The fourth quarter of the year unfolded with a noticeably different character than much of what investors experienced in Q3. While volatility never fully returned in a sustained way, markets displayed more complexity beneath the surface, with broader participation across sectors, styles and geographies. Equities generally continued to trend higher, but the advance became less concentrated, suggesting to investors a market that is slowly becoming more balanced and potentially more resilient.
Unlike the narrow leadership that dominated earlier quarters, where a small group of large cap technology and AI adjacent companies accounted for a disproportionate share of returns, the fourth quarter saw a broadening out in the names and sectors that performed well. Participation expanded across cyclicals, industrials, financials, energy, and select areas of value, while small- and mid-cap stocks showed more consistent engagement. This broadening is an encouraging development, as markets with wider participation tend to be driven by multiple engines, rather than a single dominant theme.
INTERNATIONAL EQUITIES
International equities were another area of continued strength during the quarter. After leading U.S. markets for much of the year, both developed and emerging market stocks delivered solid performance during fourth quarter. Shifting economic sentiment, more attractive relative valuations, and, in some cases, supportive currency moves all contributed. While international markets continue to face structural and geopolitical challenges, the renewed performance reinforces the importance of broader diversification, particularly during periods when U.S. equity leadership begins to broaden.
MARKET VOLATILITY
Volatility, while still muted by historical standards, was more visible than in prior quarters. Both realized and implied volatility experienced intermittent increases around key macroeconomic data releases, central bank communications, and geopolitical headlines. However, as has been the case for much of the year, these volatility spikes were largely contained and short lived. Markets demonstrated a continued ability to absorb uncertainty and move forward, though not without reminders that, historically speaking, calm conditions rarely persist indefinitely.
PORTFOLIO POSITIONING
Against this backdrop, portfolios remained broadly balanced across asset classes, both between equities and fixed income, and across styles within equities. While the improvement in market breadth has expanded the opportunity set, overall valuations, particularly in certain growth sectors, remain elevated. The result is a more balanced, but less decisive, risk-reward profile for equities as a whole. As a result, discipline and selectivity remain essential.
Within equities, our perspective is not negative towards growth; however, like last quarter, expectations remain high and the margin for error has narrowed. As leadership broadens, opportunities arise in areas that have been overlooked or underappreciated for seemingly quite some time. A broader market also reduces dependence on any single theme, which we believe can be constructive over a full market cycle.
FIXED INCOME
Fixed income, however, remains a central focus of our overall allocation and risk management process, particularly in the current environment.
After several years of historically low yields and limited income generation, fixed income has reasserted its role as a meaningful contributor within diversified portfolios through income, stability, and diversification.
Throughout the fourth quarter, we continued to view fixed income primarily as a ballast rather than an area to take outsized risks or “swing for the fences.” Our duration exposure remains relatively low, reflecting ongoing uncertainty around the path of inflation, monetary policy and economic growth. While inflation has moderated meaningfully from its peak, progress has not been linear, and the economy continues to navigate the transition from restrictive monetary policy toward a more normalized environment, made muddier by an administration that is making its desire for lower rates quite clear.
RATE SENSITIVITY
The long end of the yield curve remains sensitive to shifts in inflation expectations, fiscal dynamics, and economic data and yields have moved back and forth as markets attempt to reconcile softening growth indicators with resilient consumer activity and labor market conditions. In this environment, we believe excessive interest-rate risk remains less attractive, especially when the compensation for doing so remains limited.
Credit spreads remain extremely tight in our opinion, suggesting a high degree of optimism and limited compensation for taking additional credit risk. While default rates remain manageable and corporate balance sheets are generally healthy, tight spreads reduce the margin for error should economic conditions deteriorate more meaningfully. Given our view that fixed income is primarily intended to smooth portfolio returns and provide diversification during periods of equity stress, we do not believe this is the appropriate time to materially increase exposure to lower-quality credit. Or rather, the incremental compensation appears limited. Instead, our fixed income positioning emphasizes quality, liquidity, and flexibility. We continue to favor higher-quality segments of the market that can fulfill their role during periods of volatility while still generating reasonable income. The improved yield environment compared to recent years allows fixed income to contribute more meaningfully to total return without requiring disproportionate risk-taking.
MAINTAINING FLEXIBILITY
Importantly, fixed income also plays a key role in maintaining optionality. By preserving capital and generating income, it adds to the “dry powder” necessary to act decisively when opportunities arise in other areas of the market. In a world where volatility tends to normalize over time, having this flexibility is can be beneficial over time.
Like last quarter, we remain mindful that volatility is inherently mean reverting. Periods of unusually calm markets are often followed by more normal levels of fluctuation, even if the catalyst is unclear in advance. While it is impossible to predict the timing or source of future volatility, dry powder is only helpful if you have it before you need it. Our neutral positioning across asset classes reflects this belief.
This approach is not about making binary calls on market direction or attempting short-term movements. Rather, it is rooted in the understanding that market dynamics evolve and that prudent portfolio management requires readiness for a range of potential outcomes. Our allocation allows us to increase risk when opportunities become more compelling or shift more defensively if conditions worsen, without being forced into reactive decisions.
LOOKING AHEAD
Looking ahead, our allocation for the upcoming quarters will continue to focus on inflation trends, economic and labor market conditions, and corporate earnings. In our view, corporate earnings will remain a key lens through which we can assess the durability of growth, while consumer health will continue to play an outsized role in shaping economic outcomes.
In putting it all together, the fourth quarter represented a constructive step in market dynamics rather than a dramatic shift. Broader equity participation and continued international performance were encouraging signs, while fixed income continued to play its intended role as a stabilizing force within portfolios. While we welcome these developments, we remain disciplined in our positioning and realistic about the challenges that lie ahead.