Quarterly Performance Update

November Rally Drove U.S. Stocks’ Fourth-Quarter Gain

Despite choppy monthly performance, the S&P 500^® Index returned 2.4% for the fourth quarter. A November rally in response to Donald Trump’s election victory more than offset an October loss and a steeper December decline. For the year, the index logged 57 all-time closing highs and a return of 25%.

Only four of the S&P 500's 11 sectors posted fourth-quarter gains, led by consumer discretionary, which returned 14.3%. Size and style indices were mixed, with large-cap stocks outperforming their smaller peers and growth outpacing value.

Election Results, Economic Data Aided Market

Pre-election uncertainty gave way to post-election optimism as investors welcomed the anticipated pro-growth policies from the second Trump administration and a Republican-controlled Congress. Alongside expectations for lower taxes, fewer regulations and economic expansion, U.S. stock market capitalization surged $1.6 trillion the day after the election.

Meanwhile, economic data and corporate earnings results were generally healthy, which provided additional stock market support. The labor market exhibited some weakness, though, as payroll growth slowed and the unemployment rate ticked higher.

Volatility Sparked by Inflation Fears and 2025 Fed Outlook

As the quarter progressed, investor sentiment turned more cautious amid concerns about the potential inflationary implications of President-elect Trump’s tariff and immigration proposals. Additionally, after moderating through most of the year, inflation edged higher and remained well above the Federal Reserve’s (Fed’s) target.

Nevertheless, the Fed cut interest rates by a quarter-point in November and again in December. These cuts, combined with September’s half-point reduction, shaved a full percentage point off the Fed’s target lending rate.

Along with the December rate cut, the Fed revised its outlooks for inflation and additional easing, which triggered a late-year sell-off among stocks. Officials conceded that inflation likely would remain higher than their 2% target for two more years. The Fed projected that core inflation would be 2.5% by year-end 2025 and drop to 2% in 2027.

Coinciding with that revised inflation outlook, Fed officials lowered their 2025 rate-cut expectations. The Fed’s December economic projections noted only two rate cuts in 2025, down from the four cuts policymakers forecasted in September.

Sharp Decline in Non-U.S. Stocks

Economic worries hampered non-U.S. developed markets stocks (MSCI World Ex-USA Index), which returned -7.4% for the quarter. However, gains earlier in the year helped the index maintain a year-to-date gain of 4.7%.

Europe Lags, U.K. Outperformed in Q4

In Europe, recession fears mounted, private sector activity contracted, and stocks lagged the broader index. Additionally, political turmoil in Germany and France and fears about a potential trade war with the U.S. pressured stocks.

Against this economic backdrop, the European Central Bank reduced its benchmark interest rate twice in the quarter. Annual headline inflation headed upward, jumping from 1.7% in September to 2.4% in December.

U.K. stocks also declined, but they fared better than European equities and the broad index. Concerns about the nation’s economic and employment outlook, the federal budget and rising long-term bond yields pressured stocks. Additionally, U.K. private sector activity steadily slowed in the quarter.

The Bank of England lowered interest rates only once in the quarter. Inflation increased in November to its highest rate in eight months.

Japan Outperformed Other Developed Markets

Stocks in Japan declined but outperformed broader developed markets. Private sector activity improved in the quarter, while inflation accelerated.

The Bank of Japan left interest rates unchanged at their highest level since 2008.

Emerging Markets Stocks Struggled in Q4

Emerging markets (EM) stocks (MSCI Emerging Markets Index) were the quarter’s weakest performers, returning -8%. China accounted for much of the loss, as weak growth and ongoing property sector challenges clouded the backdrop. Uncertainty surrounding government stimulus measures combined with President-elect Trump’s tariff proposals further pressured China’s market.

Elsewhere, Brazil’s market plunged as fiscal woes weighed on the nation’s currency. South Korean stocks also posted steep losses amid political turmoil.

U.S. Bond Returns Pressured by Rising Yields, Inflation

Alongside persistent inflation and rising Treasury yields, U.S. bonds, as measured by the Bloomberg U.S. Aggregate Bond Index, returned -3.1% for the quarter. All index sectors declined. However, a strong rally in the third quarter, aided by the September launch of the Fed’s easing campaign, helped the index maintain a year-to-date gain.

The year-over-year headline Consumer Price Index (CPI) increased for the second straight month in November to 2.7%. Core CPI remained at 3.3% for the third consecutive month. Similarly, annual core Personal Consumption Expenditures, the Fed’s preferred inflation gauge, rose to 2.8% in October and remained there in November.

Despite above-target inflation, the Fed followed up its half-point September rate cut with two quarter-point cuts in the fourth quarter. This dropped the Fed’s rate target to a range of 4.25% to 4.5%. But Fed officials adopted a more cautious stance, boosting their inflation and growth forecasts and reducing their rate-cut outlook.

A brief post-election rally faded, and Treasury yields ended the quarter higher. Above-target inflation, mounting U.S. debt and changing expectations regarding Fed policy contributed to the yield backdrop. The yield on the 10-year note climbed 79 basis points to 4.58%, while the two-year Treasury yield increased 60 basis points to 4.25%.

Non-U.S. Bonds Declined in Q4

Government bond yields in the U.K. and Europe also increased, and global bonds broadly declined. However, the U.S. dollar rallied versus other currencies, boosting Bloomberg’s dollar-hedged global bond index, which returned -1% for the quarter.

EM bonds also declined for the quarter. Given the U.S. dollar’s strength, local currency-denominated securities generally underperformed U.S. dollar-denominated bonds. EM sovereign securities broadly underperformed EM corporate bonds.