Global Equities Overcome Economic Uncertainty
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SUMMARY
- International led US Equities for Q4 and 2025.
- Few US sectors post strong Q4 returns, but AI-related sectors were strong for the year.
- Earnings confirmation needed for broader international investment, in our view.
The fourth quarter of 2025 capped off a strong year for equity returns with the third quarter in a row of positive returns across the board. Additionally, in three of the four quarters last year, international equities outpaced US equities, resulting in international equites returning close to double the US large-cap’s return for the calendar year, despite a strong showing from Technology and AI-like sectors. As we discussed earlier this month, International’s strong returns are beginning to be supported by improving earnings, though we would like to see this trend strengthen. Let’s take a deeper dive into these returns to see how these themes played out.
US Sectors: Muted Returns Across the Board
Table 2 (right) shows US sector performance. Apart from Health Care and Communication Services, US sector returns were muted across the board. Looking at these two top-performing sectors, it is tough to identify a single thematic throughline. Within Health Care, it was the pharmaceutical stocks that led sector returns; pharmaceutical returns were driven by favorable news regarding government negotiations and perhaps some catch up after a poor first three quarters. For Communication Services, there seems to be no unifying theme. Only 3 of the companies in this sector outperformed the sector’s average return, while over half of the companies posted negative returns.
Looking at the bottom of the table, we see two ‘defensive’ sectors which posted a negative return. Specifically, Real Estate and Utilities are what we would consider ‘rate-sensitive’ sectors. Both these sectors have high amounts of debt and rely on cash distributions as a large portion of their total return, giving them bond-like qualities. As such, with the market cooled on expectations of cuts from the Fed, and these sectors struggled to keep up with the rest of the market.
International Stocks: China Leads, While the Dollar Stabilizes
Moving to Table 3 (below), Developed Markets led the way with Emerging Markets being hampered by poor Chinese returns. The negative quarter for China continued a trend we saw the entirety of 2025. Both the first quarter and third quarter saw China posting the best return of all indices in our global universe, while the second and fourth quarter saw China posting the worst return in our universe. We believe this volatility is characteristic of the realty of investing in China as a non-Chinese investor, coupled with their AI theme exposure being the highest after the US. While there are lots of cheap companies and companies with attractive growth prospects in China, the geopolitical and macroeconomic backdrops provide a strong headwind that may represent a ceiling to a sustainable Chinese equity rally, in our view.
At the top of the returns table excluding currency effects, we find Canada, which was only outpaced this year by China. Canada also posted returns above the US in all four quarters this year, with both equity returns, and currency returns contributing at different points in the year. In our view, this rally can primarily be attributed to strong precious metal prices.
Finally, on the currency front, only the Yen made a large move this quarter, depreciating 6.3 percent. Japanese inflation remains higher than the Bank of Japan would like it and with the Fed pausing on cuts, Japan’s low policy rate caused downward pressure on their currency. For the full year, international currency returns added to US investors’ total returns as the dollar continued to weaken throughout the year.
Looking Forward: 2026 Provides Opportunity
The fourth quarter was an example of the potential for market broadening. Over the past decade, Technology, and by extension Technology-related indices, have contributed a large portion of market returns. While we believe that these names could continue to be attractive investments if their earnings growth keeps pace with their price appreciation, both earnings and market returns are also pointing to potential in other market segments.
As such, we believe that 2026 will present opportunities to invest in markets that have lagged tech. However, we do not view this as an easy task. As we saw in 2025, market rotations are full of starts and stops. Thus, we will continue to lean on our earnings analysis to help guide our asset allocation. Additionally, we will rely more heavily on our individual security selection, as we attempt to identify specific themes and companies that are best positioned for market rotation.
For International equites specifically, we are waiting for earnings confirmation before we more broadly invest. Until then, our international positioning is dependent on our portfolio’s risk tolerance. In our short horizon portfolios, we have relatively little exposure to international markets, concentrating on Europe and Japan. For our long horizon portfolios, we are slightly overweight to international relative to our global benchmarks with an emphasis on selection, preferring European Banks, Japan and value-oriented themes, while avoiding Chinese equities. We believe this is sufficient exposure to capture the upside of these markets while we wait for more concrete earnings evidence to emerge.
Originally published January 13, 2025
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Index Definitions
Standard & Poor’s (S&P) 500 Index TR USD (US Large Cap) measures the performance of 500 large cap stocks, which together represent about 80% of the total US equities market.
Standard & Poor’s (S&P) 1000 Index (US SMID Cap) – the S&P MidCap 400 Index and the S&P SmallCap 600 Index are combined to form the S&P 1000.
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MSCI United Kingdom Index (USD) is designed to measure the performance of the large and mid cap segments of the UK market.
MSCI Canada Index is designed to measure the performance of the large and mid cap segments of the Canada market.
The MSCI USA Index is designed to measure the performance of the large and mid cap segments of the US market.
MSCI ACWI Index (Global Equities) is designed to represent performance of the full opportunity set of large- and mid-cap stocks across approximately 23 developed and approximately 25 emerging markets.
MSCI ACWI ex USA Index (Global ex US Equities) captures large and mid cap representation across approximately 22 of 23 developed markets (DM) countries (excluding the US) and approximately 25 emerging markets (EM) countries.
ICE BofA High Yield Index TR USD (High Yield) tracks the performance of US dollar denominated below investment grade rated corporate debt publicly issued in the US domestic market. Index constituents are capitalization-weighted based on their current amount outstanding times the market price plus accrued interest.
Emerging Market Equities is represented by the MSCI Emerging Markets Index (NET), a free-float adjusted market capitalization index that is designed to measure the equity market performance of emerging markets. The index consists of indices from approximately 25 emerging market country indices. Net total return indices reinvest dividends after the deduction of withholding taxes, using (for international indices) a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties.
The Bank of Japan (BOJ) is headquartered in the Nihonbashi business district in Tokyo. The BOJ is the Japanese central bank, which is responsible for issuing and handling currency and treasury securities, implementing monetary policy, maintaining the stability of the Japanese financial system, and providing settling and clearing services. Like most central banks, the BOJ also compiles and aggregates economic data and produces economic research and analysis.
Bloomberg Capital US Treasury Index TR USD (Treasury Bonds) measures the performance of the US Treasury bond market.
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Bloomberg Capital 1–3 Month US Treasury Bill Index TR USD (Cash) includes all publicly issued zero-coupon US Treasury Bills with a remaining maturity between one and three months, are rated investment-grade and have an outstanding face value of $250 million or more.
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