December 2025 Market Commentary: Strong Gains, Cautious Signals Ahead

Markets capped off an eventful 2025 with a relatively quiet month of December, as a lack of major headlines meant traders could start their holiday season early.

The S&P 500 gained +0.1% for the month to end the year at a +17.9% gain.

After shaking off the tariff-induced correction in April, the blue-chip index rallied a staggering +43% into year-end with barely a 5% dip along the way.

Smaller company stocks struggled to keep pace with their large cap competitors, as the Russell 2000 Index fell -0.6% in December for a +12.8% return in 2025.

One of the big stories within equities for 2025 was the shift to international dominance after years of prolonged underperformance compared to domestic stocks. The MSCI ACWI ex-US Index jumped +3% in December to cap the year at a +32.4% gain, beating US stocks for the first time since 2022 and only the second time in nine years.

Within fixed income, bond markets fell -0.2% as long-term rates ticked higher despite the Fed cutting rates for the third time in as many meetings. That said, the ten-year treasury rate still fell by roughly 40 basis points during the course of 2025, spurring the Bloomberg Aggregate Bond index to a +7.3% full-year return.

Commodity prices took a pause in December, falling -0.3% to bring the 2025 gain to +15.8% on the Bloomberg Commodity Index. Precious metals led the commodity space, with both gold (+65%) and silver (+148%) surging to new all-time highs during 2025. 

Heading into the new year, our proprietary Three Dials allocation framework was unchanged during the month of December, as we outline below:

1. Market Sentiment and Momentum: (Positive)

While investors maintained a healthy degree of skepticism during the back half of 2025 despite stocks’ continual rise, bullish sentiment reached its highest level of the year in December, suggesting that this bull market still has legs heading into 2026. As such, our Momentum Dial remains in a Positive position.

2. Economic Fundamentals: (Negative ❌)

While initial data from the holiday shopping season suggests buying was up over last year, the vast majority of holiday buying was concentrated in either wholesale clubs or discount stores, suggesting a value-conscious consumer in the midst of economic uncertainty. As job growth has stagnated and unemployment ticks up, we leave our Fundamental Dial in a Negative position at year-end.

3. Valuation: (Negative ❌)

Unsurprisingly, equity returns for 2025 were concentrated in the technology and communication services sectors, two of the more expensive parts of the S&P. As we turn the page to 2026, investors are likely to scrutinize the profitability of these hyper-scalers, which could put pressure on elevated price-to-earnings ratios. As such, our Valuation Dial remains Negative.

On balance, our composite positioning remains somewhat defensive, with one dial in a Positive position but two dials remaining Negative heading into the New Year.

Sources: Morningstar