive debt incurred to fund AI infrastructure, leaving a razor-thin margin for error as cash reserves dwindle and profit expectations remain sky-high.

This cooling in tech sparked a rotation into defensive sectors. Healthcare emerged as the quarter’s standout, surging 11.7%—a sharp reversal from its sluggish performance earlier in the year. While every sector finished the full year in positive territory, the final months were defined by caution; only Utilities and Real Estate posted negative quarterly returns as high interest rates began to bite.

Small and mid-cap companies faced the most severe headwinds, trailing large-cap peers by a sizable margin. These firms are disproportionately vulnerable to "tariff turbulence," particularly the 25% duties on steel and aluminum and new 10-25% levies on heavy machinery and timber implemented in late 2025. Coupled with high interest costs on existing debt, these trade barriers have compressed margins for domestic manufacturers, creating a challenging environment for companies in the Russell 2000.

2025 International Market Year-End Review: Global Equities Outpace US Markets Amid Dollar Decline

International equity markets delivered exceptional performance in 2025, significantly outperforming US benchmarks as a "sea change" in global capital flows took hold. International stocks benefited from a combination of robust earnings growth and a steadily weakening US dollar. The greenback fell over 8% for the year, acting as a powerful tailwind that boosted returns for US-based investors holding unhedged foreign assets.

Emerging Markets were the year's standout, surging 34.3% as investors pivoted toward "AI enablers" in Taiwan and South Korea. These hardware-focused firms were seen as reasonably priced beneficiaries of the global infrastructure build-out. Simultaneously, corporate reforms in Japan—dubbed "Sanaenomics"—unlocked significant shareholder value, propelling the MSCI Japan Index to a 24.6% annual gain.

2025 Fixed Income Year-End Review: Rates Ease as Yield Curve Continues to Steepen

The fixed income market delivered a robust performance in 2025, capped by a solid fourth quarter as the Federal Reserve pivot took hold. Cooling employment data provided the central bank with the necessary leeway to continue cutting interest rates, pushing the Bloomberg US Aggregate Index to a 7.3% return for the year. While the 10-year Treasury note yield ended the quarter slightly higher at 4.18%, the broader trend was defined by a stabilization of long-term rates; the 30-year Treasury bond retreated to 4.84%, a notable decline from its summer peaks above 5.0%.

Investors continued to buy credit and yield-enhancement strategies over safer Treasuries. Securitized assets, including mortgage-backed securities (MBS), emerged as the quarterly victors with a 1.7% gain. This outperformance was driven by a narrowing of spreads as volatility subsided, allowing these high-quality assets to reclaim ground lost during the previous year's rate hikes.

Credit markets remained resilient but face headwinds heading into 2026. High-yield bonds posted a strong 8.6% YTD return, supported by a "soft landing" narrative. Meanwhile, municipal bonds provided a steady 1.4% quarterly return, benefiting from strong technical demand and high tax-equivalent yields.