Q4 Recap: International Wins the Year

SUMMARY

• International led US Equities for Q4 and 2025.
• Few US sectors post strong Q4 returns, but AI-related sectors were strong for the year.
• Earnings confirmation needed for broader international investment, in our view.

The fourth quarter of 2025 capped off a strong year for equity returns with the third quarter in a row of positive returns across the board. Additionally, in three of the four quarters last year, international equities outpaced US equities, resulting in international equites returning close to double the US large-cap’s return for the calendar year, despite a strong showing from Technology and AI-like sectors. As we discussed earlier this month, International’s strong returns are beginning to be supported by improving earnings, though we would like to see this trend strengthen. Let’s take a deeper dive into these returns to see how these themes played out.

US Sectors: Muted Returns Across the Board

Table 2 (right) shows US sector performance. Apart from Health Care and Communication Services, US sector returns were muted across the board. Looking at these two top-performing sectors, it is tough to identify a single thematic throughline. Within Health Care, it was the pharmaceutical stocks that led sector returns; pharmaceutical returns were driven by favorable news regarding government negotiations and perhaps some catch up after a poor first three quarters. For Communication Services, there seems to be no unifying theme. Only 3 of the companies in this sector outperformed the sector’s average return, while over half of the companies posted negative returns.

Looking at the bottom of the table, we see two ‘defensive’ sectors which posted a negative return. Specifically, Real Estate and Utilities are what we would consider ‘rate-sensitive’ sectors. Both these sectors have high amounts of debt and rely on cash distributions as a large portion of their total return, giving them bond-like qualities. As such, with the market cooled on expectations of cuts from the Fed, and these sectors struggled to keep up with the rest of the market.

International Stocks: China Leads, While the Dollar Stabilizes

Moving to Table 3 (below), Developed Markets led the way with Emerging Markets being hampered by poor Chinese returns. The negative quarter for China continued a trend we saw the entirety of 2025. Both the first quarter and third quarter saw China posting the best return of all indices in our global universe, while the second and fourth quarter saw China posting the worst return in our universe. We believe this volatility is characteristic of the realty of investing in China as a non-Chinese investor, coupled with their AI theme exposure being the highest after the US. While there are lots of cheap companies and companies with attractive growth prospects in China, the geopolitical and macroeconomic backdrops provide a strong headwind that may represent a ceiling to a sustainable Chinese equity rally, in our view.

At the top of the returns table excluding currency effects, we find Canada, which was only outpaced this year by China. Canada also posted returns above the US in all four quarters this year, with both equity returns, and currency returns contributing at different points in the year. In our view, this rally can primarily be attributed to strong precious metal prices.

Finally, on the currency front, only the Yen made a large move this quarter, depreciating 6.3 percent. Japanese inflation remains higher than the Bank of Japan would like it and with the Fed pausing on cuts, Japan’s low policy rate caused downward pressure on their currency. For the full year, international currency returns added to US investors’ total returns as the dollar continued to weaken throughout the year.

Looking Forward: 2026 Provides Opportunity

The fourth quarter was an example of the potential for market broadening. Over the past decade, Technology, and by extension Technology-related indices, have contributed a large portion of market returns. While we believe that these names could continue to be attractive investments if their earnings growth keeps pace with their price appreciation, both earnings and market returns are also pointing to potential in other market segments.

As such, we believe that 2026 will present opportunities to invest in markets that have lagged tech. However, we do not view this as an easy task. As we saw in 2025, market rotations are full of starts and stops. Thus, we will continue to lean on our earnings analysis to help guide our asset allocation. Additionally, we will rely more heavily on our individual security selection, as we attempt to identify specific themes and companies that are best positioned for market rotation.

For International equites specifically, we are waiting for earnings confirmation before we more broadly invest. Until then, our international positioning is dependent on our portfolio’s risk tolerance. In our short horizon portfolios, we have relatively little exposure to international markets, concentrating on Europe and Japan. For our long horizon portfolios, we are slightly overweight to international relative to our global benchmarks with an emphasis on selection, preferring European Banks, Japan and value-oriented themes, while avoiding Chinese equities. We believe this is sufficient exposure to capture the upside of these markets while we wait for more concrete earnings evidence to emerge.

Risk Discussion: All investments in securities, including the strategies discussed above, include a risk of loss of principal (invested amount) and any profits that have not been realized. Markets fluctuate substantially over time, and have experienced increased volatility in recent years due to global and domestic economic events. Performance of any investment is not guaranteed. In a rising interest rate environment, the value of fixed-income securities generally declines. Diversification does not guarantee a profit or protect against a loss. Investments in international and emerging markets securities include exposure to risks such as currency fluctuations, foreign taxes and regulations, and the potential for illiquid markets and political instability. Please see the end of this publication for more disclosures.