In December, non-U.S. equities rose approximately 3%, while U.S. equities were flat. Performance outside the U.S. was supported by euro appreciation, which increased 1.3% during the month. For the full year, the S&P 500 delivered a return of more than 17%, while non-U.S. equities gained over 30%. 2025 is the first year in the current bull market where non-U.S. equities have outperformed U.S. equities and just the third year they have done so in the past decade. Non-U.S. stocks were aided by a 7% decline in the U.S. dollar versus international currencies, although the Greenback remains 20% above its average level from the 2010s.
The “Magnificent 7” remained an important contributor to the S&P 500’s return in 2025, accounting for roughly 50% of the index’s full year gains but down from more than 70% in both 2023 and 2024. Growth continued to outperform Value within the U.S., while Value stocks led performance in non-U.S. equity markets. Although the Magnificent 7 remain influential in U.S. and global markets, investors are increasingly identifying opportunities beyond these names—a welcome and healthy development for market breadth.
U.S. 10-year Treasury yields declined during the year as inflation drifted lower and the Federal Reserve delivered three rate cuts. Interest rates rose in much of the rest of the developed world, which contributed to U.S. dollar weakness. Precious metals performed strongly, with gold and silver rising more than 60% and 100%, respectively. Despite tariff-related volatility, copper prices – often viewed as a leading indicator of economic activity – advanced more than 40% over the year. Oil prices fell sharply in December following OPEC’s increase in production quotas, extending the substantial declines seen throughout 2025. Bitcoin declined approximately 6% during the year, with heightened volatility, marking its first negative annual performance since 2022.
The following table contains a summary of December and year-to-date market performance:
| Index | December | YTD | Index | December | YTD |
|---|---|---|---|---|---|
| S&P 500 (Total Return) | +0.06% | +17.88% | MSCI All Country World (Net) | +1.04% | +22.34% |
| MSCI EAFE (Net) | +3.00% | +31.22% | Bloomberg Barclays US Agg | -0.15% | +7.30% |
| MSCI Emerging Markets (Net) | +2.74% | +30.58% | 60/40 Blend* | +0.57% | +16.38% |
* 60% All Country World Index / 40% Bloomberg Barclays US Aggregate Bond Index
A common investment adage is that “bull markets do not die of old age”. Instead, most bull markets end when an external shock, such as Fed rate cuts or significant geopolitical events, drive unemployment higher and consumption lower. Since 1928 the S&P 500 has posted a negative return of -10% or greater in just 13 calendar years, highlighting the durability of equity markets. With the S&P 500 up more than 17% in 2025 despite a new administration, tariffs, government shutdowns, military strikes in Iran and extreme policy uncertainty, we are reminded of just how durable the U.S. markets and economy can be.
At the start of 2025, Caprock was constructive on the prospect of further equity gains. Our primary concerns were valuations and concentrations among high flying technology stocks. Markets were severely tested in April after President Trump rolled out substantially larger tariffs than expected. Despite deep concerns about the impact of tariffs on the economy, GDP remained robust, inflation failed to materialize and the markets proceeded to set new all-time highs.
The quick recovery of the S&P 500 from its April low was due largely to the accelerating growth of corporate earnings. Looking at valuations, the S&P 500 entered 2025 with a forward PE ratio of approximately 22x and ended the year at roughly the same level, suggesting that nearly all the market gains enjoyed in 2025 were attributable to earnings growth.
On an aggregate level, the U.S. economy remains solidly in mid-cycle economic growth, as characterized by mixed economic data and generally improving corporate earnings. While the US employment backdrop has been challenging, the overall economy is experiencing stable growth, low defaults, and slowing inflation. Softening labor market conditions and slowing inflation allowed the Fed to cut interest rates three times during the last few months in 2025. The Fed chose to cut rates even though U.S. GDP growth was accelerating as the year ended. In fact, the Atlanta Fed currently projects that Q4 GDP growth is likely to come in at more than +5%, following Q3’s impressive growth of +4.3%.
Many market observers were surprised by the decline in the 10-year U.S. Treasury rate throughout the year. From a global perspective, the U.S. was an outlier, as many other large, developed nations saw rising rates, including Germany and Japan. We view rising rates internationally as a positive sign of improving growth prospects and an important factor in the observed weakness of the U.S. Dollar during the year. Importantly, we do not view the current Dollar weakness as a paradigm shift in the status of the U.S. Dollar. Instead, we view it as somewhat predictable after years of Dollar strength, Fed rate cutting, and global economic acceleration.
Regarding our expectations for 2026, we remain optimistic about the overall economy and the potential for a fourth year of positive equity returns, especially given the strong year ahead expectations for growth in corporate earnings. However, there are still uncertainties that could impact market returns. There will always be geopolitical surprises that cannot be planned for, such as events in Venezuela and Iran, as well as known events that can cause market volatility. We can anticipate the appointment of a new Chair of the Federal Reserve, midterm elections in November, as well as developments in the labor markets and the impact of fiscal stimulus. Each of these could be a source of volatility or put the current mid-cycle economic growth at risk. While we do not view the risk of a recession as high, after three consecutive years of strong equity returns accompanied by elevated multiples, we should remain mindful that although down years are rare, pullbacks are normal.
Two fundamental principles of disciplined investing are diversification and rebalancing. It is prudent to examine current allocations relative to long term strategic allocation targets and make appropriate adjustments. Although rebalancing may incur taxes, Caprock has developed several tax mitigation tools, and our portfolio modeling process considers both the costs and benefits associated with periodic rebalancing. Proceeds from trimming outsized allocations can readily be deployed to other asset classes which have performed less well in recent years or are underrepresented in the portfolio.
We believe that real estate presents an interesting opportunity following four years of underperformance in the asset class. Underlying fundamentals, as measured by occupancy and rent growth, are quite strong for many property types. The initial causes of the downturn – higher interest rates and lack of capital availability – have also abated. With robust fundamentals and improving capital markets, real estate appears to be one of the few assets trading at a discount, especially relative to public equities.
The purpose of this month’s commentary is not to be prescriptive; every client is unique and our advisors craft recommendations specific to your needs. Our processes are designed to help achieve your investment objectives over time. Regardless of what 2026 brings, we will remain vigilant in anticipating risks and seeking out opportunities.
What we’re reading:
Below we share a glimpse into the books currently capturing the interest of the Caprock team – highlighting the diverse tastes and curiosity that drive our team.
Casey Broderick, one of our Investment Research Analysts, has recently finished and is currently reading the following books:
- The Mosaic Principle by Nick Lovegrove: An interesting book that promotes building a lifestyle and career through diverse experiences to create a unified whole rather than focusing on one single niche. The book outlines six key dimensions that can help build a remarkable life and career: Moral Compass, Prepared Mind, Intellectual Thread, Transferable Skills, Contextual Intelligence, and Extended Network. This is especially relevant to read now, as the world continues to push for specialization and reliance on artificial intelligence as the primary solution to address today’s challenges.
- Principles by Ray Dalio: This book outlines the life and work principles of Ray Dalio, founder of Bridgewater Associates, one of the world’s most successful hedge funds. Dalio emphasizes three key concepts including radical trust, transparency, and meritocracy of ideas within an organization and personal life. The book also discusses the systematic framework that an individual or organization needs to put into place for decision-making, management, and achieving goals. I received” Principles” as a high school graduation present but took it for granted at the time. Years later, I realize how powerful the ideas in this book are for attacking life’s everyday problems and long-term challenges.
- The Confessions by Saint Augustine – Maria Boulding translation (currently reading): A hard book to categorize, but Confessions is an autobiographical work by Augustine of Hippo, consisting of 13 books written in Latin between AD 397 and 400. The work outlines Augustine’s sinful youth, his professional life and studies, his conversion to Christianity, and his theological and philosophical reflections. As someone interested in exploring the greatest literary works of Western canon, I cannot wait to work through this whole book.
This communication is not an offer or solicitation with respect to the purchase or sale of any security and is for informational purposes only. Information contained herein has been derived from sources believed to be reliable, but Caprock makes no representations as to its accuracy or completeness. Investment in securities involves the risk of loss. Past performance is no guarantee of future returns.