Q4 2025 Post-Mortem From an Investment Adviser: A Year of Resilience as Gold Shines and the U.S. Dollar Dives

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With 2025 now in the books, markets have once again demonstrated remarkable resilience.

From gold's glittering ascent and outperformance of international equities not seen in decades, last year was a masterclass in adaptation and not chasing the herd. As pointed out in my article about the first quarter, "The old playbook might not cut it. Investors should take stock, literally and figuratively."

U.S. equities: Modest gains amid concentration risks

U.S. stocks capped off the year with resilient but unspectacular gains, as the S&P 500 rose more than 2% in Q4 to finish the full year up about 16%. The Nasdaq 100 delivered a stronger performance with a gain of about 20% for the year, though Q4 was more muted.

Notably, five of the Magnificent 7 stocks underperformed the S&P 500 this year, revealing potential cracks in the long-dominant mega-cap trade and underscoring the risks of heavy concentration in a handful of names.

Beneath the surface, valuation concerns mount: The S&P 500 trades at a price-to-earnings ratio of 22.5x, approaching the all-time high of 24.5x during the dot-com bubble. Warren Buffett's preferred valuation indicator is total stock market cap to GDP, which is at an eye-watering 230%.

So, investors are paying more for each dollar of future earnings than they have in some time. This suggests that the next decade could deliver more muted returns if history is a guide. This backdrop could be compounded in an era of blind passive indexing, where concentration in mega-caps amplifies vulnerabilities.

Moreover, equities now represent the largest component of aggregate U.S. household assets, surpassing real estate for the first time in recent decades, leaving many investors more exposed to stock market fluctuations.

Technically, the major U.S. indexes sit well above the 200-day moving average (DMA), levels that indicate strong momentum but also potential for mean reversion if sentiment sours.

The narrative around artificial intelligence (AI) as the unstoppable economic engine is encountering its first serious headwinds. Massive AI-related capital expenditure has surged, driving a borrowing binge that's now prompting credit markets to pull back as investors weigh the sustainability of such intense spending.

Time will tell where the balance lies.

Another open question is whether labor markets have bottomed out after a period of subdued hiring that lagged behind solid consumer demand.

Housing has also weakened, but balance sheets still remain fairly strong for now.

International equities: Outperformance takes center stage

In a stark reversal from recent years, international markets outshone their U.S. counterparts, with the MSCI EAFE Index up 5% in Q4 and surging to a 33% annual gain, while emerging markets via the MSCI EM Index jumped slightly in the quarter and ended the year up 31%.

This has been driven by improving growth expectations and a weakening dollar, which boosts returns for domestic-based investors. This outperformance raises the question: Was 2025 a one-year wonder or the start of a larger multiyear trend?

Technically, international equities remain comfortably above their respective 200-day moving averages, signaling upward momentum but warranting vigilance for any shift in dollar dynamics and overall risk off sentiment.

Fixed income: Yields dip, bonds find favor

Bonds provided a steadying force in portfolios during Q4, with the Bloomberg U.S. Aggregate Bond Index up about 7% for the year. The 10-year U.S. Treasury yield ended the year lower overall, closing at 4.16%, reflecting easing inflation pressures, ongoing Fed rate cuts and a recurring flight to quality amid periodic equity volatility.

Internationally, the German 10-year Bund yield settled near 2.86%, up notably for the year amid fiscal expansion and ECB policy dynamics.

Japan's 10-year government bond yield surged to about 2.07%, a historic rise of more than 1 percentage point that has challenged traditional yen carry trades and signaled the end of ultralow rate era assumptions.

The U.S. dollar tumbled 10%, one of its worst showings in recent memory. The euro strengthened against the dollar, with the EUR/USD cross closing near 1.174.

Gold's golden year steals the spotlight

Precious metals delivered the breakout performance of 2025, with gold leading an extraordinary rally that made it one of the standout asset classes across all markets.

Spot gold climbed 12% in the quarter and capped a stellar 65% full-year return, its best since 1979. This surge was fueled by central bank buying, strong ETF inflows, geopolitical uncertainties, a sharply weaker U.S. dollar and expectations of continued monetary support.

Silver stole even more headlines in relative terms, soaring more than 147% for the year (its strongest on record). Oil, on the other hand, tumbled about 20%, its worst showing since 2020, amid ample supply and softer demand growth.

The real torque came in the miners, where gold mining equities (e.g., via indexes like GDX) surged well over 140% for the year, leveraging the metal's rise and oil's fall, into massive margin expansion and free cash flow gains.

Gold and silver stole the whole show, not just within commodities, but across broader markets.

Those who maintained an overweight in precious metals heading into 2025 saw exceptional validation of their conviction, given how out of favor the sector was going into the year.

From unloved to portfolio essential in one dramatic turn, this has been a masterclass in why patience can pay off when macro narratives shift.

Crypto lags the pack

Cryptocurrencies faced a challenging year marked by political support and institutional adoption that couldn't fully offset macro pressures.

Bitcoin dropped more than 20% in Q4 and ended the full year down 6%, one of the weakest performances of all asset classes.

After reaching a record high of about $126,000 in early October, BTC surrendered much of its gains due to a large liquidation event and risk off sentiment.

Bitcoin maintained its dominance, holding just under 60% of the about $3 trillion total crypto market cap.

Key takeaways for navigating 2026

The lessons from 2025 boil down to timeless principles in a rapidly evolving landscape. If you're concerned about risks in the current market, consider raising defensive positions like cash or specific value stocks.

Passive investing through S&P 500 indexing may no longer be the no-brainer it once seemed. To tame volatility and avoid being caught offside, prioritize broader diversification across geographies, sectors, and asset classes.

Embrace dollar-cost averaging, especially through difficult markets if they arise.

Keep your earning power steady by staying tooled up in an ever-changing economy, whether through skill-building or side hustles.

Looking further ahead, investors will likely shift attention to the upcoming midterm elections and their potential implications for tariffs, regulation, government spending and more. The ever-growing national debt, now exceeding $38 trillion and hovering near 120% of GDP, continues to remain a long-term concern.

Ultimately, as Nick Maggiulli of Ritholtz Wealth Management wisely notes, "Wealth is not a signal of genius. It's usually a signal of restraint."

In an uncertain backdrop with elevated risks, get back to basics: ensure your portfolio has the margin of safety you desire by embracing discipline over dazzle.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.