Markets Commentary: Fourth Quarter 2025

The Bank of Canada maintained the overnight lending rate at 2.25 percent in December, following subsequent 25 basis point cuts in both September and October. Consensus projections have The Bank of Canada remaining on pause through Q1 2026, with future direction being data dependent.

The Federal Reserve cut its benchmark rate again in December, the third and last action for the year. The year ends at an effective federal funds target range of 3.50-3.75 percent. The 9-3 vote reflects a divided Fed, with consensus projections suggesting another cut in 2026.

After presenting a brief overview of the global economy, this commentary covers Canadian, U.S. and international equity markets, as well as fixed income performance. We conclude with a look ahead.

Overview of the global economy

Third quarter U.S. GDP increased at a higher-than-expected annualized growth rate of 4.3 percent. Underlying components reflected increases in consumer spending, exports and government spending that were partly offset by a decrease in investment. Imports, which are a subtraction in the calculation of GDP, decreased.

The U.S. government shutdown impacted various economic data releases, such as PCE, PPI and CPI for October. November’s monthly CPI increase of 0.2 percent brought the annual inflation to a lower-than-expected 2.7 percent. Core PCE for November was 2.8-2.9 percent year over year. December numbers will not be released until mid-January, but expectations are that both CPI and PCE will be on par with the November results. The BLS report about employment in November featured a better-than-expected 64,000 jobs added, resulting in a further rise in the unemployment rate to 4.6 percent. The Conference Board Consumer Confidence Index survey fell for a fifth consecutive month in December to 89.1, as four out of five components decreased.

Canadian equity market

The Canadian equity market advanced 6.25 percent in the fourth quarter of 2025, as measured by the S&P/TSX Composite Index. The index returned a whopping 31.68 percent for the full year 2025 amid issues of geopolitics, tariffs, inflation and a weakening labor market.

The Materials sector was the top performer for the quarter, driven by gold miners, producing a return of 11.91 percent in Q4. This was followed by the Consumer Discretionary sector, returning 10.96 percent, and the Financials sector, returning 10.48 percent for the quarter. The Real Estate sector was the largest detractor in Q4, producing a negative return of -6.15 percent.

U.S. equity markets

Despite ending the year with four straight down days, U.S. equities had an eighth consecutive month of positive returns, with the S&P 500 up 0.1 percent in December.

U.S. equity markets finished 2025 with double-digit gains for the third year in a row, including one of the most rapid recoveries on record after approaching bear market territory in early April. The S&P 500 gained 2.66 percent in Q4 and 17.9 percent for the full year 2025. The S&P 500 posted 39 record closing highs with large tech stocks helping to fuel the momentum. The AI frenzy and the Magnificent Seven provided significant returns during the year.

International equity markets

International equity markets were also positive for the quarter. EAFE produced a local currency return of 6.13 percent for Q4 and a full-year 2025 return of 20.60 percent. EM was positive 5.62 percent in local currency in Q4. For the full year 2025, the MSCI Emerging Markets Index produced a return of 31.28 percent. Emerging regions outperformed developed regions in 2025.

Fixed income markets

Canadian bond market returns were relatively flat for the quarter. The FTSE Canada Corporate Bond Index produced a return of 0.34 percent in Q4. The FTSE Canada Government Bond Index declined at -0.54 percent and the FTSE Canada Universe Index fell by -0.32 percent in Q4. The FTSE Canada Universe Index finished up 2.64 percent for the full year 2025.

U.S. Fixed Income markets were positive with the Bloomberg U.S. Aggregate Index up 1.10 percent in Q4. The U.S. Treasury yield curve steepened, as yields declined at the front-end given the recent Fed rate cut in early December, but increased at the middle and long-end with the 10-year reaching 4.17 percent principally due to persistent inflation concerns. Investment-grade corporates, high yield and asset-backed securities spread levels remained tight during the month.  

Looking ahead

The near-term outlook is mixed and influenced by whether the previous quarter’s economic momentum continues and if central banks maintain a dovish policy regarding rates. While high-income household spending, rising exports and corporate tech expenditures may continue to boost growth, uncertainty remains regarding stretched tech valuations along with labor market softness and inflation concerns. The latter conditions will be the primary focus of a divergent Fed that faces questions of independence associated with a looming leadership change in May.