Q4 2025: Higher Rates, Narrow Leadership, and No Easy Exits

For the quarter ending December 31, 2025.

If investors were hoping for a clean handoff from inflation worries to rate relief, this quarter offered a reminder that markets rarely cooperate. Despite the Fed's pivot toward easing late last year, long-term interest rates remain stubbornly higher, reflecting persistent inflation pressures, heavy Treasury issuance, and rising term premiums. In short, the bond market - not the Fed - continues to set the rules. 

Beneath the surface, equity markets delivered gains, but once again did so in highly concentrated fashion. Since 2019, virtually all meaningful returns have come from the Magnificent Seven, while the remaining 493 stocks largely marked time. This has flattered index-level performance while quietly increasing concentration risk across portfolios that appear diversified on paper. 

Meanwhile, the U.S. consumer remains resilient in aggregate, but not without emerging stress points. Household balance sheets are still strong, debt service ratios remain manageable, and housing leverage is largely fixed-rate. However, student loan delinquencies have risen sharply following the resumption of reporting - an issue likely to weigh on younger consumers and future spending trends. 

Finally, diversification quietly worked again. Real assets, private credit, and income-oriented strategies delivered steady results without drama. In a market defined by narrow equity leadership and stubborn rates, boring diversification continues to earn its keep. 

Highlights

• Q3 GDP increased, again, to 4.3% from Q2 3.8% - thank the consumer

• Headline inflation down to 2.7%, with expectations of the CPI rising to 3.5% by mid 2026 

• Wage growth remains higher than inflation 

• Tariffs on US imports averaging 16%, down from 30% in April 2025 

• The yield curve continues to steepen with the 1yr at 3.5% and the 20yr at 4.8% 

• Foreign DM stocks up 32% in 2025 while EM up 34% 

• The US market rose 17% for 2025 

• Large growth issues, led by technology, continue to dominate 

• Domestic bonds up 7% in 2025, cash 4% 

• Higher credit risk translated into higher returns for the year 

• Longer rate risk also translated into higher returns for the year, though this was reversed in Q4 

• All real assets enjoyed a very good 2025 

• Commodities rose 16%, global infrastructure 15% and global real estate 10% 

• Mixed results for RE by country: China and Japan rose nearly 40% - Germany and the US nearly flat 

Credit Yields Comparison

This chart says the quiet part out loud: yield lives outside traditional bonds. Over the past decade, U.S. Treasuries and investment-grade credit delivered stability, not income. 

Meanwhile, high yield, leveraged loans, and especially private direct lending consistently occupied a higher altitude on the yield spectrum. Today's numbers sit near the top of their 10- year range, particularly in private credit, reflecting higher base. rates and tighter underwriting. In plain English: investors are paid for illiquidity, complexity, and patience. Clip wisely. 

Source: Bloomberg, Cliffwater, FactSet, J.P. Morgan Credit Research, KBRA DLD, J.P. Morgan Asset Management. The yields of all categories are evaluated for the 10-year period indicated. U.S. Treasuries, IG corporates and U.S. High Yield categories use the yield to worst of their respective Bloomberg indices. AAA CLOS use the quarterly yield to worst of AAA-rated debt tranches as tracked by the J.P. Morgan Collateralized Loan Obligation Index (CLOIE). Leveraged Loans are represented by the yield to maturity from the J.P. Morgan Leveraged Loan Index. Direct lending uses the annualized quarterly income return from the Cliffwater Direct Lending Index from the start of the period to 12/31/2021, and the quarterly yield to maturity from the KBRA DLD Index thereafter. Past performance is not a reliable indicator of current and future results. Guide to Alternatives. Data are based on availability as of November 30, 2025. 

Equity Returns and the Mag 7 

This chart isn't subtle - and it shouldn't be ignored. Since 2019, virtually all equity returns have come from the Magnificent Seven, while the other 493 stocks politely showed up and mostly treaded water. Same stock market, wildly different experience. This is concentration risk masquerading as diversification. Yes, the Mag 7 earned it with profits and scale, but history reminds us that leadership this narrow rarely lasts forever. When the baton drops, portfolios built on breadth, not hero worship, tend to land softer.

Source: Bloomberg, Macrobond, Apollo Chief Economist

Consumer Finances

The household balance sheet looks sturdy on paper, but cracks are being reported after the payment moratorium. Unlike mortgages, are forming. The big concern is student loans, where delinquencies have surged following the resumption of reporting after the payment moratorium. Unlike mortgages, still cushioned by low fixed rates, student loans carry higher effective rates and little financing flexibility. Debt service ratios remain manageable overall, but this pocket of stress has downstream implications for spending, housing formation, and credit quality. This isn't a crisis, but it's no longer ignorable.

Source: FactSet, FRB, J.P. Morgan Asset Management; (Top and bottom right) BEA. Data include households and nonprofit organizations. Revolving includes credit cards. Values may not sum to 100% due to rounding. *Periods for which official data are unavailable are J.P. Morgan Asset Management estimates. Household debt service ratio data from 1Q80 to 4Q04 are J.P. Morgan Asset Management estimates. Due to the moratorium on delinquent student loan payments being reported to credit bureaus, missed federal student loan payments were not reported until 4Q24. Guide to the Markets - U.S. Data are as of December 31, 2025. 

Long-Term Rates and Inflation

Here's the uncomfortable truth: long-term interest rates are higher today than when the Fed started cutting rates in late 2024. That's not a policy failure - it's a market verdict. Persistent inflation, heavy Treasury issuance, and rising term premiums have overwhelmed short-rate relief. Investors are demanding compensation for inflation risk and fiscal uncertainty, and they're getting it. The era of "rates go down because the Fed says so" is over. Inflation expectations - not the Fed - now set the long end of the curve. 

Source: Federal Reserve, US Department of Treasury, Macrobond, Apollo Chief Economist 

Asset Allocation in Retirement Funds 

This chart explains more market anxiety than any CPI print. Defined contribution plans - where most Americans actually live - are now over 80% equities, with cash and fixed income playing shrinking supporting roles. Defined benefit plans remain more balanced, but they're increasingly rare. In short, retirement outcomes are more equity-dependent than ever, whether participants realize it or not. That works in long bull markets - and painfully when volatility returns. Sequence-of- returns risk hasn't disappeared; it's just been politely ignored. 

Source: Federal Reserve, Investment Company Institute, J.P. Morgan Asset Management. Data represent only investible assets sourced from the L.118 table of the Z.1 Financial Accounts of the United States. Miscellaneous assets are excluded, as they primarily represent accounting entries for unfunded liabilities and contributions receivable rather than investible holdings. For private defined benefit (DB) plans, mutual fund assets have limited allocation data and are a relatively small share of total assets. As a result, these mutual fund assets are assumed to have the same allocation as the broader portfolios. For private defined contribution (DC) plans, where mutual fund shares constitute a majority of total assets, allocation across broad asset classes is based on data tracked by the Investment Company Institute. Guide to the Markets - U.S. Data are as of December 31, 2025. 

Performance - Equities 

Equities kept marching, but the leadership baton went overseas. The Wilshire 5000 posted a strong one-year gain, while international markets - especially emerging markets - doubled the performance of the US thanks to eye-catching country-level winners like Brazil and a weaker greenback. Sector returns told the same story: technology still doing the heavy lifting, telecom still acting its age. The risk-reward chart makes it clear that investors are being paid for large growth, but only if they're willing to tolerate some stomach churn. 

Performance - Fixed-Income 

Thanks to FOMC rate cuts, bond investors finally got paid - just not evenly. Longer-duration bonds outperformed in 2025 , but Q4 reminded us of duration risk. High yield led the charge, thanks to its high correlation to stocks. Meanwhile, core bonds delivered solid one-year results but remain uninspiring over longer horizons. Translation: bonds are behaving less like shock absorbers and more like income tools with personality. Manage expectations, manage duration, and don't confuse stability with excitement. Bonds did have a good year. 

Performance - Real Assets 

Real assets quietly did their job - diversification without drama. Commodities and infrastructure led 2025 returns, while global real estate showed selective strength despite uneven regional results. Hedge strategies and merger arbitrage added ballast, not fireworks. The YTD comparison versus stocks and bonds reinforces the point: real assets aren't about winning the race; they're about finishing it upright. In a world of inflation angst and policy noise, tangible assets continue to earn their keep. Boring? Maybe. Useful? Absolutely. 

Copyright © Consilium, LLC. Commentary and opinions herein consist of subjective judgments and are subject to change without notice, as are statements of economics, investments, and financial markets. Information provided is believed to be reliable but does not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument, security, or financial advisory service. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide for, accounting, legal, investment or tax advice. Investing may involve a greater degree of risk and increased volatility than readers of this publication may be aware of or comfortable with. Past performance does not equate to future results. Consilium, LLC - Registered Investment Advisor.