VWG Wealth Management 2025 4th Quarter & Year End Review

By VWG Wealth Management on January 9, 2026

Executive Summary

• After suffering a 20% tariff induced drawdown early in April, the S&P 500 rebounded to post another solid year of returns. Adding 2.4% in the 4th quarter, the S&P 500 Index advanced 17.7% for the year. Smaller U.S. stocks lagged as the Russell 2000 Index gained 11.3%.
• The year’s overriding theme was the breathtaking developments and announcements in hypercomputing, artificial intelligence (AI) and large language models, and the massive capital-intensive buildout to support them.  It is estimated that 40% to 60% of the S&P 500’s 2025 returns and earnings were attributed to this broad theme. 
• International stocks outperformed U.S. stocks for only the 3^rd time in the last 16 years. The MSCI All Country World Index (ACWI) excluding the U.S. rose 32.5% for the year.  Emerging markets stocks also fared well.  Several respected experts believe that the resurgence of international stocks is sustainable as a “trend and not a trade.”
• The U.S. economy slowed and the labor market softened.  Much discussion revolved around the descriptive metaphor of a “K-shaped economy,” where the prospects and momentum of wealthier and higher-income households further diverged from lower-income groups and many small businesses.
• U.S. economic growth is poised to accelerate in 2026 as a “shock and awe” policy that includes large tax refunds, business tax cuts, and Federal Reserve interest rate cuts and balance sheet expansion kick in.  This should be no surprise given that important congressional mid-term elections loom in early November.  Investors should note that historically, accelerated economic growth in the 2^nd year of a presidential cycle has not translated into strong stock market returns.
• VWG expects many of 2025’s investment themes to continue in 2026.  These include a polarized, K-shaped economy, the ‘reordering’ of the U.S. in relation to geopolitics and macroeconomics, and intense focus on the hypercomputing and AI buildout.  There will likely be sharp rotations and periodic volatility along the way as investors shift between skepticism and the ‘fear of missing out’ (FOMO). 
• There are numerous reasons for long-term investors to remain positive.  Today’s possibilities for public and private entrepreneurs to build and grow thriving businesses, and to create and implement disruptive technologies, boggle the mind.  However, as asset valuations reflect quite a bit of optimism, investor expectations need to be set realistically.
• VWG recommends diversified portfolios, balancing components seeking long-term capital appreciation alongside those striving for steady conservative returns.  Appropriate levels of cash and quality liquid short-term bonds should be set dependent on an individual’s risk tolerance and their expected needs.
• As always, thoughtful financial planning and reviews should drive portfolio allocations and investment decisions.  Please contact your VWG advisor if you experience any significant changes in your financial situation or your expected future needs. 

Review of the Markets

The U.S. stock market took investors on a suspenseful and volatile ride in 2025, marked by periods of both despair and exhilaration.  After suffering a 20% drawdown that culminated a week after the tariff induced “liberation day,” stocks rebounded to new highs by the end of the second quarter.  Initially, much of the improvement was seen in deeply washed-out sectors and ‘meme’ stocks.  But the year’s overriding theme was the breathtaking sequence of developments and announcements in hypercomputing, large language models (LLMs), generative artificial intelligence (AI), and the massive capital-intensive data center buildout supporting them.  Experts estimate that between 40% to 60% of S&P 500’s 2025 returns and earnings were related to broad AI and hypercomputing. In the 4^th quarter some of the AI ebullience and FOMO (fear of missing out) swung sharply to skepticism and unease.  The overall market stayed firm as money rotated into healthcare and other sectors. 

The year’s total return for the S&P 500 index was 17.7%, gaining 2.6% in the 4^th quarter.  Small US stocks, as benchmarked by the Russell 2000 Index increased 11.3% for the year, edging 1.9% higher in the last quarter. 

Despite the AI fervor (of which much has emanated from U.S. corporations and universities), US large stocks were not the best performing asset classes in 2025.  The MSCI All Country World Index (ACWI) excluding the U.S. advanced 32.5% for the year, rising 4.9% in the 4^th quarter.  Individual stock markets in Canada, UK, Germany, Spain, Japan and Hong Kong also outperformed the S&P 500.  Emerging markets also participated, with the MSCI Emerging Markets Index gaining 33.9% for the year.

U.S. fixed income markets were positive in 2025, as economic growth slowed and unemployment trended higher.  Rapidly changing trade relationships, restrictions and tariffs created much uncertainty over future expectations for growth and inflation.  Much of the discussion revolved around the “K-shaped economy,” referring to a sharp divergence in the economic prospects and momentum between higher-income households and asset owners versus lower-income groups, many small businesses and interest-rate-sensitive industries.  The 10-year U.S. Treasury note remained sticky, ending the year with a yield of 4.17%.  This was somewhat surprising given a softening labor market, the precipitous fall in the price of gasoline, and three – 25 basis point federal funds rate cuts made by the Federal Reserve between September and December.  For the year, the Bloomberg U.S. Aggregate Bond Index earned a 7.1% total return.  The Bloomberg Barclays High Yield Bond Index increased 8.7%. 

The value of the U.S. dollar fell sharply against a basket of six major world currencies, with the ICE US Dollar Index dropping 9.1%.  This contributed to the strong performance of international stocks and some commodities.  The ICE US Dollar index ended the year around the middle of its trailing 5-year range.  But the severity of this year’s drop was notable, at a similar magnitude last seen in 2017. 

Due in part to the weakened U.S. dollar, global central bank buying, and heightened global macroeconomic uncertainty, gold enjoyed renewed interest as a “safe haven” asset. The NYMEX Gold continuous futures contract rose 64.4% for the year, one of its strongest annual performances in decades.  It climbed 12.1% in the 4^th quarter.  Crude oil dropped for the year, with the NYMEX West Texas Intermediate Crude continuous futures contract sliding 19.9%. 

Are International Equities a Trend or a Trade? 

2025 was the first of the last six years where large U.S. stocks were not significant outperformers among major asset classes.  International stocks, emerging markets stocks, and gold all significantly outperformed.  2025 was only the third year out of the last 16 that international stocks outperformed U.S. stocks, and it was their largest margin of outperformance since 2009.  Can this continue in 2026?

Lisa Shalett, Morgan Stanley’s Chief Investment Officer, believes that “international equities are a trend not a trade.¹”  She remains constructive on U.S. stocks but urges realistic expectations and diversification.  She highlights U.S. fiscal imbalances—federal debt at ~120% of GDP and annual deficits near 7% of GDP—as creating “fiscal dominance,” pressuring the dollar and limiting the Fed’s ability to combat inflation. This could redirect investor flows away from U.S. assets and toward relative value opportunities in select international market.²” 

AQR’s Antti acknowledges in his “Exceptional Expectations” white paper that “the U.S.’s superior GDP growth, its dominant mega capitalization companies, and maybe even AI tailwinds, justify a continued edge.³” But he points out that “over the past 35 years U.S. equity valuations have repriced from roughly 50% of international equity valuations to about 200%, a four-fold increase.⁴”  He cautions investors from “extrapolating past growth and remarkable valuation repricing into the future, stating ‘review mirror expectations may be the strongest just when they are most dangerous.⁵” 

 Bridgewater Associates’ (one of the world’s largest hedge funds) co-CIO Greg Jensen further expounds on the topic.  He comments, “to me if you look at the world right now, overweighting the U.S. ‘home bias’ is a trap (when considering the challenge of safely compounding wealth going forward over the long term).  Most people have moved away from diversification because it hasn’t worked for 15 years, when all you needed was U.S. equities, and the more liquid (and larger) the better.  I would own a much globally diversified portfolio than most people have, because you don’t know who the winners and losers will be, particularly with the radical changes going on in the United States.⁶” 

Independent global strategist Gav-Kal’s Louis-Vincent Gave promotes his thesis of a “world reordering,” which is a fundamental change in the global economic/geopolitical environment which has been largely in place in the past 50-year, post-Bretton Woods era.  He doesn’t see a “new world order,” but a “fraying into multiple parallel or multi-polar orders.  These are marked by a potential decline (but not replacement) in U.S. dollar dominance, overhanging U.S. fiscal issues, the receding of U.S. global geopolitical and military influence, the growth of China’s technological and industrial expertise, and a breakdown in traditional finance and trade structures.  At the margin, capital flows into attractively priced international stocks, emerging markets and commodities could increase, away from the West.^7,8” 

Portfolio Positioning for 2026

Are we making a call away from U.S. stocks, or predicting which sub-classes of stocks will perform best this year?  Absolutely not.  VWG rarely makes timing or trading “calls.”  We firmly advocate focusing on the long term in investing for our clients.  Investors cannot be too negative on US stocks.  We fully embrace the ownership of high-quality compounding businesses (and portfolio managers that own them) having defensible moats.  A majority of these are domiciled in the United States. 

Economic growth in 2026 is expected to accelerate in what Strategas’ Dan Clifton terms a “shock and awe economic policy.⁹”   This will be fueled by $150 billion in tax refunds and $200 billion in business tax cuts, (created in the One Big Beautiful bill passed last year), along with interest rate cuts and balance sheet expansion by the Federal Reserve.  Coming in the 2^nd year of the Presidential cycle and into the mid-term elections, this should be of no surprise.  The past 28 years’ history supports this, regardless of which party was in office.

Dean Curnutt, CEO of Macro Risk Advisors, explains the current landscape: “2026 sets up to be a “win at any cost” mid-term contest for the house and senate, and we may see some unbelievable stuff, particularly with our incredibly polarized US political climate.  Fiscal discipline, whatever that might mean in today’s lexicon of enormous debt and deficits, is unlikely to be seen next year if it means losing control of congress.  If there is an opportunity to goose the economy to improve standing with voters, it will be attempted.   The stakes are viewed as way too high not to.¹⁰”   

However, if the “shock and awe” fully materializes and economic growth does accelerate, it may not translate into easy gains for the U.S. stock market.  Clifton explains, “despite midterm election years having highest economic growth rate, the midterm year is on average the worst for (U.S.) stocks.  Equity markets are very good at pricing in expectations for higher growth. But once that growth hits (and bond yields concurrently rise), the equity market has often exhibited a large intra-year drawdown.¹¹” 

Looking further out, it is hard to envision how the US’s current combination of loose fiscal discipline, enormous Federal debt, stifled immigration, falling birth rates, declining aggregate savings, and aging baby boomers drawing more upon social security and Medicare (while earning less and paying less taxes) will resolve without angst.  Despite a hopeful short-term picture for the US economy and the stock market, VWG must maintain a long-term, balanced focus for our clients. 

As always, diversification is our first line of defense when facing short- and long-term macroeconomic, geopolitical and market uncertainty, and the inevitable volatility which will follow.  For those portfolios that have become overly concentrated in U.S. large equity exposure after a stellar 15-year run of outperformance, some rebalancing only makes sense.  This rebalancing should include increasing the allocation to international equities if they are underweight (assuming that the overall portfolio is in line with the client’s current needs, long-term objectives, and risk tolerance).  This is not a market call.  It is part of prudent risk management.

AQR’s Antti Ilmanen explains this in his excellent white paper “Diversifying Alternatives and the Rearview Mirror.”  He states that, “just as the ‘rearview mirror mindset’ has probably pushed U.S. equity market valuations too high in the mid-2020s, it has probably pushed expectations for (and allocations to) diversifying alternatives too low.  While equity markets remain in an exuberant mood, investors may have a golden opportunity to make corrective strategic re-allocations at tactically attractive prices.¹²”   

VWG has always embraced constructing and maintaining portfolios that include diversifying alternatives that include an appropriate allocation to private managers and strategies, non-correlated assets and strategies, domestic and international equities, and appropriate levels of cash and quality short-term bonds.  We will diligently continue this mission in 2026.

As always, please inform us should you experience any significant changes that could impact your needs, goals, and your long-term financial plan.  It is a great honor to serve you and your family.  Best wishes for a healthy and prosperous New Year!

Regards, 

VWG Wealth Management 

Suzanne, Ashley, Kay, Brandi, Emily, Irish, Loy, Collin, Lynette, Michelle, Mary Kate, Ryan, Ryan, Ryan, Justin, John, Rick and Jeff 

* All stated index returns are as of 12/31/2025 unless otherwise indicated. 

* Index Data and Charts sourced from FactSet Research, Morningstar, Bloomberg, Strategas Research Partners, Jay Pelosky TPW Advisors.

Footnotes: 

1. Bloomberg Surveillance interview, December 4, 2025. 

2. Morgan Stanley Global Investment Committee Report: “Is Higher Inflation Here to Stay?” published December 2, 2025. 

3. “Exceptional Expectations: U.S. vs. Non-U.S. Equities,” AQR White Paper by Antti Ilmanen and Thomas Maloney, published May 2025. 

4. Ibid. 

5. Ibid. 

6. “In Good Company” Podcast, Nicolai Tangen with Greg Jensen, Bridgewater Associates Co-CIO, November 26, 2025. 

7. “A Rapidly Changing World,” Louis-Vincent Gave, Gavekal Research, November 12, 2025. 

8. “The Wrong Question to Ask,” Louis-Vincent Gave, Gavekal Research, November 10, 2025. 

9. “Strategas Policy Outlook,” Daniel Clifton, Strategas Research Partners, December 17, 2025. 

10. “Alpha Exchange” Podcast, Dean Curnutt, ‘Price is the Only Fundamental,’ November 25, 2025, 

11. “Strategas Policy Outlook,” Daniel Clifton, December 17, 2025. 

12. “Diversifying Alternatives and the Rearview Mirror,” AQR White Paper by Antti Ilmanen and Thomas Maloney, published November 2025. 

13. Neil Dutta, Renaissance Macro, “Why the Fed might need to ‘get on with it’ and cut rates,” Yahoo Finance, June 12, 2025.