The Brave Report: Market Commentary for Q4 2025

The Everything Rally…Markets just capped off another year of positive gains as nearly all major asset classes posted positive returns for the year.  This year felt like a mirror image of 2022.  While returns moderated slightly in the fourth quarter, markets continued to shrug off inflation and valuation concerns. Worries around the tariff’s impact on inflation have proven to be unfounded so far, and the Fed has been able to continue its process of fiscal and monetary stimulus.

We do enter the new year with some additional geopolitical uncertainties, but economic growth has been resilient to these types of worries as of late.  Valuation concerns persist, especially with the AI-oriented names, but growth has begun to spread to more sectors, which could provide some legs to the rally.

Market Overview

The markets just completed another stellar year with all major indices gaining ground, albeit at a slower rate than the previous quarter. The Dow Industrials finished up 3.5%. The S&P 500 returned just above 2%, and the NASDAQ trailed, gaining 1.83%.  This brings full-year returns on the S&P to almost 18%.  While domestic returns were great, international markets outperformed for the first time in 20 years.  Developed international markets rose by over 31,% and emerging markets surged 34%. This was driven in part by a weakening dollar, which saw its steepest drop since 2009. This brought overall global returns to 21.3% for the year.

On the fixed income side, rates remained relatively steady throughout the quarter.  We saw a slight jump in rates near the long end of the curve, but the 10-year was almost flat for the quarter.  Overall, for the year, the US Aggregate Bond index returned 7.3% on the year. Inflation fears were worse than reality, and this allowed central banks across the globe to normalize rates without muting growth.

This year rewarded those who did not panic and were well diversified, and I expect that trend to continue. In a stark contrast to 2022, we saw positive performance across the board.  There was still some concentrated outperformance in the large tech names, fueled by the AI-based rally, but we started to see some broadening of performance both internationally and between sectors. With continued monetary and fiscal stimulus, I would not be surprised to see this trend continue.

The AI-fueled rally has raised concerns over a dot-com era bust, but the backdrop of this rally is fundamentally different than what we saw in the late 90s. The tech sector’s free cash flow margin is more than double what it was in the 90’s, showing great profitability. While I do agree that some of the speculative AI investments are a bit overdone, the underlying fundamentals of many of the companies involved are quite robust. This creates a downward floor on many of the companies that have seen an AI boost to their stock price. Additionally, much of the AI spend has real infrastructure behind it, in the form of chips and data centers. It can be argued that AI-based returns are quite fragile, as it has yet to be proven how many of these companies are going to monetize these advancements. However, many of the companies involved have a stellar track record of monetizing new technology.

In a stark change this year, we also saw international markets outperform domestic equities for the first time in years.  This was primarily driven by a weakening dollar, but we also started to see the growth gap between international and domestic companies start to compress.  This trend should continue as international equities play some catch-up from previous years, and we continue to see the earnings growth gap narrow.

I don’t often discuss commodity performance in depth, but with the performance of precious metals this year, I would be remiss not mention it.  The precious metals index surged 80.2% this year, led by a 149% return for silver.  Some of this can be attributed to central bank diversification and a shift away from the USD, but we also saw large ETF inflows as inflation fears pushed investors into hard assets.  Some economists have warned that this could be a warning sign for the global economy, but I think some of those fears are overdone. I expect to see some moderation or profit taking in these returns in the first half of the year, but metals should still be represented in most portfolios.

With markets continuing to hit all-time highs, the big question that remains is when will this party come to an end? Over the past year, we saw numerous spikes in volatility, most notably in early April when the President instituted sweeping tariffs.  However, the markets quickly recovered and have seemed to put the fear of tariff-induced inflation in the rear-view mirror.  As we enter the new year, we still have several uncertainties hanging over the market.  Geopolitical tensions have risen.  We have conflicts in Ukraine, the Middle East, and now in Venezuela.  These specific conflicts aren’t what worries me; it’s how they impact our relationship with other world economic powers. Europe, China, and Russia all have a stake in the game in each of these conflicts, and that could easily spill over to the economic world. The battle for oil and other natural resources plays a part in each of these conflicts, and how we navigate them will have major impacts on the economy moving forward.

Outside of geopolitical tensions, valuation concerns still hang over the markets. I have discussed this at length over the past year, and I think this will still be the catalyst that causes the markets to take a pause or see a pullback.  I do not think such a pause would be a bad thing.  The markets have run hot for a few years now, and it is natural for us to see some profit-taking as we allow company performance to catch up with valuations.  I also think some of the AI-induced enthusiasm is a bit overdone in a few names.  Not every company is going to be able to win the AI battle, and this could cause some sharp declines.

With all of this considered, I think we can take some lessons away from this year.  The markets showed an ability to navigate uncertainties and rewarded patient investors who didn’t make rash decisions based on short-term noise.  It also proved that continuing to be invested through uncertainty will pay off in the long run.  We saw the benefits of diversification as international and fixed income exposure helped to balance short-term shocks to domestic markets.

Moving forward, I am still cautiously optimistic.  The economy has some tailwinds and is growing faster than many were expecting.  While inflation isn’t all the way back down to long-term targets, it has been kept in check, even as the labor market has softened and the Fed has cut rates. While we could see a pullback at some point, investors should still maintain their long-term asset allocation plans and continue to add quality names on any weakness. It would be prudent to take some profit in any asset classes that have outperformed and make sure that your allocation hasn’t gotten out of balance.

Strategy Commentary

I continue to maintain my overall equity allocation targets.  I have done some basic rebalancing and used some new capital to help shore up existing allocation.  I continue to be patient with new money and have been dollar cost averaging into new portfolios. I am not rushing to chase the current bull market. I do expect to see some opportunity to put more new money to work on any market pullback, especially for long-term investors.

I am continuing to maintain my overweight to technology and communication services.  While communication services did lag in the 4^th quarter, technology and communication services ended the year as the top two performing domestic sectors. They ended the year up 24.7% and 23%, respectively.  Financials continue to be intriguing, but I have not increased exposure at this time.

Internationally, I will be looking to increase allocations, if given the chance.  This was definitely a missed opportunity in 2025, and I overestimated the risks posed by geopolitical tensions.  Emerging markets continue to look intriguing, even with the performance they saw last year, and I expect other developed markets to continue to play some catch-up with their domestic counterparts.

On the fixed income side, I have now moved back to favoring just the short end of the curve.  The long end of the curve has proven to be relatively range-bound.  We could still see a drop in rates if there is a rush to safety or if the Fed is forced to cut rates more rapidly. However, so far, that thesis has not played out.

Click here for .pdf version of this report: The Brave Report-2025Q4