Market Commentary
The fourth quarter of 2025 capped a strong year for most asset classes, though market gains were accompanied by increased volatility as investors balanced optimism around policy easing with episodic political and macro uncertainty. After a robust rally through much of the year, equities entered Q4 on firmer footing, supported by continued progress on inflation and clearer guidance from the Federal Reserve. Sentiment was periodically tested by a U.S. government shutdown in the first half of the quarter, which raised concerns around near-term growth disruptions and policy dysfunction. While markets initially reacted with caution, the shutdown ultimately proved short-lived and largely contained, allowing investors to refocus on fundamentals. Earnings reports for the quarter were generally solid, with a majority of companies meeting or modestly exceeding expectations, reflecting resilient margins and continued pricing discipline despite slower revenue growth. Results were strongest among firms tied to infrastructure, industrial activity, and AI-related investment, while more consumer-sensitive areas showed greater dispersion. The S&P 500 finished the quarter up 2.7%, extending its 2025 advance, while global equities (MSCI ACWI) also posted solid gains of 3.3%. Fixed income performed well, with core bonds advancing 1.1% as yields declined further following the Fed’s rate cuts and reinforced expectations for additional easing in 2026.
The dominant narrative of the quarter centered on the transition from restrictive to supportive monetary policy, even as fiscal uncertainty briefly resurfaced. Economic data continued to signal moderation rather than contraction, with job growth slowing and consumer spending becoming more selective but resilient. Inflation made additional progress toward the Fed’s target, reinforcing confidence that price pressures were no longer a binding constraint. In December, the Federal Reserve delivered another rate cut and reiterated its data-dependent but increasingly accommodative stance. Markets largely looked through the government shutdown, viewing it as a political event with limited lasting economic impact. Meanwhile, corporate fundamentals remained supportive, particularly among companies levered to long-term capital investment trends, with ongoing commitments to AI-related CapEx—spanning semiconductors, datacenters, and cloud infrastructure—continuing to underpin earnings expectations.
Looking ahead to 2026, the market outlook remains constructive. We expect economic growth to continue to be strong, supported by easing financial conditions, resilient consumer and corporate balance sheets, and sustained investment in productivity-enhancing technologies. As earnings growth becomes less concentrated among a narrow group of mega-cap companies, there is potential for market leadership to broaden beyond the themes that have dominated recent years. This would mark a notable shift from the post-pandemic period, when a small subset of stocks drove a disproportionate share of market performance. While valuations in select areas and lingering policy risks warrant ongoing discipline, a backdrop of solid growth and broader earnings participation may provide a healthier and more durable foundation for returns, reinforcing the importance of diversification and active risk management.
Portfolio Commentary
Equity Sleeve: We continue to maintain a mix of active and passive strategies across our equity exposures, with an emphasis on diversification across regions, styles, and market capitalizations. After a strong year for global equities in 2025, we remain constructive on international allocations given still-attractive relative valuations versus U.S. large caps and the diversification benefits that come from broader geographic exposure. We are decreasing passive exposure to US Value in favor of a global actively managed strategy. Within U.S. equities, we continue to balance large cap exposures with an overweight to mid and small cap stocks where relative valuations remain compelling and earnings participation has the potential to broaden as we move through 2026. While small and mid caps have lagged the S&P 500 in recent periods, our allocation to active managers has helped improve results through differentiated security selection and style tilts. We are also maintaining targeted allocations to our Dividend and Growth stock baskets, which were recently refined to better align with momentum, quality, and income characteristics in the current market environment.
Fixed Income Sleeve: Fixed income remains an important stabilizer within portfolios as markets transition from a restrictive policy environment toward a more accommodative stance. While expectations for additional Federal Reserve cuts have supported bond returns, the path forward remains data-dependent and rate volatility may persist as investors weigh inflation progress, growth resilience, and shifting policy expectations. Within credit markets, spreads remain historically tight, which reinforces the importance of discipline and selectivity across corporate and securitized exposures. We continue to rely on our core active fixed income manager to navigate both duration and credit positioning, while also evaluating more tax-efficient implementation where appropriate. For high-tax-bracket investors, municipal bonds remain a compelling option as part of the liquidity and income allocation, helping enhance after-tax yield while maintaining a high-quality risk profile.
Alternatives Sleeve: To further diversify portfolio returns and reduce reliance on traditional stock and bond exposures, we utilize a blend of yield-oriented and hedged equity strategies designed to provide a smoother return profile across market environments. This sleeve is intended to complement—not replace—core fixed income by helping balance total return potential with less equity volatility, particularly during periods of market uncertainty or elevated valuations. Included in this allocation are strategies that generate income through options-based approaches, maintain modest equity participation with built-in risk management, and seek to dampen overall drawdowns while still allowing for participation in rising markets. These strategies may lag during sharp, momentum-driven equity rallies, but they can be especially beneficial in sideways or choppier markets where consistency and downside mitigation become more valuable.
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The commentary in this report is not a complete analysis of every material fact in respect to any company, industry, or security. The opinions expressed here are not investment recommendations, but rather opinions that reflect the judgment of Horizon as of the date of the report and are subject to change without notice. Forward-looking statements cannot be guaranteed. We do not intend and will not endeavor to provide notice if or when our opinions or actions change. This document does not constitute an offer to sell or a solicitation of an offer to buy any security or product and may not be relied upon in connection with the purchase or sale of any security or device.
Equity markets are represented by the S&P 500 Index. The S&P 500 is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The MSCI All Country World Index (ACWI) is a global equity index that tracks the performance of large- and mid-cap stocks in developed and emerging markets. The Bloomberg U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities and collateralized mortgage-backed securities. References to indices, or other measures of relative market performance over a specified period of time are provided for informational purposes only. Reference to an index does not imply that any account will achieve returns, volatility, or other results similar to that index. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change. Indices are unmanaged and do not have fees or expense charges, both of which would lower returns. It is not possible to invest directly in an unmanaged index.
This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such.
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