Market Commentary | Q4 2025
We approach markets and long-term investing with the patient attention of a gardener. We cannot rush the seasons or accelerate the time that growth and transitions naturally take, but we also cannot expect these outcomes without careful planning, thoughtful pruning, and regular watering.
As we close out 2025, many investors are left with a familiar tension. Portfolios made progress, markets moved higher, and yet the past twelve months rarely felt calm. The year unfolded against a backdrop of fast-moving innovation and AI-everything, turbulent new trade policies, and persistent geopolitical uncertainty. The market finished near a record high, but a steady stream of global headlines tested investor confidence along the way.
This contrast offers one of the enduring lessons from 2025: market volatility is not a sign that something has gone wrong, but rather a fundamental reality of investing in a dynamic and imperfect global economy.
Seasoned investors know that outcomes cannot be rushed, nor can every detail be controlled. What can be controlled is diversification, disciplined rebalancing, knowing when to act, and just as importantly, when not to. As we partner with clients, our role is not to react to every headline, but to remain focused on nurturing durable growth over time.
2025 in Review
Despite widespread uncertainty, markets demonstrated notable resilience in 2025. A cascade of concerns around tariffs, politics, and AI valuations all failed to meaningfully derail the momentum of the current rally.
For the full year, returns across major asset classes reflected the market’s resilient growth [1] :
- Large Cap U.S. Stocks (S&P 500): +17.9%
- Small-cap U.S. Stocks (S&P 600): +6.0%
- International Stocks (EAFE Index): +31.2%
- U.S. Bonds (AGG Index): +7.3%
- Real Estate (FTSE NAREIT Index): +1.7%
Tariff announcements last April briefly panicked markets, reviving fears of higher costs and disrupted trade. While initial reactions were sharp, longer-term impacts have been muted. Businesses adapted, exemptions were granted, and deadlines were extended. Investors who stayed invested participated in the recovery that followed. Once again, patience proved more effective than reaction.
One of the more consequential yet under-the-radar storylines last year was the steady weakening of the U.S. dollar. This currency shift persisted throughout the year, providing a meaningful tailwind for international and emerging market stocks that have lagged US markets in recent years. Most analysts failed to forecast this outperformance in advance, highlighting another enduring lesson from 2025: portfolio construction matters more than prediction for long-term investors.
The AI Cycle: From Narrative to Reality
Artificial intelligence remained one of the most influential forces in markets during 2025, continuing to drive large-cap U.S. stock performance for a third consecutive year. As with other technological breakthroughs, AI represents a genuine shift with long-term implications for productivity, business models, and economic growth.
At the same time, history reminds us that innovation cycles are never linear. Early enthusiasm runs ahead of real-world implementation, and markets price in future possibilities well before outcomes are fully realized. Over time, expectations must turn into execution.
Investors are increasingly shifting their focus from possibility to profitability. Highlighting this concern, Oracle’s share price fell sharply after a recent earnings report that raised new doubts about the timing and scale of expected AI-related cash flows. After rising significantly on AI optimism, investors recalibrated their expectations.[2] This serves as a reminder that while narratives can move markets in the short term, fundamentals ultimately determine long-term results.
Looking Ahead to 2026
While financial markets are always evolving, there are a few key themes and storylines worth paying attention to as we enter the new year:
- Renewed Tariff Turmoil and Geopolitics. While tariffs faded from the spotlight in the second half of 2025, they may re-emerge as a source of uncertainty. A U.S. Supreme Court decision on the legality of recent “reciprocal” tariffs is expected in early 2026, and if they are overturned it could lead to legal issues and renewed volatility. Add to this the geopolitical tensions that accompany the U.S. forcefully expanding its influence in Venezuela, ongoing conflicts in Europe, and mid-term elections looming at the end of the year. As with many policy-driven and geopolitical issues, we expect clarity will arrive slowly and unevenly.
- Interest Rates and Fed Independence. When a new Fed Chair is appointed in May 2026, we expect renewed discussions about central bank independence and political pressure to cut rates. Recent meetings have been marked by disagreement among Fed Governors, which adds to the uncertainty around the direction and pace of interest rate policy. Rates impact every corner of the economy, so markets will pay close attention to every word from the Fed in the coming year.
- Market Breadth and AI Earnings. A key question in 2026 will be whether the rally broadens beyond the tech sector, which many investors are expecting as we turn the page of the calendar.[3] However, with AI-related companies now representing a significant share of major indices, concentration risk is no longer theoretical; even modest earnings shortfalls could have an outsized impact on broad market performance. This reinforces the importance of our diversification across industries and geographies, especially during periods when market leadership narrows.
While we expect these themes to be prominent in the coming year, we also appreciate that it’s impossible to forecast novel events in advance. We enter 2026 with Wall Street predicting another banner year for financial markets, but we’ve been managing portfolios for long enough to know that there will undoubtedly be meaningful bumps along the way.
Investing Through the Seasons
At North Berkeley, we do not attempt to outguess markets or chase short-term trends. Instead, we take a timeless approach designed to allow clients to benefit from long-term compounding. History consistently shows that while investors cannot control markets, they can control their reactions to headlines and their portfolio structure.
This is where we strive to add repeatable value: maintaining diversified portfolios, rebalancing through market cycles, and aligning investment decisions with long-term financial plans. Good investing often feels unspectacular in the moment, yet over time, the quiet compounding helps cultivate financial security for our clients.
Our goal is to create a sense of calm for our clients in a noisy world, allowing financial decisions to be made with confidence rather than urgency. Like tending a garden, progress often comes not from constant action, but from knowing when to water, when to prune, and when to allow time to do its work.
Resources
[1] 2025 Total Return Data from Morningstar, Inc.
[2] Oracle Delays Some Data Center Projects for OpenAI to 2028. Bloomberg
[3] AI ‘Fatigue’ Leaves Investors Focused on S&P’s Other 493 Stocks. Bloomberg
