The Cornerstone Investment Commentary: Year-End 2025

In a year with an abundance of ‘noise’ – to borrow from statistician Nate Silver’s book title – the twin ‘signals’ of interest rate changes and corporate profit levels most impacted 2025’s investment results.

These same two factors were also the lead of our 2024 investment commentary. Their repeat ‘top billing’ is an important reminder: Corporate profits and interest rates usually matter more than anything else in determining your portfolio’s performance even as both are influenced by changing economic events. Inflation heating up or cooling down puts pressure on the Federal Reserve to adjust the interest rate it controls. Shifts in consumer spending impact corporate profits more than A.I. (artificial intelligence). Even tariffs (and who will pay them) only affect markets to the degree that they impact corporate profits.

For 2025, stocks and bonds benefited positively from falling interest rates in the year’s second half and unfolding evidence that tariffs would not impact corporate profits as many feared early last year when their announcement caused global equities to fall over 15% in a seven-week period. However, a shift in the favorability of international stocks (versus U.S.) from February through May gave them a substantial ‘lead’ that expanded further by year-end. That said, foreign stocks’ large advantage last year wasn’t nearly enough to overtake U.S. equity dominance during the last three (2023-25) and five (2021-25) years.

Your portfolio’s global allocation allowed its stock market holdings to materially outpace the S&P 500 index of U.S. equities. Our mid-year increase in your foreign equity allocation also helped achieve this result. It was also a strong year for bond market performance as falling interest rates boosted the overall fixed income market, which particularly benefited the mix of bond holdings in your portfolio. Finally, it’s worth mentioning that just three years ago, many ‘experts’ were proclaiming the ‘death’ of the balanced, globally diversified portfolio. But since 2022, a 60/40 allocation (60% globally diversified equities, 40% fixed income) has returned nearly 14% annually.

As we begin 2026, two upcoming decisions could have a short-term effect on market results: the Supreme Court’s decision on the legality of many tariffs collected last year and the choice of Federal Reserve Chair to succeed Jerome Powell. More broadly, we anticipate that expectations and the magnitude of interest rate changes will again play a large role in 2026. The trends that marked 2025’s fourth quarter are more likely than not to continue: slowly falling interest rates and stronger performance from value stocks.

In light of last year’s equity gains, we believe it prudent to rebalance your portfolio this quarter to slightly reduce its holdings in U.S. large growth stocks and add to your existing fixed income, large value and/or foreign holdings. As always, we will do so in a tax-efficient and cost-effective manner. It goes without saying that we will be watching how markets react to events and ‘signals’ in the new year and assess the need to make further changes as they do.

With wishes for a healthy and happy 2026, we thank you for the continuing opportunity to work together.