2025: Q4 Macro Review

Macro Review – Q4 CY 2025

Global Markets

Global equities (MSCI All Country World Index) rose 3.7% in Q4, capping 2025 with a third straight quarterly gain
fueled by AI spending, solid earnings, and Fed liquidity. While the ECB held steady, the Fed cut rates twice, ended
quantitative tightening, and launched Reserve Management Purchases (RMP) to counter a softening labor market.
In the UK, cooling inflation prompted a December rate cut by the BOE.
Japan saw a market rally following Sanae Takaichi’s election as PM; her “economic security” focus lifted tech and
defense stocks, while the BOJ hiked rates by 25 bps to 0.75%. Trade tensions eased significantly as US-China deescalation saw US statutory tariffs drop from an April peak of 30% to 15.7% by year-end. In alternatives, gold hit
record highs above $4,000/oz, while Bitcoin tumbled over 25% from its peak. Fixed income saw positive total returns
amid shifting fiscal policies, and commodities finished higher as gains in metals offset losses in energy and agri.

United States

US equities climbed 2.7% in Q4. While robust earnings and consumer resilience bolstered markets, high tech
valuations and AI spending concerns shifted capital toward cyclical and value stocks. 2025 was a year of remarkable
resilience. Despite an early 20% sell-off driven by trade uncertainty, the S&P 500 staged a massive recovery to finish
the year up 17.9%, marking its third consecutive year of double-digit gains. This growth was fueled by AI innovation,
strong corporate earnings, and a pivot toward lower interest rates. Led by the “Magnificent 7,” Growth stocks
outperformed Value (18.6% vs. 15.9%) for another year. This dominance extended across market caps, with Large
Caps significantly outpacing Mid Caps (S&P 400: +7.5%) and Small Caps (Russell 2000: +12.8%).
While tech-heavy indices like the Nasdaq 100 posted annual return of +21%, market leadership began to shift toward
large-cap value proxies and the Dow Jones gained +4.0% in the final quarter. This rotation occurred as the AI theme
matured; investors moved away from broad enthusiasm toward a selective focus on companies that could turn AI
demand into near-term profits and maintain cash flow despite heavy capex —this shift helped distinguish companies
with solid fundamentals from the higher-risk players within the AI ecosystem. Notably, market breadth remained
narrow, as only 29% of S&P 500 stocks outperformed the index in 2025, well below the 49% historical average. In the
Magnificent 7 group, Alphabet cemented its position as the AI infrastructure frontrunner with a 29% Q4 surge, fueled
by advancements in its custom silicon initiatives The fourth quarter was defined by a 43-day government shutdown that began on October 1st, the longest in history,
which created a “data fog” by delaying critical reports on employment, inflation, and growth. This lack of timely
information forced investors and the Federal Reserve to rely on corporate earnings and non-government surveys,
contributing to periods of market volatility. Despite these hurdles, the U.S. economy showed resilience driven by
strong consumer spending, exports, and government. Real GDP growth rose to +4.4% in Q3, up from +3.8% in Q2,
marking the strongest consecutive quarters of growth since 2021; annual inflation (CPI) held steady at 2.7%.However,
cracks appeared in other areas: the labor market softened with unemployment hitting 4.4%, and the homebuilder
sentiment index remained below 50 (at 37), indicating that housing activity is still running below pre-pandemic trends.
In response to this shifting landscape, the Fed continued its rate-cutting cycle, delivering two -0.25% reductions in
October and December. This brought the total rate cuts to -1.75% since September 2024, lowering the target rate to
3.75%. While these cuts were supportive, Fed officials signaled a likely pause for early 2026, cautioning that future
policy will be highly sensitive to incoming data. This nuanced messaging reflects a divide among policymakers; some
fear policy remains too restrictive, while others worry that cutting too quickly could reignite inflation.
Within the S&P 500’s 2.7% quarterly gain, 8 of the 11 sectors were positive. The Health Care sector spearheaded this
growth with an impressive +11.7% gain, bolstered by standout performances in pharmaceuticals (+23.6%) and
biotechnology (+9.4%). Communication Services also posted notable strength, rising +7.3%. Conversely, the Real
Estate sector faced the steepest decline at -2.9%, while Utilities and Consumer Staples also lagged behind the
broader market with returns of -1.4% and +0.0%, respectively. Credit markets remained relatively quiet. While
shorter-maturity Treasury yields fell alongside Fed cuts, longer-maturity yields (10Y) ended the quarter slightly higher
at 4.17%. Corporate bonds gained roughly +1% in Q4, capping off +8% returns for the full year, though credit spreads
have reached their tightest levels in decades.
The Forward View: As we enter 2026, the market faces a higher bar. With stock valuations elevated and high
expectations already priced in, there is less room for error or positive surprises. However, the fundamental backdrop
remains strong: tech innovation is at a multi-decade high, and systemic stress is low. The fear for the economy is the
decreasing consumer confidence – this data should continue to put pressure on the Fed to cut. The market will see
pullbacks and these would present a good time to add to US portfolios. US GDP growth could well touch 5% in 2026.

Europe

European equities surged 6.2% in Q4, buoyed by an upgraded 2025 Eurozone growth forecast of 1.3% (up from 0.9%)
and an expected 7.3% rise in STOXX 600 earnings. While the manufacturing PMI slipped to 48.8, the services sector
drove the Composite PMI to 51.9, marking a full year of post-pandemic expansion. The ECB maintained rates for the
fourth straight meeting as inflation held at 2.1%, while the BOE cut rates in December as UK inflation hit an eightmonth low of 3.2%. Geopolitically, the EU pledged a €90 billion loan to Ukraine, though ceasefire talks remained
stalled. Europe’s manufacturing PMI dipped to 48.8 in December as orders slowed, yet overall sentiment rose to 97.0
on 2026 production optimism and defense spending. Sustained growth in the services sector helped balance the
industrial lag, while industry confidence strengthened on the back of German stimulus hopes.

Germany (+2.6%): Despite a low 0.6% growth forecast for 2026, the ZEW Sentiment Index jumped to 45.8 (beating
the 38.5 estimate) on hopes for fiscal stimulus.
UK (+7.1%): Business activity accelerated in December following a £22 billion tax-heavy “Autumn Budget,” despite a
minor 0.1% GDP contraction through October. Annual headline inflation fell to 3.2% in November, a sharper-thanexpected drop to its lowest level in eight months.
France (+3.5%): Political gridlock over the 2026 budget and a target to cut the deficit below 5% of GDP pushed 10-
year bond yields to a 14-year high, forcing emergency spending legislation.

China

Chinese stocks experienced a turbulent fourth quarter, finishing down 7.6% as markets grappled with evolving
geopolitical tensions, inconsistent economic reports, and varying levels of policy intervention. While the quarter saw
periods of stability, shifting international relations and lukewarm domestic data kept investors on edge.
China’s trade surplus reached a historic milestone, exceeding US$1 trillion as November exports climbed 5.9% yearover-year—notably overcoming a nearly 29% plunge in US-bound shipments. However, this trade strength contrasts
with a struggling domestic landscape; while December’s factory activity beat expectations, November’s declines in
industrial output, retail sales, and investment underscored deep-seated economic fragility. With the property sector’s
slump worsening—highlighted by a 2.4% drop in home prices—and internal demand remaining stagnant, the
government faces mounting pressure to implement aggressive consumption-led stimulus.
Q4 GDP grew by 4.5% YoY (1.2% QoQ), meeting the 5% annual target. December 2025 manufacturing PMI returned
to expansion at 50.1, breaking an eight-month decline. CPI and Core CPI remained weak at 0.8% and 1.2% YoY
respectively, signaling persistent deflationary pressures that continue to overshadow the recovery in manufacturing.

Emerging Markets

Emerging markets equities climbed 5.7% in Q4, with Latin America leading the charge, followed by Asia and EMEA.
▪ Asia (+5.8%): Taiwan (+13.9%) reached record heights as AI demand drove November exports up 56% to US$64
billion. South Korea (+30.8%) also saw massive gains following a US trade deal involving a US$350 billion
investment commitment in exchange for reduced tariffs. This spurred a 1.3% Q3 GDP expansion—the fastest in
nearly four years—and pushed 2025 exports to a record US$700 billion, bolstered by a 40% surge in December
semiconductor shipments.
▪ India (+6.3%): India’s economy sustained healthy momentum in the quarter ended December 2025, with GDP
growth pegged around 7.0%. Economic activity remained robust, supported by a 10.3% YoY rise in industrial and
services indicators in December, driven by strong festive demand and auto/energy consumption. India’s macro
environment was defined by exceptionally low headline inflation, with December CPI rising to 1.33% from 0.71%
in November, driven by persistent food deflation (-2.71% in December). This benign price environment allowed
the RBI to cut the repo rate to 5.25% from 5.50% in December 2025 to support growth, adopting a neutral stance.
The quarter saw a notable turnaround in corporate profitability, with 54% of companies reporting positive results,
led by mid and small caps (64% and 55% positive, respectively), while large caps lagged.
▪ EMEA (+2.7%): Saudi Arabia (-7.6%) faced a downturn following the Capital Market Authority’s delay in reforms
regarding majority foreign ownership. Despite this, non-oil activity hit a 10-month high, even as the PMI
moderated from 60.2 to a healthy 58.5 in November. Mirroring the Fed, the Saudi Central Bank cut repo and
reverse repo rates by 25 bps to a three-year low. Meanwhile, South Africa (+9.7%) saw inflation cool to 3.5% in
November, the first dip in three months. Economic momentum remained positive as Q3 GDP grew 0.5% quarterover-quarter, bolstered by gains in the mining and agriculture sectors.
▪ Latin America (+8.8%): Brazil (+9.8%) saw a significant boost following the removal of 40% US tariffs on food
products. While tight monetary policy cooled the economy—resulting in a modest 0.1% Q3 GDP growth—inflation
hit a 14-month low of 4.5% in November, falling within target ranges. Meanwhile, Mexico (+3.5%) implemented
aggressive 50% tariffs on China and other nations, effective January 1. Despite a 0.3% Q3 GDP contraction and a
revised 2025 growth forecast of just 0.3%, the central bank cut interest rates by 50 bps to 7% in December.

Pacific Basin

•  Australia (-1.6%): Equities dipped as persistent inflation and a tight labor market dashed hopes for rate cuts.
  October’s CPI surged at its fastest pace in seven months, with core inflation hitting 3.3%—well above the RBA’s
  2.0% – 3.0% target. Q3 GDP grew 0.4% (missing the 0.7% forecast), despite a 1.3% surge in household spending.
  The RBA held rates at 3.6%, with Governor Michele Bullock signaling a potential end to the easing cycle. However,
  a loss of 21,300 jobs in November tempered hawkish expectations.
  ▪ Japan (+9.6%): Markets rallied following the election of Prime Minister Sanae Takaichi, Japan’s first female
  leader, heading an LDP-Japan Innovation Party coalition. Sentiment was bolstered by a record ¥21.3 trillion
  stimulus package, though a faster-than-expected 2.3% annualized GDP contraction in Q3 and persistent inflation
  complicated the outlook. The BOJ hiked rates by 25 bps to a 30-year high. 10-year government bond yields hit
  their highest level since 1999 (over 1.0%) due to speculation of aggressive tightening, though December’s softer
  inflation suggested a more gradual path ahead.
  ▪ Hong Kong (-4.1%): Real GDP accelerated to 3.8% in Q3, prompting the government to raise the full-year growth
  forecast to 3.2%. Merchandise exports hit an all-time high in December (+26.1% YoY), fueled by global demand
  for AI electronics. Despite a 3.8% unemployment rate, the economy remained resilient with mild inflation at 1.1%.
  Despite a 4.1% dip in Q4, the Hang Seng Index ended 2025 with a 27.8% gain, marking its best year since 2017.
  This coincided with a significant IPO market recovery, which raised HK$285.8 billion.
  ▪ Singapore (+0.8%): Singapore maintained steady growth, with 2025 GDP expanding by a surprisingly robust
  4.8%, fueled by AI-driven electronics demand. The MAS held rates steady as core inflation moderated to 1.2% in
  November. PM Lawrence Wong warned of a 2026 slowdown to 1% – 3%, pledging an economic overhaul to
  combat trade fragmentation and rising tensions.
  ▪ New Zealand (+2.0%): The S&P/NZX 50 Index reached near all-time highs in Q4, setting nine new peaks in
  October and November. This rally came despite a broader economic “catch-up” phase. The RBNZ aggressively cut
  the Official Cash Rate (OCR) twice in the quarter (-50 bps in October and -25 bps in November), bringing it down
  Pacific Basin
  Quarterly Macro Review: December 2025
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  to 2.25%. Unemployment rose to 5.3%, but the central bank now views inflation risks as balanced, suggesting
  future rate moves could go in either direction.

Commodities

Commodities gained +1.0% in Q4, led by surges in metals despite drags from energy and agriculture.
▪ Industrial Metals (+15.8%): Led by Copper (+22.6%) on AI demand and supply woes. Aluminum (+11.7%), Nickel
(+9.1%), and Zinc (+7.5%) rose on green energy needs and Indonesian supply cuts, while Lead (+0.5%) edged up
on low inventories.
▪ Precious Metals (+15.6%): Silver (+51.0%) surge was fueled by a widening gap between stable mine production
and soaring industrial demand, particularly within the renewable energy sector. Gold (+12.2%) prices climbed on
safe-haven demand stemming from geopolitical tensions, a weaker US dollar, and central bank accumulation.
▪ Agriculture & Livestock (-0.6%): Gains in Corn (+3.5%) and Soybeans (+2.9%) were offset by losses in Cocoa (-
11.2%), Sugar (-8.7%), and Lean Hogs (-3.8%). Cattle dipped slightly (Feeder -0.2%; Live -0.1%) following Brazil
tariff removals.
▪ Energy (-5.0%): Dragged down by Crude Oil (-5.6%), Gasoline (-4.7%), and Heating Oil (-4.5%) as peace talks
weighed on prices. Natural Gas (-2.9%) fell on mild weather and high storage.

Currencies

Currency markets showed mixed performance, with the US dollar remaining rangebound, but with a negative
outlook. Within the G10, the Swedish krona and Canadian dollar emerged as leaders in appreciation, while the
Japanese yen weakened significantly, pressured by an expansive fiscal policy and a cautious, dovish stance from the
Bank of Japan. Emerging markets were similarly varied, with Latin American currencies consistently outperforming
their peers, while results across Asia and the EMEA regions remained inconsistent.

Market Performance Total Returns (%)