Fourth Quarter 2025 Market Commentary

Major Index Performance

One of the most memorable—crazy, I’ll say crazy—years of my investment career.

To kick things off, international stocks finished the year strong. In the final quarter, the MSCI EAFE Index—the benchmark for developed international markets—and the MSCI Emerging Markets Index returned 4.86% and 4.73%, respectively. On a full-year basis, this marked the first time developed international stocks outperformed the S&P 500 since 2022, and the first time emerging markets did the same since 2017. Odd year or the start of a new trend?

Turning to U.S. equity markets, the Dow Jones Composite was the strongest-performing index for the quarter, returning 2.72%. Yet despite that showing, it was the weakest performer for the full year, with a gain of 13.68%. In other words, even a strong quarter wasn’t enough to change the broader story: “old-economy” stocks continued to take a back seat to higher-growth names. Speaking of which, the Nasdaq Composite also returned 2.72% in Q4 and surged 21.14% in 2025. No surprise there if you’ve been paying attention to the news. If you haven’t—good for you; you’re probably happier for it. The driver behind the Nasdaq’s outperformance? Artificial intelligence. Finally, the S&P 500 returned 2.66% in Q4, which was somewhat unexpected, as it typically lands somewhere between the “old-economy” Dow Jones and the “new-economy” Nasdaq. When we widen the lens to the full year, however, the S&P 500 gained 17.88%. That result aligns with our expectations that it would fall between the annual performance of the two indices discussed above.

After leading the way in Q3, the “little guys” that make up the Russell 2000—the small-cap index—lagged in Q4 and for the year, returning 2.19% and 12.81%, respectively. Undoubtedly, the uncertainty unleashed in 2025 disproportionately hurt smaller companies, which are generally more sensitive to domestic economic conditions and tend to have weaker balance sheets than their large-cap, internationally diversified counterparts.

All in all, major stock indices climbed the wall of worry in 2025, posting strong returns and blowing past most performance expectations for the year.

U.S. Sector Performance

Digging into sector performance, healthcare carried much of the S&P 500’s gains in Q4.

While this is only a single quarter, it’s a welcome development to see a sector not named technology or communication services doing the heavy lifting for S&P performance for a change. Eli Lilly & Co. (LLY), buoyed by strong results from its obesity drug franchise, surged 41.06% in Q4 and was the primary driver of the sector’s strength. It turns out that slimming drugs can lead to fat profits. Who knew?

When we zoom out and look at the full year, however, the technology and communication services sectors ruled 2025, returning 24.60% and 23.07%, respectively. You know the story, I know the story—we all know the story. A.I. enthusiasm was the dominant driver behind the strong performance of both sectors. Whether through hardware plays like Nvidia and Broadcom or software giants like Alphabet and Microsoft, being anywhere near the artificial intelligence ecosystem was good for stock prices. That said, while demand—and profits—on the hardware side have been handsomely rewarded for supplying what A.I. applications require, a key question remains: can the software side of the business actually monetize its massive A.I. investments in hardware and infrastructure? For now, A.I. software profitability remains elusive, even for well-known names like ChatGPT. Estimates suggest it is poised to lose roughly $27 billion in 2025 and could lose another $16 billion in 2026. This disparity highlights why being in the hardware business has been extraordinarily profitable—while the software side, at least so far, has been far less so.

The weakest sector for the quarter—and the second worst for the year—was real estate. The sector declined 3.19% in Q4 and managed to eke out a modest 2.60% gain for the full year. It has continued to be a tough environment for real estate investors, as longer-term interest rates remain elevated relative to recent history.

Recall that in 2021 the federal funds rate sat at 0.00% and the 10-year Treasury yield dipped below 1.00%. That backdrop encouraged many real estate investors to take on significant debt to acquire properties and build their portfolios. In isolation, that logic made sense: when interest rates are low, the return hurdle for debt to be accretive to value and performance is also low. The problem, however, is that many investors forgot a basic relationship—interest rates and real estate values (hell, most asset prices) tend to move inversely. As a result, investors were levering up to buy properties at extremely high prices. Fast forward to today, and many real estate companies are now underwater on highly leveraged assets. And to make matters worse, many of those properties are failing to achieve the rents investors originally underwrote (more on that when we discuss Alexandria).

Because of this “levering up at high prices” dynamic, the real estate sector—after briefly outperforming during the 2021 property boom—has since become a significant laggard, underperforming by roughly 67% from the end of 2021 through 2025.

S&P 500 Top/Bottom Performers

Fourth Quarter

Year to Date

Albermarle (ALB) – Lithium Highs

Albemarle, one of the world’s leading lithium producers, benefited from a rebound in lithium prices during Q4. The move was partly driven by developments in China’s Jiangxi province—one of the country’s key lithium hubs—where local authorities announced the cancellation or expiration of certain mining permits. While the immediate impact on current supply was limited, the news heightened concerns around future supply availability and helped push prices higher. This is classic supply-and-demand dynamics at work. When markets perceive a potential reduction in future supply while demand remains intact, prices tend to adjust upward. Because Albemarle’s lithium production is geographically diversified and not dependent on Chinese mining output, the company was well positioned to benefit from higher pricing without a corresponding hit to production volumes.

In addition, Albemarle reported Q3 earnings that came in better than analysts had expected, prompting several Wall Street upgrades to the company and its stock. Analyst optimism continues to be supported by expectations of sustained lithium demand, driven by electric vehicles as well as growing commercial and residential energy-storage applications. While near-term lithium markets remain cyclical, Albemarle’s scale and global footprint position it as a key beneficiary when pricing fundamentals improve.

Micron Technologies (MU) – Cramming RAM for A.I. Programs

Micron Technology closed out both the fourth quarter and 2025 as one of the top-performing stocks in the S&P 500, returning 70.75% in Q4 and more than 240% for the year. Micron, a leading producer of dynamic random-access memory (DRAM), has been a clear beneficiary of the surge in A.I.-related data-center investment. While Nvidia’s GPUs dominate the conversation around “pick-and-shovel” plays in artificial intelligence, Micron’s performance highlights that other, less obvious hardware providers are benefiting as well.

What’s particularly noteworthy is Micron’s position within the global DRAM industry. Together with SK Hynix and Samsung, the company operates in a highly concentrated market where a small number of players account for the vast majority of global DRAM supply. In an oligopolistic market structure like this, pricing power tends to be meaningful—especially when demand is strong and supply is constrained. When that dynamic takes hold, profit outlooks improve materially.

Recent earnings results appear to support this. In mid-December, Micron reported record revenue and delivered results that exceeded analyst expectations, prompting a wave of analyst upgrades. The stock responded sharply, rallying into year-end as investors grew more confident in the durability of the memory upcycle driven by A.I. and data-center demand.

Alexandria Real Estate (ARE) – Reality Killed Life Sciences

Alexandria Real Estate Equities was hit hard, declining more than 40% during the quarter and ranking among the worst-performing stocks in the S&P 500 for both the quarter and the year. The company is a real estate owner and developer focused primarily on life sciences properties—a segment that surged in popularity in the immediate aftermath of the 2020 COVID crisis, but whose momentum has faded as conditions normalized in the years that followed.

Like many companies coming out of the post-COVID period, Alexandria appears to have extrapolated the economics of an extraordinary environment further into the future than ultimately proved prudent. The company invested heavily in acquiring and developing life sciences real estate—a business that is capital-intensive, specialized, and difficult to pivot—under the assumption that demand from biotech, pharmaceutical, and academic tenants would remain strong. What ended up happening? Well, leasing demand cooled, contributing to softer occupancy trends and weaker operating performance.

Compounding these challenges, interest rates have remained higher for longer than the assumptions embedded in much of Alexandria’s underwriting (I'm assuming but am 99% sure is true). Higher financing costs and lower asset values have put additional pressure on returns, particularly for highly leveraged or newly developed properties. Against this backdrop, Alexandria’s third-quarter results disappointed investors. Revenue and earnings declined year over year, and the company reported impairment charges tied to property values, reinforcing concerns about the durability of cash flows and balance-sheet flexibility.

International Indices

Developed Markets

British equities were among the strongest-performing international developed markets in the fourth quarter and finished 2025 as one of the better-performing non-U.S. developed markets overall. Germany was the clear standout for the year, however, posting outsized gains supported in part by a shift toward more stimulative fiscal policy. As discussed in a previous quarter's commentary, Germany approved changes to its fiscal framework that relaxed long-standing spending constraints, allowing for increased government investment relative to GDP—an important tailwind for both economic expectations and equity markets.

Turning back to the United Kingdom however, British equities benefited from a reduction in political uncertainty and a macroeconomic backdrop that, while still mixed, became more predictable over the course of the year. The U.K. equity market is tilted more heavily toward financials than many other developed markets (like the U.S. with it's tech heavy concentration), making it particularly sensitive to economic stability and policy clarity. Banks tend to thrive in environments where inflation, employment, and monetary policy follow more predictable paths, as this supports lending activity—the core driver of bank profitability. And since earnings ultimately drive stock prices over the long term, improving visibility into future earnings growth helped support higher equity prices in the present.

Last for the quarter and last for the year (but not last in our hearts), Australian equities declined 1.33% in Q4 and 13.35% for the full year. Broadly speaking, there was no single, clear catalyst behind the underperformance in the fourth quarter. There were no major fiscal, monetary, or economic developments during the quarter that would have meaningfully altered earnings expectations.

For the year, however, Australia’s relative underperformance can largely be attributed to two factors: commodity dynamics and a relatively more hawkish Reserve Bank of Australia (RBA). While Australia is the world’s largest producer and exporter of iron ore—which rose 19.30% according to S&P’s commodity indices—broader commodity performance was mixed and failed to provide a sustained tailwind for equities. On the monetary policy front, the RBA signaled throughout the year a more cautious, “wait-and-see” approach to interest-rate cuts. Combined with hotter-than-expected inflation readings, this led markets to reassess the timing and magnitude of potential rate cuts. As a reminder, higher interest rates are typically a headwind for most asset prices.

Emerging Markets

Continuing its strong run from the third quarter, South Korea led emerging markets again in Q4, posting a staggering 24.14% return. Given its performance throughout the year, it was no surprise that South Korea finished 2025 as one of the strongest-performing emerging market countries, with its MSCI index nearly doubling. The driver of this strength has been consistent: technology hardware. As discussed earlier in the context of Micron, South Korea’s market heavyweights—SK hynix and Samsung—surged amid strong demand tied to artificial intelligence and the global memory cycle, making them the primary contributors to the country’s exceptional performance.

Then, China. Chinese equities struggled relative to their emerging market peers in the fourth quarter. Broadly speaking, the weakness was driven by macroeconomic concerns rather than any single market-specific shock. While China’s economy grew approximately 5% in 2025, growth slowed toward the end of the year, with fourth-quarter GDP expanding closer to 4.5%. Although net exports held up despite ongoing trade and tariff tensions, domestic consumption and investment weakened. In prior cycles, this imbalance may have been less concerning, as China functioned primarily as an export-driven economy. However, as policymakers have pushed to transition toward a more consumption-led growth model—closer to that of developed economies—softness in domestic demand has taken on greater significance for investors.

Compounding these concerns, ongoing stress in China’s real estate sector remains a major drag on investment sentiment. Reports indicate that home prices declined late in the year and that property investment fell sharply in 2025. Given the close linkage between the real estate and financial sectors, persistent weakness in property markets continues to raise legitimate concerns around bank balance sheets—leaving both policymakers and investors cautious as the country works through these structural challenges.

U.S. Fixed Income

The Yield Curve

The yield curve steepened modestly this past quarter, as short- to intermediate-term yields declined while longer-term yields rose. On the short end of the curve, markets are now pricing in an additional rate cut over the next three months compared to prior expectations. This shift likely reflects growing concern around labor market and income data, which we’ll discuss shortly.

The Credit Curve

All in all, credit spreads were largely flat this quarter in terms of magnitude, with the notable exception of securities rated “CCC or below.” This development is particularly interesting because, as we’ve discussed in the past, credit spreads typically move inversely to equity markets. Given the strong performance of stocks in the final quarter of the year, we would have expected high-yield bond spreads to narrow, not widen.

This divergence may simply reflect a short-term anomaly—or it could signal that the fixed-income market is sending a different message than equities. Which market is accurately assessing current conditions? I guess we'll see.

Fixed Income Fund Performance

Broadly speaking, the divergence in fixed-income performance this quarter had more to do with maturity (or duration) risk than with credit risk. Because high-yield bond ETFs tend to hold shorter-maturity securities—and occupy the riskier end of the credit spectrum (generally closer to B/BB, and not quite “CCC or below”)—it’s not surprising that they were among the best-performing bond ETFs for the quarter.

At the other end of the spectrum, extended-duration Treasury securities performed the worst, as yields on long-dated Treasuries rose during the quarter, causing prices to fall.

The U.S. Economy

Unfortunately, our analysis of the U.S. economy is limited this quarter due to reduced data availability from government agencies—most notably the Census Bureau, the Bureau of Economic Analysis, and the Bureau of Labor Statistics. These disruptions stem primarily from the recent government shutdown, which temporarily suspended or delayed many data collection and publication activities. As a result, the framework we use to discuss the economy will likely evolve in coming quarters as greater clarity emerges around which data series will resume on their normal schedules and which may face longer delays. For now, we’ll have to make do with the information that is currently available.

The U.S. economy continued to show resilience in the third quarter, even as other economic indicators pointed to emerging areas of concern. Real GDP grew at roughly a 4.3% annualized rate, well above its long-term average of around 3.0%. As is typically the case in the U.S., consumer spending was the primary driver of growth, rising at a strong annualized pace and accounting for a sizable share of the overall increase in GDP.

Another notable contributor was net exports. Exports increased during the quarter while imports slowed, meaning net exports detracted less from growth—and, in fact, contributed positively to the headline GDP figure. Put differently, the trade deficit narrowed enough to provide a tailwind to growth. One way to think about this dynamic is through a household analogy: when someone who has been spending beyond their means reduces their purchases (imports) while also increasing their income (exports), they may still be spending more than they earn—but not by nearly as much as before.

The unemployment rate has moved modestly higher in recent months, rising into the mid-4% range after sitting closer to historical lows earlier in the cycle. Given the steady stream of headlines announcing layoffs and hiring freezes, this increase shouldn’t come as a major surprise. From an analytical standpoint, while the absolute level of unemployment is not yet flashing warning signs, the direction of travel is more concerning...

...which is reinforced by broader employment data. Job growth has slowed meaningfully compared to prior years, with nonfarm payroll gains becoming increasingly modest and private-sector hiring losing momentum. While payroll growth remains positive, the pace is consistent with a labor market that is cooling rather than expanding.

Historically, environments characterized by slowing job growth and a gradually rising unemployment rate tend to occur later in the economic cycle and often precede broader economic slowdowns. On their own, these indicators don’t signal an imminent recession—but taken together, they suggest the labor market is no longer the tailwind it once was.

One of the more notable consequences of the government shutdown was the disruption to earnings data typically released by the Bureau of Economic Analysis (BEA). Even with those limitations, the available wage data still tell an important story.

In contrast to the softening trends we’re seeing in the labor market, earnings data suggest conditions remain relatively stable on the income side. Inflation-adjusted hourly earnings are modestly positive, indicating that wage growth has been keeping pace with—and slightly exceeding—inflation. Meanwhile, nominal wage growth is running near long-term historical norms. Taken together, these figures point to a labor market that is cooling in terms of hiring but still providing incremental income gains for those who remain employed.

That said, wage growth has not been evenly distributed. Measures of median pay have grown faster than average earnings, suggesting that income gains have been more pronounced in lower- and middle-pay segments of the workforce. This dynamic is consistent with broader labor-market developments: many of the highest-paying firms—particularly in the technology sector—have reduced headcount or slowed hiring, while job growth has been more concentrated in lower-wage service-oriented industries.

In short, while the labor market is clearly losing momentum, wage data indicate that household income growth has not yet rolled over—an important distinction when assessing near-term economic resilience.

Another major casualty in last quarter’s economic data was inflation reporting. Most notably, the release of Personal Consumption Expenditures (PCE) price data was delayed. This is particularly important because PCE is the Federal Reserve’s preferred measure of inflation—though presumably the Fed has its own internal estimates in the meantime (one would hope).

That said, based on the inflation data we did receive, the overall trend points to slowing price pressures, albeit with a cautious takeaway. Yes, inflation is easing, but why? Is it because of a softening labor market with subpar earnings? Or are some of the abnormalities from the post-Covid craziness have started working themselves out.

Housing data availability was also disrupted during the quarter, as the government shutdown delayed the release and processing of several reports typically published by the Census Bureau. While this did not result in a permanent cancellation of housing data, the interruptions reduced the timeliness and completeness of information available for analysis. Given both these limitations and the highly cyclical nature of housing, this is an area where we may revisit the structure—or scope—of this section in future quarters.

Looking at the year-over-year data that are available, housing inventory has generally increased, sales activity has softened modestly, and median prices for existing homes have edged slightly higher. By contrast, during the fourth quarter—which is typically the slowest period of the year for single-family housing transactions—inventory declined, sales picked up somewhat, and prices eased.

Interpreting these trends, the year-over-year figures suggest that many sellers remain reluctant to meaningfully reduce asking prices, contributing to elevated inventory levels and subdued transaction volumes. At the same time, homes that do transact are often selling at prices not materially different from those seen a year earlier.

Looking at housing overall, affordability remains a central issue. Mortgage rates continue to sit at elevated levels relative to recent history and home prices remain out of reach for many prospective buyers. While the future path of mortgage rates is uncertain, current conditions point toward a housing market where prices are more likely to remain flat—or drift modestly lower—rather than reaccelerate.

That being said, housing fundamentals are highly regional, and outcomes in markets like Austin, Texas may differ significantly from those in markets such as New York City. This commentary is prepared by and is the property of EID Capital, LLC and is circulated for informational and educational purposes only. There is no consideration given to the specific investment needs, objectives, or tolerances of any of the recipients. Additionally, EID Capital's actual investment positions may, and often will, vary from its conclusions discussed herein based on any number of factors, such as client investment restrictions, portfolio rebalancing and transactions costs, among others. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This material is for informational and educational purposes only and is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. This material does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors which are necessary considerations before making any investment decision. Investors should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, where appropriate, seek professional advice, including legal, tax, accounting, investment, or other advice.

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