The LTWM Insider – Market and Economic Commentary Q4 & Full Year 2025

Executive Summary

The fourth quarter of 2025 was strong for stocks, making the full year 2025 robust for portfolio returns. More importantly, globally diversified portfolios delivered outsized returns, due to a significant shift in market leadership, as international and emerging markets outperformed U.S. equities for the first time in years. There were several key performance drivers, including the nearly 10% decline in the U.S. Dollar Index (DXY). This provided a "currency kicker" for U.S.-based investors, significantly boosting the dollar-denominated returns of foreign assets. Second was a more accommodative monetary policy, as global central banks, including the Federal Reserve, transitioned into a rate-cutting cycle. This easing of interest rates supported both equity valuations and bond prices throughout the year. Third was the valuation differential, international stocks began 2025 at deep discounts compared to U.S. multiples, attracting capital as investors sought better value outside of concentrated U.S. tech. Fourth was the broadening of the bull market: While AI-related mega-cap stocks (the "Magnificent 7") remained influential, the rally broadened in Q4 to include small-cap and cyclical stocks as the economic outlook for 2026 improved. Additionally, strong corporate earnings and a "soft landing" economic backdrop, marked by resilient consumer spending and falling inflation, helped markets overcome early-year volatility and a mid-year tariff-related correction.

We are pleased to see the latest developments and remain cautious due to the high valuation of U.S. large cap stocks but optimistic on small cap stocks and international asset classes. The S&P 500 Price to Sales ratio is at a new all-time high of 3.46, above its previous peak of 3.23, reached in December of 2021. The outperformance of small cap stocks and the increased breadth of positive gains (not just the Mag7) is positive for the rest of 2026. With such a strong start in January for the first quarter, it improves the probability the momentum continues into 2026.

For those who would like a deeper dive into the details, please continue reading…

World Asset Class 4th Quarter 2025 Index Returns

The fourth quarter of 2025 was positive for U.S., International Developed and EM stocks but negative for global real estate. For the total U.S. Stock Market, the fourth quarter return of 2.4% was slightly below the average quarterly return of 2.5%. International Developed Stocks returned 5.2%, well above the long-term average quarterly return of 1.8%. Emerging Market Stocks returned 4.73%, above the average quarterly return of 2.7%. The worst return was found in Global Real Estate Stocks, which lost -0.81%, well below the asset class’s average quarterly return of 2.2%. The U.S. Bond Market was positive, up 1.1%, just above its average quarterly return of 1.0%, while the Global Bond Market (ex U.S.) was up 0.52%, slightly below its average quarterly return of 0.9%.

Here is a look at broad index returns over the past year (all of 2025) and longer time periods (annualized):

For full year 2025, EM stocks led all broad categories with a positive return of 33.57%, International Developed stocks were up 31.85%, U.S. stocks were up 17.15%, and Global Real Estate stocks were up 7.67%. The U.S. Bond Market gained 7.3% and Global Bonds were up 2.8% for the past year. Over the past five years, U.S. stocks were up 13.15% annually, while International Developed stocks were up 9.46% annually, Emerging Market stocks were up 4.2% annually, and Global Real Estate stocks were up 3.92% annually. The U.S. Bond Market was slightly negative, down -0.36% annually for the past five years, while Global Bonds were up 0.79% annually. Over the past 10 years, the U.S. stock market (up 14.29% annually) is still ahead of International Developed (up 8.55% annually), Emerging Market stocks (up 3.82% annually) and Global Real Estate stocks (up 5.39% annually). U.S. Bonds were up 2.01% and Global Bonds were up 2.58%, annually, over the last 10 years. You can also view annual returns for 15 and 20 years. The past 15 years have been strong for U.S. stocks, up 13.58% annually.

Taking a closer look within U.S. stocks during the fourth quarter, Large Cap Value took the top spot, up 3.81%, followed by Small Value with a gain of 3.26%. Marketwide stocks were up 2.4% for the quarter. It was a challenging quarter for Large and Small Growth stocks.

If we extend our analysis of U.S. stocks over longer time periods, Large Growth stocks still led over the past year, up 18.56% while Large Value was up 15.91%. Large Growth has been the top returning asset class in the U.S. over the past 3, 5, 10, 15 and 20 years, outpacing the broad Large Cap category in each of the periods.

The U.S. stock market represents 63% of the global stock market. The U.S. business cycle continues to slow as measured by leading economic indicators; however, GDP growth is robust for 2025, and expectations are positive for 2026. The latest GDP growth news is the initial estimate released by the Bureau of Economic Analysis (BEA) on December 23, 2025, and U.S. real GDP increased at an annual rate of 4.3% in the third quarter of 2025. This was much higher than expectations and the strongest quarterly growth in two years. While consumer spending was strong, which is excellent for the economy, there was a sharp rebound in exports due to the reduction of tariffs from much higher levels, which isn’t likely to repeat. The Federal Reserve Bank of Atlanta’s GDPNow model estimates 5.3% growth for Q4 2025 and most estimates for the full year of 2025 hover around 2%. Estimates for 2026 are slightly higher, between 2-2.6%. Tax cuts and reforms from the OBBBA are expected to drive growth in 2026. The outlook for the U.S. economy is positive.

International Developed stocks were very strong in local currency and still strong in dollars for the quarter, as the U.S. dollar weakened against most major currencies. International stock returns were well above U.S. stock returns in the fourth quarter. International Value stocks led the fourth quarter, up 8.15%, after currency adjustment (up 9.2% in local currency). Growth Stocks were last, up 2.2% in U.S. dollars, (up 3.26% in local currency). The currency effect served as a more than 1% headwind, hurting international stock returns during the fourth quarter:

For all of 2025, International value led with a strong return of 42.23%, while growth stocks returned 21.94%. Over longer time periods, the value premium (value-growth) is positive for the fourth quarter, the past one-year period, and the past 3, 5, 10 and 15-year periods, but still slightly negative over the last 20 years. The size factor premium (small cap-large cap) is negative in the past quarter, positive in the 1-year, 3-year and 15-year periods (6.82% vs. 6.59%), and 20 years (6.05% vs. 5.69%); and negative for the past 3 years (15.77% vs. 17.64%), 5 years (6.49% vs. 9.46%) and 10 years (8.05% vs. 8.55%):

The International Developed Market represents 26% of the global stock market and Emerging Markets represent 11% of the global stock market. International stocks outperformed the U.S. for the full year of 2025, for the first time in many years. There are many factors that drove the outperformance. The primary driver was a nearly 10% decline in the U.S. dollar index (DXY), which adds to dollar returns of international stocks. An accommodative monetary policy also helped as global central banks transitioned to a rate cutting cycle, which supports equity valuations and bond prices. International stocks are also playing valuation catch up since they were trading at deep discounts to U.S. stocks at the beginning of the year. We believe these trends will continue into 2026.

Moving the commentary to fixed income, bond market returns around the world were mostly positive during the fourth quarter (the only negative return was for the Long Bond index, down -0.04%). The yield on the 5-year Treasury Note decreased by 1 basis point, ending the quarter at a yield of 3.73%, down from 3.74%. The yield on the 10-year Treasury Note increased by 2 basis points, ending the quarter at a yield of 4.18%, up from 4.16%. And the 30-year Treasury bond yield increased by 11 bps to 4.84%, up from 4.73%. As yields increase, bond prices decline, and higher borrowing costs make it more difficult for consumers and corporations to use debt, including auto loans and mortgages. Here is the U.S. yield curve, and you can see how yields decreased for all short and intermediate maturities except those at the very long end (current yield curve in grey, one quarter ago in blue, and one year ago in green):

Looking at fixed income asset classes, the highest fourth quarter bond return was for the broad Municipal Bond Index (up 1.56%), while the worst return was the Government Bond Index Long (long-term Treasuries, down -0.04%). The U.S. High Yield Corporate Bond Index was positive for the quarter (up 1.31%), so bond traders were not concerned about lower quality bonds. The U.S Aggregate Bond Index was up 1.1%. It is worth noting that the long bond index was down -7.18% annually for the past five years. Long duration bonds can have significantly negative returns during periods of rising interest rates. Here are the fixed income periodic returns:

The stock market considers hundreds of factors to determine asset prices, some more important than others. Currently, inflation is one of the most influential factors for determining asset price movements. The uncertainty of the new administration’s tariff policy and amount of U.S. government debt that mut be sold periodically has increased inflation expectations. However, the Fed could decrease the amount of bonds it sells monthly or even stop quantitative tightening all together to create a bond rally, which would drop interest rates. 

CONCLUSION

The broadening of returns during the fourth quarter and the change in leadership away from U.S. large cap growth stocks is supportive of a continuation of the bull market. The high stock market valuation is supported by better-than-expected GDP growth, a resilient U.S. consumer, strong corporate spending, fiscal policy and an accommodative Federal Reserve. The valuation of the S&P 500 remains elevated, but international and emerging market stocks and even U.S. small cap stocks are still attractive. This is the reason we hold globally diversified portfolios, which we believe will do well this coming year.

Our recommendation is to stay disciplined with investments, tune out the news and focus on what you can control with your financial plan in the new year. We are here to help you succeed and look forward to seeing you soon.

^{Standardized Performance Data and Disclosures}

^{Russell data © Russell Investment Group 1995-2025, all rights reserved. Dow Jones data provided by Dow Jones Indexes. MSCI data copyright MSCI 2025, all rights reserved. S&P data provided by Standard & Poor’s Index Services Group. The BofA Merrill Lynch Indices are used with permission; © 2025 Merrill Lynch, Pierce, Fenner & Smith Inc.; all rights reserved. Citigroup bond indices copyright 2025 by Citigroup. Barclays data provided by Barclays Bank PLC. Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio.}

^{Past performance is no guarantee of future results. This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell securities.  Diversification does not guarantee investment returns and does not eliminate the risk of loss.}  

^{Investing risks include loss of principal and fluctuating value. Small cap securities are subject to greater volatility than those in other asset categories. International investing involves special risks such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks. Sector-specific investments can also increase these risks.}

^{Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, liquidity, prepayments, and other factors. REIT risks include changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, supply and demand, and the management skill and creditworthiness of the issuer.}

^{Principal Risks:}

^{The principal risks of investing may include one or more of the following: market risk, small companies risk, risk of concentrating in the real estate industry, foreign securities risk and currencies risk, emerging markets risk, banking concentration risk, foreign government debt risk, interest rate risk, risk of investing for inflation protection, credit risk, risk of municipal securities, derivatives risk, securities lending risk, call risk, liquidity risk, income risk. Value investment risk. Investing strategy risk. To more fully understand the risks related to investment in the funds, investors should read each fund’s prospectus.}

^{Investments in foreign issuers are subject to certain considerations that are not associated with investment in US public companies. Investment in the International Equity, Emerging Markets Equity and the Global Fixed Income Portfolios and Indices will be denominated in foreign currencies. Changes in the relative value of these foreign currencies and the US dollar, therefore, will affect the value of investments in the Portfolios. However, the Global Fixed Income Portfolios and Indices may utilize forward currency contracts to attempt to protect against uncertainty in the level of future currency rates (if applicable), to hedge against fluctuations in currency exchange rates or to transfer balances from one currency to another. Foreign Securities prices may decline or fluctuate because of (a) economic or political actions of foreign governments, and/or (b) less regulated or liquid securities markets.}

^{The Real Estate Indices are each concentrated in the real estate industry. The exclusive focus by Real Estate Securities Portfolios on the real estate industry will cause the Real Estate Securities Portfolios to be exposed to the general risks of direct real estate ownership. The value of securities in the real estate industry can be affected by changes in real estate values and rental income, property taxes, and tax and regulatory requirements. Also, the value of securities in the real estate industry may decline with changes in interest rate. Investing in REITS and REIT-like entities involves certain unique risks in addition to those risks associated with investing in the real estate industry in general. REITS and REIT-like entities are dependent upon management skill, may not be diversified, and are subject to heavy cash flow dependency and self-liquidations. REITS and REIT-like entities also are subject to the possibility of failing to qualify for tax free pass through of income. Also, many foreign REIT-like entities are deemed for tax purposes as passive foreign investment companies (PFICs), which could result in the receipt of taxable dividends to shareholders at an unfavorable tax rate. Also, because REITS and REIT-like entities typically are invested in a limited number of projects or in a particular market segment, these entities are more susceptible to adverse developments affecting a single project or market segment than more broadly diversified investments. The performance of Real Estate Securities Portfolios may be materially different from the broad equity market.}

^{Fixed Income Portfolios:}

^{The net asset value of a fund that invests in fixed income securities will fluctuate when interest rates rise. An investor can lose principal value investing in a fixed income fund during a rising interest rate environment. The Portfolio may also be affected by: call risk, which is the risk that during periods of falling interest rates, a bond issuer will call or repay a higher-yielding bond before its maturity date; credit risk, which is the risk that a bond issuer will fail to pay interest and principal in a timely manner.}

^{Risk of Banking Concentration:}

^{Focus on the banking industry would link the performance of the short-term fixed income indices to changes in performance of the banking industry generally. For example, a change in the market’s perception of the riskiness of banks compared to non-banks would cause the Portfolio’s values to fluctuate.}

^{The material is solely for informational purposes and shall not constitute an offer to sell or the solicitation to buy securities.  The opinions expressed herein represent the current, good faith views of Lake Tahoe Wealth Management, Inc. (LTWM) as of the date indicated and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such.  The information presented in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, LTWM does not guarantee the accuracy, adequacy or completeness of such information.} 

^{Predictions, opinions, and other information contained in this presentation are subject to change continually and without notice of any kind and may no longer be true after the date indicated. Any forward-looking statements speak only as of the date they are made, and LTWM assumes no duty to and does not undertake to update forward-looking statements.  Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time.  Actual results could differ materially from those anticipated in forward looking statements. No investment strategy can guarantee performance results. All investments are subject to investment risk, including loss of principal invested.}

^{Lake Tahoe Wealth Management, Inc.is a Registered Investment Advisory Firm with the Securities Exchange Commission.}