Q4 2025: Markets continue to climb a wall of worry

It’s often said that bull markets climb a wall of worry—and the fourth quarter of 2025 stands as a compelling testament to that adage. Despite the longest U.S. government shutdown in history, a spike in job cuts, consumer sentiment hovering near record lows, and a relentless stream of negative headlines, risk assets maintained their upward trajectory in the fourth quarter. As of December 18, 2025, U.S. and international equities delivered quarter-to-date returns of 2% and 3%, respectively, underscoring the resilience of markets even in the face of pronounced uncertainty.

Equities were not the only asset class that benefited investors during the quarter, as broad fixed income categories also posted positive returns of approximately 1% as of December 18, as shown in Figure 1. From a portfolio perspective, a balanced 60/40 stock/bond portfolio returned 2% for the quarter and is now up 16% year-to-date (as of December 18, 2025), materially above the long-term average.
 

As we reflect on 2025, it’s clear that the year delivered strong returns for diversified, balanced investors who stayed the course through volatility and the news cycle—as the path to those returns was far from linear. After a challenging start to the year, U.S. equities faced significant headwinds, declining nearly 19% from their February peak by April 8—officially entering correction territory and hovering just below the threshold for a bear market. Yet, the market demonstrated remarkable resilience, rebounding sharply to post a 38% gain from the April 8 low. Against this backdrop of volatility, equities reached new all-time highs on 39 separate occasions, including December 23 and 24; thus, making 2025 one of the top years of the market hitting all-time highs and positioning annual returns well above their historical average (Figure 2a)—a powerful reminder that staying the course can yield meaningful results even in turbulent environments.

This year’s strong U.S. equity returns follow the very robust performance of U.S. equities in 2023 and 2024. In fact, the U.S. equity market has provided returns exceeding 15% in four of the last five years, with the exception being 2022, when it was down 19%. As we continue to observe, equity returns are rarely as expected and seldom near their long-term averages. Instead, they exhibit a very wide distribution, making the ability to tune out the noise a true superpower for investing success.

Non-U.S. equity markets far outpaced their U.S. counterparts, delivering robust returns of approximately 29% for the year, as of December 18. U.S. bond markets, as measured by Bloomberg U.S. Aggregate Bond Index, also had a strong year with returns of approximately 7% (Figure 2b). Balanced allocations, such as a U.S. 60% stock/40% bond portfolio, provided a return of approximately 13% (Figure 2c). The strong performance of both U.S. equity and balanced portfolios in 2025 once again highlights the importance of diversification, remaining disciplined, and maintaining a long-term investment strategy. 

 

Despite good rebalancing behavior, there is still work to be done!

Despite the strong rebalancing efforts by advisors during the most recent cycle, as outlined in our Risk Speedometers, equity returns have been so strong relative to fixed income that there is likely more work to be done. As of November 30, 2025, equity allocations were near their peak levels, as illustrated in Figure 3. As a result, for many clients, additional rebalancing from equities into fixed income may be needed in 2026. Following such periods of strong equity outperformance, it can be difficult—even counterintuitive—to sell equities and rebalance into fixed income. Additionally, rebalancing often carries another headwind, as it may trigger capital gains taxes for some clients. In such cases, the tax impact can be managed through strategies such as tax-loss harvesting or direct indexing where losses from other investments are used to offset gains. Other effective approaches to minimize the tax burden include rebalancing using ongoing portfolio cash flows or by making transactions within tax-advantaged accounts.

2026 and beyond

As we enter 2026 and you prepare for annual reviews with clients, the market returns of 2025—and even those of the last five years—present you with an excellent opportunity to re-visit your clients’ asset allocation and risk tolerance, reinforce the value of staying the course, and assess whether your clients' portfolios require rebalancing from equities into fixed income. By leveraging history as a guide, you can remind clients that staying the course—which includes rebalancing—has historically served to mitigate risk and improve long-term returns.

For clients, higher wealth and less variability in that wealth—which comes from staying invested and not trying to time markets—increases their chances of financial success. For advisors, practicing holistic wealth management and financial planning, helps to remove some of the uncertainty from the financial planning process.  That, in turn, will likely result in happier clients. And satisfied clients are more likely to make referrals to friends and family for a partner they trust and who has served them well.

We are here to support you in these conversations, with our Market Hindsight Tool, Behavioral Coaching Toolkit, and Advisor's Alpha hub resources. You can also reach out to your Vanguard sales executive for further assistance such as arranging specialist consultations. Using these resources and insights, you are better equipped to have conversations that emphasize the tangible value you provide while also deepening the client relationship. By doing so, both your clients and your practice can have the best chance for long-term success!

 

Notes:

All investing is subject to risk, including possible loss of principal.

Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.

Investments in bonds are subject to interest rate, credit, and inflation risk. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.

Tax-loss harvesting involves certain risks, including, among others, the risk that the new investment could have higher costs than the original investment and could introduce portfolio tracking error into your accounts. There may also be unintended tax implications. We recommend that you carefully review the terms of the consent and consult a tax advisor before taking action.

CFA® is a registered trademark owned by CFA Institute.

Certified Financial Planner Board of Standards Inc. owns the certification mark CFP® in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.