GSAM's Investment Committee Releases Its 4th Quarter 2025 Market Update

January 19, 2026

As we close the books on 2025 and reflect on the fourth quarter, the economy finds itself at an important inflection point. The past year was defined by gradual adjustments to the economy. Inflation continued to cool, monetary policy eased, and growth persisted. While headlines often focused on what could go wrong, the underlying data suggested more economic moderation rather than contraction.

Politics were front and center for much of 2025, and markets were not indifferent to the headlines. Trade policy dominated early in the year as the administration levied steep tariffs against most U.S. global trade partners. Markets were caught off guard and reacted accordingly. At one point in early April, the U.S. equity market, as measured by the S&P 500, was down 19%. Concerns quickly dissipated as some tariffs were revised and/or paused. Investors and companies took a step back to digest the projected impact and eventually markets marched higher.

The fourth quarter also brought some uncertainty to markets, again driven by the political environment. A historic 43-day government shutdown affected federal operations and left key economic reports, including some October jobs and inflation data, canceled or delayed. The shutdown added uncertainty to the economic outlook and stoked short-term market volatility in the fourth quarter. As the issue was resolved, investors refocused on solid economic data, strong corporate earnings and enjoyed another year of impressive growth.

Setting aside political uncertainties, the underlying economic data was generally supportive of the growth investors enjoyed last year. Consumer spending continued as a primary driver of economic growth in 2025, with noticeable strength towards year-end and throughout the holiday season. Online spending during Thanksgiving weekend was up over 7% from last year, well outpacing inflation. Consumers spent steadily on both essential goods and services, particularly travel, dining, and experiences. We observed some cracks in the consumer, however. Credit usage increased, primarily among lower-income consumers, signaling some strain for certain pockets of consumers in the higher interest rate environment. The current strength in spending data is being driven by the wealthiest consumers, and this is a trend we are monitoring for 2026.

Inflation remains in focus for the Fed and consumers alike. In the decade ending December 2019, the annualized inflation rate, as measured by the consumer price index (CPI), was below the Fed’s 2% annual target. Alternatively, since 2020, the annualized rate of price increase has measured at double the target rate, although progress has been made over the past eighteen months. In 2025, inflation drifted downward but remained above the 2% objective for much of the year. The largest contributor to elevated inflation in recent years has been related to shelter/housing. However, there may be relief on the horizon. Shelter inflation (mortgages and rent) recently saw the smallest twelve-month increase since 2021 and it is forecast to moderate further in 2026. Additionally, easing energy costs provided relief to household budgets.

The labor market continued to soften in 2025, with the unemployment rate rising to 4.6% in November, its highest level since September 2021. Importantly, this increase was not driven by widespread job losses. Instead, it reflected a growing number of Americans re-entering the labor force and actively seeking work after time on the sidelines. While hiring activity has slowed, layoffs remained contained. Historically speaking, today’s unemployment rate remains very healthy compared to average rates over the past three decades. From 2000-2009, the unemployment rate averaged 5.5% and from 2010-2019 it averaged 6.2%. Even including the pandemic-era spike, the unemployment rate has averaged 4.9% since 2020, underscoring how resilient the labor market has been in recent years. Overall, the labor market has transitioned from an exceptionally tight market post-Covid to a more balanced one.

The Federal Reserve held rates steady for most of 2025, shifting from a restrictive stance earlier in the year toward modest rate cuts. The Fed reduced the federal funds target rate by 0.75% with three 0.25% cuts through December, primarily driven by cooling inflation and a softening labor market. The federal funds rate ended Q4 with a target range of 3.50%–3.75%, its lowest since 2022, and compared to a target range of 4.25%–4.50% at the end of 2024.

Against this macroeconomic backdrop, equity markets demonstrated resilience, with long-term investors benefiting from staying disciplined and diversified. Refer to the data table below for a comparison of performance across various indices: 

U.S. equities again delivered solid positive performance in 2025. Major benchmarks finished the year with double digit gains and even saw the S&P 500 reach more than forty record closes for the year. Large cap growth companies, including several artificial intelligence (AI) and tech leaders, continued to account for the lion’s share of returns. The top performing sectors for the year were Communication Services and Information Technology, driven by strong digital advertising, cloud investment, and ongoing adoption of artificial intelligence tools and services. Looking ahead, AI and technology capital investment and its projected growth remain central narratives for strong equity markets. Continued growth in corporate capital expenditures on AI, data centers, and related infrastructure should support earnings and innovation across multiple sectors. The next twelve months could see sustained earnings growth for U.S. large- and mid-sized companies overall, with AI-enabled productivity gains becoming more visible in financial results.

International equities delivered a notable comeback in 2025, narrowing the long-standing performance gap with U.S. stocks that had dominated much of the last two decades. Non-U.S. equities climbed roughly 32% in 2025, surpassing U.S. equities by the widest margin in more than two decades. This outperformance by non-U.S. equities was driven in large part by the weakening U.S. dollar, which fell more than 9% against major currencies. Looking ahead to 2026, the outlook for international stocks remains promising, with valuation discounts still wide, earnings growth expected to broaden beyond the U.S., and diversification benefits becoming more compelling for global investors.

Shifting to fixed income, 2025 marked a return to bonds fulfilling their traditional role as a source of income, stability, and diversification within portfolios. With inflation continuing to moderate and central banks shifting from tightening toward rate cuts, much of the developed world saw interest-rates stabilize. Yields generally trended lower, supporting positive total returns across a wide range of fixed-income sectors. (see chart below) The aggregate U.S. bond market as measured by the Morningstar US Core Bond index completed its best year since 2020, returning a solid 7.1% for the year.

As we move into the new year, the economic environment appears more balanced than it has been in some time. The Grant Street Investment Committee believes markets are poised for another year of continued global growth in 2026. Many of the macroeconomic concerns have made progress over the last twelve months: inflation pressures are easing, labor markets remain relatively stable, and markets have priced in potential further rate adjustments. Our committee continues to lean into growth-oriented equity strategies and sector specific allocations, such as healthcare. We expect Artificial Intelligence-related investment to continue to be a core driver of economic growth, and we are focused on the impacts of this evolution on markets broadly as well as within niche opportunities. On the defensive side of portfolios, traditional bonds offer core positioning and are expected to once again serve as ballast if volatility spikes, as they have in the past. Defensive exposure has been rounded out with unique equity-linked strategies that build in principal protection while offering upside participation as stocks climb higher.

This year marked an important chapter of growth for Grant Street Asset Management. We were fortunate to deepen relationships with many of you, welcome new clients, and continue expanding the services we offer, all while staying focused on impactful, personalized advice. To support this growth and maintain our deep relationships with existing clients, we welcomed four talented new team members. Each brings valuable experience and fresh perspective, strengthening our ability to respond quickly, plan proactively, and serve you well for years to come. We are proud of what we have built together and grateful for your trust, making this progress possible.

Sincerely,

The Grant Street Investment Committee