Overview
Global markets closed out 2025 with mixed performance as investors repositioned portfolios and reset expectations for 2026. In the U.S., equity markets finished December essentially flat, as gains in Financials, Technology, and Communication Services were offset by weakness in Utilities, Real Estate, and select defensive sectors. International equities outperformed, with Emerging Markets and developed markets leading returns.
In Canada, the S&P/TSX Composite posted modest gains, supported by strength in Financials and Materials as commodity prices remained relatively firm. Investor sentiment continued to be shaped by central bank policy signals, easing inflation data, labor market trends, and ongoing geopolitical and trade-related uncertainty.
U.S. Market Performance & Policy
The S&P 500 ended December little changed, capping off a volatile but strong year. Sector leadership rotated, with Financials leading the market as rate expectations stabilized and balance-sheet quality regained investor focus. Technology and Communication Services also posted gains, while Utilities and Real Estate underperformed amid rising long-term interest rates.
The Federal Reserve cut the federal funds rate by an additional 25 basis points in December, bringing the target range to 3.50% – 3.75% and totaling 75 basis points of cuts in 2025. While the Fed acknowledged easing inflation trends, policymakers signaled a more cautious stance going forward. Market expectations for further near-term cuts declined, with attention shifting toward incoming inflation and labor data ahead of the January FOMC meeting.
Key U.S. Economic Data
- Federal Funds Rate: Reduced by 25 bps in December; policy now viewed as closer to neutral.
- ISM Manufacturing PMI: Declined to 48.2, indicating continued contraction in manufacturing activity.
- ISM Services PMI: Increased to 52.6, reflecting ongoing expansion in the services sector.
- Labor Market: Payroll growth exceeded expectations, while unemployment edged higher to 4.6%.
- Inflation: Headline and core inflation resumed their downward trend, with November readings near 2.7%.
Canadian Market Overview
The S&P/TSX Composite recorded modest gains in December, supported by Financials, Materials, and Industrials. Gold prices moved higher, while oil prices declined modestly, contributing to mixed performance across resource sectors. Investor interest remained focused on high-quality growth names and companies with strong balance sheets.
The Bank of Canada held its policy rate steady, reiterating that previous rate hikes are still working through the economy. Statistics Canada data showed easing inflation and mixed domestic demand, while international investor demand for Canadian equities remained supportive of the TSX.
Outlook
As markets enter early 2026, the investment landscape appears to be shifting away from a rate-dominated environment toward one driven by earnings quality, sector selection, and productivity trends. While economic growth is slowing, it remains positive, and inflation continues to moderate. For diversified portfolios, maintaining exposure to quality growth, value-oriented cyclicals, and resilient income assets—while closely monitoring central bank guidance and labor market conditions—remains a disciplined approach in a more balanced but still volatile market environment.