Multi-Asset Solutions
Mosaic Quarterly Communication
Market Recap – Fourth Quarter 2025
While the final quarter of 2025 resulted in a more modest, +2.7%, gain for the US stock market, as measured by the S&P 500 Index, the year’s +17.9% advance caps a historical 3+ year run that has seen the US market double off the October 2022 low that marked the dawn of the AI era. Notably, the year wound down with questions percolating around AI’s circular investments, true earnings potential, vastly growing capital intensity, and the introduction of debt-based versus internally generated financing to pay for the AI buildout. This newfound skepticism resulted in a bit of a timeout for the ongoing AI and momentum-based boom, as the Technology sector and growth stocks gave way to Health Care and value stocks for 2025’s final chapter.
Herding and concentration in mega cap growth stocks continued to be a path to outperformance in the US market for 2025. However, low quality, high beta stocks proved to be the biggest winners of the year, especially off the April low, where the S&P 500 High Beta Index jumped 75% into year-end, nearly double the 39% for the S&P 500 and light years ahead of the 28% move in the S&P 500 Quality Index. Encouragingly, global diversification added value for the year as larger returns were found in the international markets with the MSCI ACWI ex-US Index outperforming over the final quarter, with a +5.1% gain, and the year at +32.4%. A nearly 10% drop in the US dollar provided a substantial tailwind for owning non-US dollar assets in 2025.
Fixed income investors were also spoiled with sizeable gains as short to intermediate term interest rates fell and credit spreads tightened. The broad-based Bloomberg US Aggregate Bond Index gained +7.3% in total, with +1.1% coming from Q4.
Simply put, 2025 was a fantastic year for investors.
Download the Quarterly Mosaic Overviews
Quarterly Video
Performance
Within US equities, the AI/momentum pause and broader US stock market performance benefited portfolio results for the quarter given our underweight exposure to mega cap growth stocks. Our preference for high quality US large caps was also rewarded, however exposure to US small caps detracted from results. Throughout the year we have steadily increased our holdings in international stocks, which has been a step in the right direction, however our remaining incremental preference for domestic equities tempered relative returns. Fixed income results were solid, boosted by our overweight to mortgage-backed securities, which benefited from increased investor demand for their credit quality and attractive relative valuations.
For the year, absolute returns were sizeable, yet the dominance of a small set of US large cap growth stocks, and our preference for higher quality and more attractively valued areas of the market, caused returns relative to blended benchmarks to fall short. Our incremental additions to international stocks throughout the year benefited total return, as did our overweight positioning in emerging Asia and the Eurozone. However, much like the quarter, our overall underweight versus the US detracted from results given the sizeable outperformance of non-US stocks. Bond performance also mimicked the quarterly returns, where an outsized gain from mortgage-backed securities was the biggest positive driver.
Outlook & Positioning
We were encouraged by the broadening of the US equity market as 2025 concluded as it signals greater investor confidence in the health of the overall market and direction of the economy. After being burdened by the economic impacts of tariffs on both businesses and consumers in 2025, 2026 looks like a much more favorable set-up. The Federal Reserve has cut interest rates by 1.75% since late 2024, with more cuts expected by mid-year. We should see positive incremental economic growth brought on by the fiscal benefits of the One Big Beautiful Bill Act. Earnings growth expectations across the market cap spectrum are highly encouraging. Combining this supportive backdrop with the growing questions around AI and historically frothy valuations of mega cap growth stocks gives credence to the continued broadening of the US market.
We believe 2026 will be a year in which diversification continues to benefit investors, not just in regard to US versus foreign assets, but within the US market as well. Where it should pay to seek opportunities outside of the AI sphere. Non-US dollar assets remain attractive given the changing world order and likely rebalancing of international investors away from US dollar denominated assets.
Geopolitical risk remains one of the biggest wildcards, yet markets have generally shrugged at every turn. Within the US, the biggest questions are around the true state of the labor market and the ability of the economy to move beyond the AI buildout. The labor market appears stagnant but stable, a dynamic that should allow the Federal Reserve to continue to ease monetary policy. Any sign of a significant deterioration in the employment picture would be cause for us to revisit our 2026 optimism.
We truly appreciate your confidence and partnership.
Explore Mosaic Model Portfolios
Subscribe to the Mosaic Weekly Market Update
Upon request, Madison may furnish to the client or institution a list of all security recommendations made within the past year.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only, and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
Diversification does not assure a profit or protect against loss in a declining market.
Please consult with your financial advisor to determine your risk tolerance and investment objectives. While Madison constructs portfolios for various risk tolerances, its Asset Allocation Team does not determine individual client’s risk tolerance or investment objectives.
All investing involves risks including the possible loss of principal. There can be no assurance the asset allocation portfolios will achieve their investment objectives. The portfolios may invest in equities which are subject to market volatility. In addition to the general risk of investing, the portfolio is subject to additional risks including investing in bond and debt securities, which includes credit risk, prepayment risk and interest rate risk. When interest rates rise, bond prices generally fall. Securities rated below investment grade are more sensitive to economic, political and adverse development changes. International equities involve risks of economic and political instability, market liquidity, currency volatility and differences in accounting standards.
Holdings may vary depending on account inception date, objective, cash flows, market volatility, and other variables. Any securities identified and described herein do not represent all of the securities purchased or sold, and these securities may not be purchased for a new account. Past performance does not guarantee future results. There is no guarantee that any securities transactions identified and described herein were, or will be profitable.
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 the report constitute the authors’ 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.
Madison’s expectation is that investors in the strategy will participate near fully in market appreciation during bull markets and experience something less than full participation during bear markets compared with investors in portfolios holding more speculative and volatile securities. Therefore, the investment philosophy is intended to represent a conservative investment strategy. There is no assurance that Madison’s expectations regarding this investment strategy will be realized.
Click to view index descriptions:
The S&P 500® is an unmanaged index of large companies and is widely regarded as a standard for measuring large-cap and mid-cap U.S. stock-market performance. Results assume the reinvestment of all capital gain and dividend distributions. An investment cannot be made directly into an index.
The S&P 500® High Beta Index measures the performance of 100 constituents in the S&P 500 that are most sensitive to changes in market returns.
The S&P 500® Quality Index is designed to track high quality stocks in the S&P 500 by quality score, which is calculated based on return on equity, accruals ratio and financial leverage ratio.
Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group.
The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 11% of the total market capitalization of the Russell 3000® Index.
The MSCI ACWI ex-USA Index captures large and mid cap representation across 22 of 23 Developed Markets countries (excl. the US) and 23 Emerging Markets countries. With 1,843 constituents, the index covers approximately 85% of the global equity opportunity set outside the US.
Bloomberg U.S. Aggregate Bond Index is an unmanaged index of U.S. fixed income securities. The U.S. Aggregate Index covers the USD-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. The index includes bonds from the Treasury, Government-Related, Corporate, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS sectors.