Q4 2025 Market Outlook

MARKET OUTLOOK

Up, up, and away. The fourth quarter of 2025 extended a remarkable mid-decade run for global equities. While history has taught long-term investors to be pleased with average annual stock market returns of roughly 8–10%, the MSCI ACWI has delivered total returns in excess of 20% per year over the past three years—more than double what most would reasonably expect. This bull market has been fueled by a combination of factors: a resilient global economy, moderating inflation which allowed interest rates to move lower; a policy environment marked by tax relief and lighter regulation; a powerful surge in investment tied to artificial intelligence; and easing concerns around global trade and tariffs as the year progressed.

What’s not to love? For one thing, market performance has become increasingly concentrated in a relatively small group of stocks and themes, with a growing share of recent gains driven by higher valuations rather than underlying earnings growth. In environments like this, broadly diversified and risk-aware portfolios—like the strategies we manage—can lag headline market indexes, even though they are designed to be more resilient when conditions weaken. Narrow markets make it difficult to match index returns, as a handful of very large companies do most of the work while many others lag. Because diversified portfolios rely less on those few leaders, periods of relative underperformance can occur. Looking ahead, this concentration matters. Markets driven by a small group of stocks tend to be more sensitive to changes in market dynamics or investor sentiment, and historically have been prone to volatility or periods of lower returns. In narrowly fueled markets, we believe discipline matters more than chasing benchmarks, and we remain focused on prudent, long-term portfolio construction.

A quick word on AI seems appropriate, as much of the current surge in stocks features AI in its sails, and we are only in the early innings of AI deployment. We imagine that the AI theme will continue to be an important contributor to stock returns going forward, so it is something we will continue to research and evaluate for clients where it is appropriately aligned with their objectives. The AI revolution, similar to all major technology trends that preceded it, has aspects both to admire and fear. AI will drive breakthroughs that can improve medical care and wellbeing, better address global food shortages, and mitigate natural disasters with earlier warning signs and structural preparedness. It will drive the necessary productivity that our aging global population requires. It still remains to be seen what the AI impact on working-age labor markets will be a decade from now. Certainly, some job functions will disappear, probably in greater quantities than the ones it creates. The challenge will be how societies proactively deal with this and recognize the need for re-training and support for those impacted. Our advocacy work around AI and that of our peers we are in community with is more critical than ever. Companies must self-educate and be thoughtful and accountable for how they are deploying AI and protecting against its harmful, unintended consequences without brazenly rushing ahead. This will be quite an engagement challenge, but one that we are up for.

One sign that the bull market may be maturing can be seen in the source of these robust annual returns. In 2023 and 2024, roughly two-thirds of the MSCI ACWI’s gains were driven by corporate profit growth, with the remaining third coming from higher valuations. In 2025, that ratio shifted. Earnings growth remained solid, but close to half of the market advance came from investors paying higher prices for those earnings. This distinction matters. While earnings growth has remained healthy, it did not do as much of the heavy lifting needed to push stocks higher at roughly twice their long-term pace in 2025. Looking ahead, if corporate profits do not reaccelerate in 2026, markets may be unable to rise at the same rate without relying more heavily on further valuation expansion. Historically, advances that depend increasingly on higher multiples tend to be more volatile and less durable over time.

As we approach the end of 2025, signs of a potential economic slowdown ahead in the U.S. are less about an imminent shock and more about a gradual loss of momentum. The effects of higher interest rates are still working their way through the economy, even as rates have begun to ease. At the same time, consumers are more financially strained, as borrowing costs remain elevated and wage growth is moderating alongside a cooling labor market. Fiscal policy is also providing less support than in prior years, while businesses face tighter credit conditions and a more cautious outlook for profit growth. Taken together, these factors point toward slower and more uneven growth ahead—not necessarily a recession, but a shift away from the unusually strong conditions that have supported markets in recent years. This moderating growth picture is certainly not unique to the U.S. Another development to keep an eye on in 2026 is the widening financial well-being gap between our society's top 10% of households and the bottom 50%. This dynamic has broader social and political implications that extend beyond economic considerations, which we will write further about in the new year.

Impact Update

In our Q4 2025 Impact Update, we examine how power, data, and shareholder voice are reshaping investment risk and opportunity. Our engagements this quarter focused on the expanding surveillance economy, growing constraints on shareholder rights, and the real-world consequences of weak governance—from data misuse and human rights risks to rising legal, regulatory, and reputational exposure. Despite a more restrictive proxy environment, we filed shareholder proposals at five companies and continued dialogue with investors, academics, and civil society to advance accountability. https://www.zevin.com/news-views/q4-2025-impact-update.

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