Market Commentary
- Non-U.S. equities closed out the year on a high note, outpacing domestic markets in Q4 and beating U.S. equities by the widest margin for the calendar year since 2009. A weaker U.S. dollar, more attractive valuations compared to the U.S., and a favorable corporate backdrop all helped propel non-U.S. markets ahead.
- Valuations look full relative to history across asset classes and investors should evaluate risk tolerances appropriately. Pockets of opportunity exist. Fixed income looks attractive both on an absolute basis and relative to public equities. Where appropriate, investors may consider marketable alternative strategies that may help reduce downside risk in a narrow and fully valued market.
- The rise of AI has been considerable in recent years, and AI is poised to be an influential factor in markets in 2026. Earnings growth expectations for mid- and small-cap companies are relatively higher compared to other areas of the market, creating opportunity outside of the “Magnificent 7.” Thoughtful diversification and owning “too little” AI may be preferred over risking a severe drawdown from overexposure should AI falter.
Fixed Income
- Interest rates were volatile during the quarter and the U.S. yield curve steepened. The Federal Reserve cut interest rates twice over labor market concerns, pushing front-end yields lower. However, better than expected economic data and the market’s more positive outlook on the economy moved long-end yields higher. Core bonds saw a modest gain, with the Bloomberg U.S. Aggregate Bond Index rising 1.1%.
- Credit spreads were volatile during the period, widening early in the quarter before trending back closer to where they started. The Bloomberg U.S. High Yield Index returned 1.3% in the quarter. Strong corporate fundamentals, a favorable technical backdrop and increased credit quality have pushed spreads to near 10-year lows, and we remain mindful of elevated valuations within the high yield asset class.
Equity
- Favorable earnings, a Fed rate cut, and positive economic data helped support equity markets during the quarter. Large cap modestly edged out small cap as the outlook for further rate cuts in 2026 diminished. The S&P 500 had a favorable quarter (up 2.7%) as investors digested the government shutdown and subsequent data delays, two Federal Reserve rate cuts, and relatively strong corporate earnings reports. The Russell 2000 Index (a proxy for small cap stocks) gained 2.2%.
- Non-U.S. markets outpaced domestic and developed edged out emerging. Europe experienced favorable returns as the outlook for economic growth improved and corporate earnings were favorable. The MSCI EAFE Index returned 4.9% while MSCI Emerging Markets rose 4.7%. AI optimism helped drive semiconductor companies higher in South Korea and Taiwan, but weaker economic data was a headwind for Chinese equities.
Real Assets
- Rising long-term yields negatively impacted REITs in the fourth quarter and the asset class lagged the broader equity market. The FTSE NAREIT All Equity REITs Index fell 2.1%. Office struggled as the hybrid work environment continues to create uncertainty for the space. Industrial-related REITs were among the few positive areas in the quarter.
- The Bloomberg Commodity Index gained 5.8% in the quarter, driven by precious and industrial metals. Gold had a banner year, touching multiple all-time highs as investors digested uncertainty surrounding trade policy, inflation, and economic data throughout the year. Precious metals had its best calendar year of the last 30 years.
This report is intended for the exclusive use of clients or prospective clients (the “recipient”) of HCR Wealth Advisors and the information contained herein is confidential and the dissemination or distribution to any other person without the prior approval of HCR Wealth Advisors is strictly prohibited. Information has been obtained from sources believed to be reliable, though not independently verified. Any forecasts are hypothetical and represent future expectations and not actual return volatilities and correlations will differ from forecasts. This report does not represent a specific investment recommendation. The opinions and analysis expressed herein are based on HCR Wealth Advisor research and professional experience and are expressed as of the date of this report. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice. Past performance does not indicate future performance and there is risk of loss.
Comparisons to any indices referenced herein are for illustrative purposes only and are not meant to imply that actual returns or volatility will be similar to the indices. Indices cannot be invested in directly. Unmanaged index returns assume reinvestment of any and all distributions and do not reflect our fees or expenses.
Bloomberg Aggregate Bond Index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
Bloomberg US Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt. Eurobonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included.
S&P 500 Index is a capitalization-weighted index designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Russell 2000 Index consists of the 2,000 smallest U.S. companies in the Russell 3000 index.
MSCI EAFE Index is an equity index which captures large and mid-cap representation across Developed Markets countries around the world, excluding the U.S. and Canada. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
MSCI Emerging Markets Index captures large and mid-cap representation across Emerging Markets countries. The index covers approximately 85% of the free-float adjusted market capitalization in each country.
Bloomberg Commodity Index is calculated on an excess return basis and reflects commodity futures price movements. The index rebalances annually weighted 2/3 by trading volume and 1/3 by world production and weight-caps are applied at the commodity, sector and group level for diversification.
FTSE Nareit All Equity REITs Index is a free-float adjusted, market capitalization weighted index of U.S. equity REITs. Constituents of the index include all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property.
Material Risks Disclosures
Fixed Income securities are subject to interest rate risks, the risk of default and liquidity risk. U.S. investors exposed to non-U.S. fixed income may also be subject to currency risk and fluctuations.
Domestic Equity can be volatile. The rise or fall in prices take place for a number of reasons including, but not limited to changes to underlying company conditions, sector or industry factors, or other macro events. These may happen quickly and unpredictably.
International Equity can be volatile. The rise or fall in prices take place for a number of reasons including, but not limited to changes to underlying company conditions, sector or industry impacts, or other macro events. These may happen quickly and unpredictably. International equity allocations may also be impact by currency and/or country specific risks which may result in lower liquidity in some markets.Real Assets can be volatile and may include asset segments that may have greater volatility than investment in traditional equity securities. Such volatility could be influenced by a myriad of factors including, but not limited to overall market volatility, changes in interest rates, political and regulatory developments, or other exogenous events like weather or natural disaster.
All investing involves risk including the potential loss of principal. Market volatility may significantly impact the value of your investments. Recent tariff announcements may add to this volatility, creating additional economic uncertainty and potentially affecting the value of certain investments. Tariffs can impact various sectors differently, leading to changes in market dynamics and investment performance. You should consider these factors when making investment decisions. We recommend consulting with a qualified financial adviser to understand how these risks may affect your portfolio and to develop a strategy that aligns with your financial goals and risk tolerance.