WESCAP Q4 2025 Quarterly Commentary: Global Strength and the Productivity Pivot
Portfolio results for the last quarter of 2025 were strong, with most investment categories posting positive returns. Exceptions included long-term bonds and real estate securities, as they were adversely affected by a rise in long-term interest rates.
For all of 2025, returns were strongly positive for most equity assets classes. Foreign stocks had very strong returns (EAFE index +31.2% for 2025 and +4.9% Q4). Emerging markets also did well (MSCI EM +33.6% for 2025 and 4.7% Q4). Precious metals did even better for the quarter and the year. The S&P 500 had a total return of 2.7% for the quarter and 17.9% for the year. The S&P 1500 value index had a respectable 3.2% for the last quarter and 12.7% for the year. Financial, health care and other value sectors outperformed tech and mega-cap stocks for the last quarter, though they lagged earlier in 2025. WESCAP had meaningful allocations to these asset classes, which helped WESCAP portfolios have a good 2025.
Foreign bonds and stocks did exceptionally well as the dollar fell versus other major currencies in 2025.
Inflation has continued to decelerate as wages moderate and labor markets slow. While tariffs are exerting some price pressure, productivity has improved sufficiently to largely offset these and wage-related pressures. The U.S. Bureau of Labor Statistics showed second quarter unit labor costs only up 1% (annualized), as a 4.3% wage increase was mostly offset by a 3.3% improvement in productivity. This helps bring down inflation and improves corporate earnings. If the economy continues to expand, but labor markets stagnate, it could result in the Federal Reserve cutting interest rates more than expected later in 2026. This could give yet another boost to financial markets and interest-rate-sensitive sectors (e.g., banking, M&A, real estate). However, short-term fixed income assets are expected to deliver lower returns in 2026 as the Fed continues to cut interest rates. A modest shift away from high-quality, short-term fixed income assets is recommended in 2026 for all but the most conservative investors.
Artificial Intelligence (AI) is one of the contributors to both productivity improvement and significant GDP-boosting capital expenditures. While there may be over-optimism regarding the magnitude of AI’s positive impact and some valid concerns about labor markets, AI progress should benefit many endeavors and overall economic growth for some time.
Domestic policy uncertainty and continued geopolitical risk are expected to produce sharp securities price movements, both up and down in 2026, giving ample opportunity to take advantage of these bouts of volatility.
We will discuss this in more detail in our pending 2026 Outlook. As always, feel free to contact your WESCAP advisor if you have any questions or if you want to review your goals, objectives and portfolio positioning.