Markets navigated a rather complex set of circumstances in the fourth quarter of 2025. Momentum remained robust through September fueled by healthy corporate earnings, strong consumer spending, and continued business investment. However, as the quarter unfolded, recession fears, cracks in the AI growth story, and a historic 43-day federal government shutdown stalled this momentum and denied investors a “Santa Claus” rally for a second year in a row.
A combination of a softening labor market and easing inflation compelled the Fed to continue lowering interest rates, once in September and two more times in the fourth quarter. By year end, the Fed funds target range moved to 3.50%-3.75%, its lowest level since 2022.
Current conditions are challenging the dual mandate of the Fed, causing them to try to maneuver a delicate balance between rising unemployment and inflation rates that are still not at their 2% target. The December rate cut decision was not unanimous with some members expressing a preference to pause, others advocating for a .25% cut, and Stephen Miran pushing for an aggressive .50% cut. Adding to this complexity is the contentious relationship between the Trump administration and Fed Chair Powell which escalated late last year when a criminal investigation was opened by the Justice Department alleging egregious cost overruns on Fed building renovations. It remains to be seen whether this has merit or is politically motivated, fueling more debate about the independence of the Fed.
For the quarter, US large company stocks (S&P 500 Index) rose 2.66% capping off a third straight year of double-digit returns. Small US stocks (Russell 2000 Index) continued to show promise adding 2.19% and closing the year in double digits as well. The significant revival of international equities (MSCI EAFE Index) remains in place gaining an impressive 4.86% and ending the year up 31.22%. Emerging market stocks were not far behind for the quarter, up 4.73%. Real estate (Dow Jones US Real Estate Index) struggled due to elevated capital costs, high operating expenses, and broader economic uncertainty finishing down 2.32%. Fixed income (Bloomberg U.S. Aggregate Index) was in positive territory up 1.10% as the Fed continued to lower rates seeking what they perceive to be a neutral rate.
Ringing in the New Year
As we begin 2026, stock market valuations are higher while concentration risks remain elevated. Nobel Prize-winning economist, Dr. Robert Shiller, developed what is considered by many to be a more reliable indicator to measure long-term stock market levels, the CAPE ratio. This ratio smooths business cycle fluctuations by averaging inflation-adjusted earnings over 10 years as opposed to traditional P/E measures. It is noteworthy that the current CAPE ratio is ~40x earnings, a level not seen since the late 90’s tech bubble.
The concentration risk in the S&P 500 index remains high with the “Magnificent Seven” still representing an historically high 34% of the total S&P 500 index market capitalization. While we believe the AI growth story will generally remain intact, investors are becoming more selective and holding these companies to a higher level of scrutiny, especially where companies use too much free cash flow or require external financing. This will most likely result in more volatility and rotation both within and outside the space. Further, there will be less patience with the promise of monetization and more focus on those who are able to actually show sustainable profits and productivity from the enormous investments made.
Despite possible headwinds from these factors, we remain cautiously optimistic. While the OBBBA passed last summer, many of its key components will take effect this year. This will include lower tax rates, reduced withholding, and a host of other provisions that should provide relief for consumers. Businesses will also benefit by being able to fully expense equipment and R&D, which could in turn spur additional investment. Many taxpayers will receive larger refunds than usual because the IRS withholding tables were not updated immediately to reflect the provisions of the new bill, perhaps giving the economy an additional boost.
On the monetary side, the Fed claims they will remain data dependent, balancing their support for the labor market while attempting to reduce inflation to target. Most Fed governors seem to be supportive of lower rates, but any signs of rising inflation, economic missteps, or external shocks could quickly change their stance. Regardless, keep in mind that the Fed has very limited control over long-term rates, which may not move in lockstep with reductions in the Fed Funds rate. U.S. debt, deficit, Inflation expectations, fiscal policy, and investor sentiment can influence this relationship, as evidenced by recent trends between the Fed Funds rate and 10-year Treasuries where yields rose while the Fed cut rates.
Geopolitics
Growing geopolitical tensions in any of the current global hot spots could prove to be destabilizing to the economy and the markets. The Ukraine/Russia war is shaping up to be more than a simple conflict between the two countries, but rather a showdown between Russia and NATO. The Gaza peace plan seems to be moving forward, but it remains a very delicate process where progress is slow. The newfound alliance between China and Russia gives the world pause, as together they present a formidable adversary on the world stage. Meanwhile, the Trump administration has begun flexing its muscles in our hemisphere, seeking to assert control through what is being called the “Donroe Doctrine”, using tenets of the Monroe Doctrine, a longstanding U.S. foreign policy meant to keep other aggressors out of our hemisphere. The surgical removal of Nicolas Maduro, the ruler of Venezuela, and his wife, Celia Flores, and President Trump’s declaration that the U.S. would “run” Venezuela is a statement of his intentions. President Trump is also making overtures about striking drug cartels in Mexico while Secretary of State, Marco Rubio, declared that Cuba “is in a lot of trouble”. And his most recent declaration of the need to annex Greenland is presently causing an international stir. So far, markets have generally shrugged off these events, however, each one presents both opportunity and risk.
Affordability
Restoring affordability has been used as a battle cry for both Republicans in the aftermath of the COVID crisis, and now by Democrats to put pressure on the Trump administration to keep its promise to bring down the cost of living for everyday Americans. Consumers continue to feel the pinch on everything from groceries, medical costs, and utility bills to housing and automobiles. Politics aside, the issue of affordability has been a growing problem for decades, and it is not only a function of inflation and pricing, but also on wage growth over time. Promising a timely resolution to this issue will prove to be a dangerous proposition, as this is a complex, deep-seeded problem.
In measuring progress, consumers often conflate price levels with inflation. When they hear that inflation has come down from 9.1% to 2.7%, they are puzzled why they do not feel any relief. The reason is that price level is the overall average cost of goods and services at a point in time, and inflation is a rate of change over time. In our current environment, prices have remained high while the rate of increase has slowed giving consumers little to no relief.
The other major factors in affordability are productivity and wages relative to prices and inflation. Productivity measures how much income is generated by labor in an average hour of work in the economy. Theoretically, as productivity increases, it generates more income, which creates the potential for improving wages to mitigate inflation. Starting in the late 1970’s, there have been large gaps in wage growth versus productivity where wages have not kept pace with inflation. There are also variations in wages based on geography, class, race, and immigration status. While there are exceptions to this statistic, if a typical worker’s wages had kept up with productivity over the past 45 years, their wages would be ~40% higher than they are today.
Some economists have described our economy as “K-shaped”, where different individuals are experiencing a divergence of outcomes, like the letter K where one arm is heading up and the other is heading down. If you are a business owner, executive, or a professional, most likely your wages have outpaced inflation. You may have also had the cash flow to buy a house and invest in appreciating assets like stocks, which have also outpaced inflation. All told, to you, price levels have been manageable. However, if you are not a high wage earner or have accumulated debt, face financial strain, or job instability, you are struggling. To make matters worse, chances are you do not own a home or have any appreciating assets either. According to Oxfam America, a global non-governmental organization focused on alleviation of poverty, over 39 million Americans earn less than $17/hr. In the last five years, groceries have gone up by over 25%, home prices are 50% higher, with the average car loan at 69 months and record loan defaults. To these consumers, it is no wonder they are desperate for change. Politicians tend to seek short-term solutions using tools such as stimulus, subsidies, and in the recent case of the Trump administration, an announced effort to cap credit card rates at 10%, use 401k money for down payments on homes, and a $200 billion government sponsored purchase of mortgage bonds to bring down mortgage rates for current home buyers. Restoring durable affordability will take fundamental changes with the coordination of both the public and private sector over time with discipline and sacrifice for many Americans. Politicians would be well served not to ignore this powerful voting block when shaping policy.
Our Approach
We are grateful the markets have provided a tailwind for clients in recent years. As we enter 2026, we remain committed to our approach of comprehensive financial planning and disciplined investment management. The markets and economy will no doubt present new surprises both exciting and challenging, and we urge you to remain vigilant and adaptable with focus on reaching your long-term goals. We look forward to continuing to partner with you in doing so.
Thank you for your continued confidence in our services.
– The Wealth Dimensions Team
Indices themselves are not investible products.
The S&P 500® Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 large publicly traded companies in
the U.S.
The Russell 2000® Index is a small-cap stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index.
The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries around the world, excluding the US and Canada.
The MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets (EM) countries.
The Bloomberg Aggregate Bond Index or “the Agg” is a broad-based fixed-income index which broadly tracks the performance of the U.S. investment-grade government and corporate bonds.
For informational purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealth Dimensions, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513-554-6000. Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.
Quarterly Commentary: Fourth Quarter 2025
Markets navigated a rather complex set of circumstances in the fourth quarter of 2025. Momentum remained robust through September fueled by healthy corporate earnings, strong consumer spending, and continued business investment. However, as the quarter unfolded, recession fears, cracks in the AI growth story, and a historic 43-day federal government shutdown stalled this momentum and denied investors a “Santa Claus” rally for a second year in a row.
A combination of a softening labor market and easing inflation compelled the Fed to continue lowering interest rates, once in September and two more times in the fourth quarter. By year end, the Fed funds target range moved to 3.50%-3.75%, its lowest level since 2022.
Current conditions are challenging the dual mandate of the Fed, causing them to try to maneuver a delicate balance between rising unemployment and inflation rates that are still not at their 2% target. The December rate cut decision was not unanimous with some members expressing a preference to pause, others advocating for a .25% cut, and Stephen Miran pushing for an aggressive .50% cut. Adding to this complexity is the contentious relationship between the Trump administration and Fed Chair Powell which escalated late last year when a criminal investigation was opened by the Justice Department alleging egregious cost overruns on Fed building renovations. It remains to be seen whether this has merit or is politically motivated, fueling more debate about the independence of the Fed.
For the quarter, US large company stocks (S&P 500 Index) rose 2.66% capping off a third straight year of double-digit returns. Small US stocks (Russell 2000 Index) continued to show promise adding 2.19% and closing the year in double digits as well. The significant revival of international equities (MSCI EAFE Index) remains in place gaining an impressive 4.86% and ending the year up 31.22%. Emerging market stocks were not far behind for the quarter, up 4.73%. Real estate (Dow Jones US Real Estate Index) struggled due to elevated capital costs, high operating expenses, and broader economic uncertainty finishing down 2.32%. Fixed income (Bloomberg U.S. Aggregate Index) was in positive territory up 1.10% as the Fed continued to lower rates seeking what they perceive to be a neutral rate.
Ringing in the New Year
As we begin 2026, stock market valuations are higher while concentration risks remain elevated. Nobel Prize-winning economist, Dr. Robert Shiller, developed what is considered by many to be a more reliable indicator to measure long-term stock market levels, the CAPE ratio. This ratio smooths business cycle fluctuations by averaging inflation-adjusted earnings over 10 years as opposed to traditional P/E measures. It is noteworthy that the current CAPE ratio is ~40x earnings, a level not seen since the late 90’s tech bubble.
The concentration risk in the S&P 500 index remains high with the “Magnificent Seven” still representing an historically high 34% of the total S&P 500 index market capitalization. While we believe the AI growth story will generally remain intact, investors are becoming more selective and holding these companies to a higher level of scrutiny, especially where companies use too much free cash flow or require external financing. This will most likely result in more volatility and rotation both within and outside the space. Further, there will be less patience with the promise of monetization and more focus on those who are able to actually show sustainable profits and productivity from the enormous investments made.
Despite possible headwinds from these factors, we remain cautiously optimistic. While the OBBBA passed last summer, many of its key components will take effect this year. This will include lower tax rates, reduced withholding, and a host of other provisions that should provide relief for consumers. Businesses will also benefit by being able to fully expense equipment and R&D, which could in turn spur additional investment. Many taxpayers will receive larger refunds than usual because the IRS withholding tables were not updated immediately to reflect the provisions of the new bill, perhaps giving the economy an additional boost.
On the monetary side, the Fed claims they will remain data dependent, balancing their support for the labor market while attempting to reduce inflation to target. Most Fed governors seem to be supportive of lower rates, but any signs of rising inflation, economic missteps, or external shocks could quickly change their stance. Regardless, keep in mind that the Fed has very limited control over long-term rates, which may not move in lockstep with reductions in the Fed Funds rate. U.S. debt, deficit, Inflation expectations, fiscal policy, and investor sentiment can influence this relationship, as evidenced by recent trends between the Fed Funds rate and 10-year Treasuries where yields rose while the Fed cut rates.
Geopolitics
Growing geopolitical tensions in any of the current global hot spots could prove to be destabilizing to the economy and the markets. The Ukraine/Russia war is shaping up to be more than a simple conflict between the two countries, but rather a showdown between Russia and NATO. The Gaza peace plan seems to be moving forward, but it remains a very delicate process where progress is slow. The newfound alliance between China and Russia gives the world pause, as together they present a formidable adversary on the world stage. Meanwhile, the Trump administration has begun flexing its muscles in our hemisphere, seeking to assert control through what is being called the “Donroe Doctrine”, using tenets of the Monroe Doctrine, a longstanding U.S. foreign policy meant to keep other aggressors out of our hemisphere. The surgical removal of Nicolas Maduro, the ruler of Venezuela, and his wife, Celia Flores, and President Trump’s declaration that the U.S. would “run” Venezuela is a statement of his intentions. President Trump is also making overtures about striking drug cartels in Mexico while Secretary of State, Marco Rubio, declared that Cuba “is in a lot of trouble”. And his most recent declaration of the need to annex Greenland is presently causing an international stir. So far, markets have generally shrugged off these events, however, each one presents both opportunity and risk.
Affordability
Restoring affordability has been used as a battle cry for both Republicans in the aftermath of the COVID crisis, and now by Democrats to put pressure on the Trump administration to keep its promise to bring down the cost of living for everyday Americans. Consumers continue to feel the pinch on everything from groceries, medical costs, and utility bills to housing and automobiles. Politics aside, the issue of affordability has been a growing problem for decades, and it is not only a function of inflation and pricing, but also on wage growth over time. Promising a timely resolution to this issue will prove to be a dangerous proposition, as this is a complex, deep-seeded problem.
In measuring progress, consumers often conflate price levels with inflation. When they hear that inflation has come down from 9.1% to 2.7%, they are puzzled why they do not feel any relief. The reason is that price level is the overall average cost of goods and services at a point in time, and inflation is a rate of change over time. In our current environment, prices have remained high while the rate of increase has slowed giving consumers little to no relief.
The other major factors in affordability are productivity and wages relative to prices and inflation. Productivity measures how much income is generated by labor in an average hour of work in the economy. Theoretically, as productivity increases, it generates more income, which creates the potential for improving wages to mitigate inflation. Starting in the late 1970’s, there have been large gaps in wage growth versus productivity where wages have not kept pace with inflation. There are also variations in wages based on geography, class, race, and immigration status. While there are exceptions to this statistic, if a typical worker’s wages had kept up with productivity over the past 45 years, their wages would be ~40% higher than they are today.
Some economists have described our economy as “K-shaped”, where different individuals are experiencing a divergence of outcomes, like the letter K where one arm is heading up and the other is heading down. If you are a business owner, executive, or a professional, most likely your wages have outpaced inflation. You may have also had the cash flow to buy a house and invest in appreciating assets like stocks, which have also outpaced inflation. All told, to you, price levels have been manageable. However, if you are not a high wage earner or have accumulated debt, face financial strain, or job instability, you are struggling. To make matters worse, chances are you do not own a home or have any appreciating assets either. According to Oxfam America, a global non-governmental organization focused on alleviation of poverty, over 39 million Americans earn less than $17/hr. In the last five years, groceries have gone up by over 25%, home prices are 50% higher, with the average car loan at 69 months and record loan defaults. To these consumers, it is no wonder they are desperate for change. Politicians tend to seek short-term solutions using tools such as stimulus, subsidies, and in the recent case of the Trump administration, an announced effort to cap credit card rates at 10%, use 401k money for down payments on homes, and a $200 billion government sponsored purchase of mortgage bonds to bring down mortgage rates for current home buyers. Restoring durable affordability will take fundamental changes with the coordination of both the public and private sector over time with discipline and sacrifice for many Americans. Politicians would be well served not to ignore this powerful voting block when shaping policy.
Our Approach
We are grateful the markets have provided a tailwind for clients in recent years. As we enter 2026, we remain committed to our approach of comprehensive financial planning and disciplined investment management. The markets and economy will no doubt present new surprises both exciting and challenging, and we urge you to remain vigilant and adaptable with focus on reaching your long-term goals. We look forward to continuing to partner with you in doing so.
Thank you for your continued confidence in our services.
– The Wealth Dimensions Team
Indices themselves are not investible products.
The S&P 500® Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 large publicly traded companies in
the U.S.
The Russell 2000® Index is a small-cap stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index.
The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries around the world, excluding the US and Canada.
The MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets (EM) countries.
The Bloomberg Aggregate Bond Index or “the Agg” is a broad-based fixed-income index which broadly tracks the performance of the U.S. investment-grade government and corporate bonds.
For informational purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealth Dimensions, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513-554-6000. Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.