AE Wealth Management Quarterly Market Report for Q4 2025

The fourth quarter delivered record highs, a government shutdown, sharp volatility and a late-year recovery. Despite turbulence, patient investors were rewarded as markets regained momentum heading into 2026.

The final quarter of 2025 capped off an already eventful year with another round of headlines, uncertainty and sharp market moves. After navigating tariff shocks, shifting economic data and evolving policy expectations earlier in the year, the fourth quarter presented its own challenges — including the longest government shutdown in U.S. history and a renewed spike in volatility. Yet through all the noise, markets ultimately found their footing and finished the year strong.

Markets Enter Q4 in Turmoil

The quarter began with an unexpected jolt: a federal government shutdown. Federal offices were closed for 43 days, surpassing previous records and immediately disrupting the flow of economic data.¹

With core reports — such as employment, inflation and consumer spending — paused, markets were operating without the usual guidance to gauge U.S. economic health. The absence of data left traders, analysts and everyday investors building narratives based on assumptions.

This uncertainty created a challenging environment for long-term investors. Markets generally prefer clarity, even if the data is mixed. Without major reports, investors were left without critical signals to assess what the Federal Reserve might do about rates in its final two meetings of the year. Although the Social Security cost-of-living adjustment required an emergency inflation estimate, this one-off calculation was not enough to anchor broader market expectations.² Markets began pricing in the possibility that the shutdown would meaningfully affect fourth-quarter growth, particularly if consumption slowed during the holiday retail season. Without updated data to counter or confirm these assumptions, volatility continued building — a dynamic that echoed other periods in 2025 when uncertainty pushed markets ahead of the evidence.

Fed Policy Adds Fuel to the Fire

Although they didn’t have much data to guide their decision, the Fed cut interest rates for the second time in October.³ In isolation, this rate cut would typically be seen as a boon for markets. But investors were unsettled when Fed Chair Jerome Powell warned in his post-meeting comments that the central bank might need to pause further cuts in December.⁴

Markets had been banking on a December rate cut up to that point, climbing to new highs based on that expectation. But Powell’s comments shifted the narrative quickly. Without confirmation that inflation was easing or labor markets were continuing to weaken, Powell seemed to suggest a more cautious path lay ahead.

Markets did not respond well. Within a short period, volatility spiked and the market experienced its most significant pullback since the tariff-driven declines in April.⁵

Volatility Peaks, Then Fades

The sell-off persisted into mid-November, fueled by both policy uncertainty and the continued absence of updated data. Fortunately, the downturn this time did not persist, and markets stabilized as the shutdown ended and clarity began to return. By Thanksgiving week, markets were already recovering.

The relief rally continued through year-end, pushing major indexes back toward highs reached earlier in the fall. In December, the Fed ultimately delivered its third 25-basis-point (0.25%) cut for the year, which eased concerns that policy would remain restrictive into early 2026.⁶

Equity Performance as of Dec. 31, 2025

Economic Growth Stayed on Track

Despite the disruptions, the broader economy appears to have retained much of its momentum. Revised data for the second quarter showed gross domestic product (GDP) growing by 3.8%, reinforcing that earlier weakness was largely tied to an unusual surge in imports ahead of tariff announcements.⁷

While inflation remained a persistent concern earlier in the year and the labor market showed unmistakable signs of cooling, consumer resilience and steady corporate activity supported growth across most sectors.⁸ Taken together, 2025’s economic performance was stronger than many anticipated during the most volatile moments of the year.

A Tumultuous Year Ends on a Firm Note

The fourth quarter echoed the full story of 2025: rapid shifts, overlapping policy changes and a market eager to move ahead of the data. Investors faced no shortage of headlines, from the shutdown and questions about Fed leadership to heightened political attention as we head into a midterm election year. Yet through all of this, markets rewarded those who focused on fundamentals rather than reacting to short-term noise.

Long-term discipline proved especially important in the weeks following the shutdown. The market’s recovery from November into December reinforced a familiar pattern: Periods of uncertainty can present opportunity, but they often demand patience.

Looking Ahead

As we move into the first quarter of 2026, several themes will guide market performance. The timing and trajectory of future Fed decisions will remain central, especially if incoming economic data shows further cooling in inflation or the labor market. Markets will be watching closely for signs that the Fed’s late-year cuts are gaining traction.

Political developments may also influence sentiment. With both chambers of Congress up for grabs in 2026, markets may experience periods of uncertainty as policy priorities and economic proposals shift. Election years always have the potential to bring added volatility, though U.S. markets have historically weathered campaign seasons with resilience.⁹

Finally, investors should expect a return to more typical data cycles now that government operations have resumed. Regular updates on employment, inflation and consumer spending will provide much-needed visibility. Clearer data may help stabilize expectations and reduce the guesswork that contributed to volatility in the fourth quarter.

As always, a disciplined, long-term approach remains essential. Reviewing allocations, rebalancing where needed and aligning portfolios with goals for the new year can help investors stay positioned for whatever 2026 brings.

¹ Kevin Freking, Joey Cappelletti and Matt Brown. PBS News. Nov. 13, 2025. “Trump signs government funding bill, ending record 43-day shutdown.” https://www.pbs.org/newshour/politics/trump-signs-government-funding-bill-ending-record-43-day-shutdown. Accessed Dec. 10, 2025.

² Social Security. Oct. 24, 2025. “Social Security Announces 2.8 Percent Benefit Increase for 2026.” https://www.ssa.gov/news/en/press/releases/2025-10-24.html. Accessed Dec. 10, 2025.

³ Federal Reserve. Oct. 29, 2025. “Federal Reserve issues FOMC statement.” https://www.federalreserve.gov/newsevents/pressreleases/monetary20251029a.htm. Accessed Dec. 10, 2025.

⁴ Amanda Macias. Fox Business. Oct. 29, 2025. “Powell warns shutdown is clouding Fed’s view of the economy: ‘Driving in the fog.’” https://www.foxbusiness.com/politics/powell-warns-shutdown-clouding-feds-view-economy-driving-fog. Accessed Dec. 10, 2025.

⁵ Yahoo! Finance. “CBOE Volatility Index (ˆVIX).” https://finance.yahoo.com/quote/%5EVIX/. Accessed Dec. 10, 2025.

⁶ Taylor Tompkins. Investopedia. Dec. 10, 2025. “Fed Meeting Today: Fed Cuts Interest Rates for a Third Meeting In A Row.” https://www.investopedia.com/fed-meeting-live-december-11865793. Accessed Dec. 10, 2025.

⁷ Bureau of Economic Analysis. Sept. 25, 2025. “Gross Domestic Product, 2^nd Quarter 2025 (Third Estimate), GDP by Industry, Corporate Profits (Revised), and Annual Update.” https://www.bea.gov/data/gdp/gross-domestic-product. Accessed Dec. 10, 2025.

⁸ Jennifer Liu. CNBC. Nov. 7, 2025. “Worried about layoffs? Economists say the job market is cooling but ‘not falling off a cliff.’” https://www.cnbc.com/2025/11/07/-economists-say-job-market-is-cooling-but-not-falling-off-a-cliff.html. Accessed Dec. 10, 2025.

⁹ Jamie Chisholm. Morningstar. Nov. 28, 2025. “Midterm elections are coming in 2026. Here’s what 100 years of data tell us about how stocks may react.” https://www.morningstar.com/news/marketwatch/20251128186/midterm-elections-are-coming-in-2026-heres-what-100-years-of-data-tell-us-about-how-stocks-may-react. Accessed Dec. 10, 2025.

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