Cornerstone 4th Quarter 2025 Commentary

A Tale of Two Markets

“This is the century of Fear.” – Albert Camus

“Two roads diverged in a yellow wood, and I took the one less traveled by and that has made all the difference” – Robert Frost

“Every year, if not every day, we have to wager our salvation upon some prophecy based upon imperfect knowledge” – Oliver Wendell Holmes, Jr.

The fourth quarter was similar to much of 2025.  Major indexes moved higher during the period, and once again capitalization weighted indexes outperformed their equal weighted counterparts.  This was largely because the U.S. tech complex, driven by the AI trade, continued to dominate both domestic and foreign markets throughout the quarter.  It is true that large cap value staged something of a resurgence during the quarter and managed to outperform growth at the end of 2025, but for diversified investors this was not much consolation as the Russell 1000 Growth once again turned in a stellar performance for the year. 

The impact of AI euphoria can be felt globally as well.  The MSCI ACWI (All Country World Index) provided a strong return of over 22% in 2025, largely on the back of U.S. and global tech companies like Nvidia and Taiwan Semiconductor.  Of course, the index also received a boost from the falling dollar which significantly helped the companies outside the U.S. in the index (approximately 35% of the index is non-U.S. dollar denominated).

This broad index is normally a reasonable proxy for a global basket of diversified equities – with a significant amount of U.S. equity components, developed market equities, and emerging market exposure.  However, as market caps continue to swell, the U.S. and global tech sector have dominated the index and have led to significant performance differentials. 

This can easily be seen here in the U.S. where the S&P 500 Composite Index was up 17.88% while the S&P 500 Equal Weight Index was up 11.43%.  Both returns are above long-term averages, and, in general, equity investors should be pleased.  However, the divergence is significant and has resulted in a “tale of two markets.” 

One market is the high growth, AI-driven tech market characterized by strong earnings growth, significant volatility (albeit mostly in an upward direction), and high valuations.  The other market has been characterized by more modest earnings growth, lower volatility, and reasonable valuations. 

A falling U.S. dollar and the vagaries of international tariffs elevated these differentials to an extreme in global markets in 2025.  The MSCI EAFE Index rose over 31% for the year and the MSCI Emerging Markets Index was up over 33% for the year.  Both of these markets were boosted by the 10% decline in the U.S. dollar, but they also benefited from key tech-related names.  This was particularly true of the MSCI Emerging Markets Index which was significantly boosted by Chinese tech companies like Tencent and Alibaba along with the Taiwanese company Taiwan Semiconductor.

As of the end of 2025, TSMC (Taiwan Semiconductor) made up nearly 12% of the emerging markets index.  Here in the U.S. Nvidia currently comprises nearly 8% of the S&P 500 Composite Index.  While these companies are producing tremendous earnings and are contributing valuable products to the global economy, their stock prices are driving markets.

Most investment managers have policy parameters limiting individual position size to 5% or less at cost, and most institutional fiduciaries echo this sentiment in their own investment policies.  Consequently, holding the S&P 500 ETF as the single position in an institutional portfolio would actually result in a violation of many institutional investment policies! The rest of the market has continued to perform relatively well, but as we noted has been significantly overshadowed by the performance of U.S. and global tech.

As we enter 2026, there is no reason to believe that these divergent roads will suddenly merge back into a single, undivided highway.  We believe that massive infrastructure spending, cross investments, and slowing overall growth will all serve as factors potentially limiting future stock price appreciation in the AI trade, but it is difficult to ascertain at what point investors will really focus on these issues.

It seems that investors are more worried about missing out on short-term growth opportunities than they are being caught with Tesla, Nvidia, or TSMC when the music stops! Current valuation extremes mean that any of the high-flying stocks driving the index are sensitive to news events and possible changes to the “AI” narrative as we saw with the DeepSeek debacle in early 2025. 

This has resulted in sharp short-term pullbacks followed by sudden positive rallies.  We see this situation continuing into 2026, but we are also hopeful that the appeal of the broader market will attract additional investment and that as the growth in tech-related security prices slows, other overlooked areas of the market will gain ground allowing more diversified investors to benefit.  There were other factors at work during the fourth quarter as well.  The U.S. government experienced it longest shutdown in recent history. 

While the shutdown did not really have that much of a direct effect on investors, it did skew government economic data, and it may have impacted the FOMC’s decision to lower rates at their December meeting.  The Fed lowered rates three times during the second half of the year.  They cut rates by 25 basis points at their September, November, and December meetings.

The absence of government data potentially limited information the Fed had at its disposal related to the U.S. jobs market and inflation, but investors largely accepted the fact that the Fed had other means at its disposal for monitoring the economy, and in any event the market received the cut it expected at the Fed’s final 2025 meeting in December. 

While these cuts led to the shorter end of the yield curve declining throughout the year, intermediate term rates remain stubbornly high. Consequently, there was not a lot of movement in fixed income returns during the fourth quarter.  Investors primarily benefited from interest income with little price appreciation during the quarter.  The Bloomberg Aggregate Index ended the year up 7.3% after experiencing about a 1% gain during the fourth quarter.

As previously noted, value outperformed growth during the fourth quarter of 2025.  The Russell 1000 Value Index was up 3.81% during the fourth quarter, outperforming the Russell 1000 Growth’s return of 1.12%. Much of that performance differential came late in the quarter and has persisted into 2026, supporting our belief that markets may broaden further in upcoming quarters. 

The Russell 2000 Value also outperformed its growth counterpart by approximately 200 basis points, ending the quarter up 3.26% and the year up 12.59%.  However, despite value’s strong fourth quarter showing, growth remained ahead for the year on a market-wide basis.  Despite the decline in interest rates, REITs continued to perform poorly in the fourth quarter. They ended down approximately 1.5% for the fourth quarter.  Their return of 2.9% for the year was far below other equity indexes and was a drag on diversified portfolio results. 

International equities were the darlings of 2025.  Virtually all broad international indices outperformed their U.S. counterparts during the year, and performance was strong during the fourth quarter as well. Overseas, developed market equities, as measured by the MSCI EAFE Index, were up almost 5% during the fourth quarter and over 31% for the year.  Emerging markets equities also produced nearly a 5% gain during the period and were up over 33% for the year.  However, international small cap stocks proved to be the standout, up 3% for the quarter but a stunning 36% for all of 2025. 

Of course, these returns were boosted by the significant decline in the dollar, but even without the currency tailwind, international securities would have outperformed domestic equities.  Given the high probability of continued weakening in the dollar, it is likely that this trend of international outperformance may continue in 2026.    That continued weakening in the dollar along with numerous other concerns: growing U.S. debt burden, U.S. unpredictability, central bank demand, etc. has led to significant surge in the price of gold. 

This recent run finally pushed gold above its inflation-adjusted high set in early 1980.  While central bank demand may be moderating a bit, the other factors we noted remain in place, and it is likely that gold may run a bit further before the trend ends.

As we put 2025 in the rearview mirror, there is much that we could say about the year.  The first year of the second Trump administration has been far from boring and has been characterized by geopolitical uncertainty, tariff drama, fiscal support, and easing monetary policy.  At the outset many would have forecast a much more negative impact from the Liberation Day Tariffs, but following the initial volatility, the outcome has been rather mild to say the least!  President Trump seems determined to try to deliver on many of his campaign promises, and while his bombastic style is often difficult to stomach, he continues to make progress on many of his goals and objectives that support both the U.S. economy in general and equity markets more specifically.

Tariffs remain a significant question as we enter 2026, but as of the end of 2025, the “worst” hasn’t happened and much of the “cost” of tariffs to this point has been absorbed in corporate profit margins.  While inflation has not declined much, it has also not risen substantively – a fact that, when coupled with a slowing job market, allowed the Fed to cut rates throughout the second half of the year. 

As we enter 2026, we believe the accommodative fiscal policy brought about by the Big Beautiful Bill, and the tax cuts and deregulation that accompany it, will be positive for markets and the economy in the upcoming year. Additionally, the most likely path of short-term interest rates is lower, and we believe monetary policy will remain stimulative.

Lower interest rates, a volatile president, and concern around the U.S. debt burden are likely to lead to dollar weakness.  This fact should further improve America’s trade balance, boosting GDP in the short term and also benefiting U.S. owners of international securities.  Finally, while U.S. consumer sentiment is quite low, consumer spending continues to remain healthy.

We believe this is because consumers are reacting to a slowing job market and inflationary concerns.  Consumers often “anchor” on previous cost levels, and it takes quite a while for them to adjust to a new absolute price level.  Regardless of where the rate of inflation settles, it is this anchoring effect that impacts consumers’ perceived sense of wellbeing.  However, underlying spending continues to support the U.S. economy, and so we remain cautiously optimistic as we move into the second year of Mr. Trump’s second term.

For additional information about Cornerstone Management or this report, please contact Bryan Taylor or
Chad Crawford

770-525-8249
bryan@cornerstonemgt.net
chad@cornerstonemgt.net

Cornerstone Management Inc. is a Registered Investment Advisory Firm. Although the information in this report has been obtained from sources that the Firm believes to be reliable, we do not guarantee its accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitute the Firm’s judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. This report may only be dispensed with this disclosure attached.