2025 Review: Closing the Books

January 08, 2026

The U.S. economy finished 2025 on solid footing. As of December 31st, the Atlanta Fed’s GDP Now model reported roughly 2.7% growth in the fourth quarter, supported by strong consumer spending and rising private inventories.¹ Healthy consumer demand remains a hallmark of steady expansion, while inventory investment tends to be more mercurial. Fourth-quarter growth followed solid expansions in Q2 and Q3, after a policy-driven contraction in Q1 caused largely by a surge in imports ahead of tariff enactments.

The labor market cooled meaningfully over the course of the year. Unemployment rose from 4.0% in January to 4.4% in December, while job creation slowed sharply.² Over the past three Nonfarm Payroll reports, job losses averaged approximately 22,000 per month.³ Federal Reserve Chair Jerome Powell has also raised concerns that current payroll methodology may be overstating job creation by as much as 60,000 jobs per month.⁴ If accurate, the U.S. economy may continue experiencing net job losses as it enters 2026.

Productivity, defined as output per hour worked, is a key driver of economic growth, corporate profitability, and living standards. It also influences wage growth and tends to be deflationary, putting downward pressure on prices. Productivity growth has been uneven over the past century, alternating between periods of strong gains and relative stagnation. With immigration slowing, future GDP growth will depend more heavily on productivity improvements, making this an increasingly important metric to monitor. Any drag from a slower-growing labor force will need to be offset by technological adoption and innovation.

Data from the Bureau of Labor Statistics indicate that productivity gains in 2025 were solid but remain below long-term historical averages. Since 2019, productivity has grown at an average annual rate of 2.0%, slightly below the 2.1% U.S. average since 1947.⁵ Although this suggests some improvement relative to the post-pandemic period, productivity growth has not yet returned to its long-run trend. A notable exception occurred in the third quarter of 2025, when productivity rose at a 4.9% annualized pace. Subsequent data will be critical in determining whether this acceleration represents a sustained shift or a temporary rebound.³

The disinflationary trend that began after 2022 slowed during 2025, though the most recent Consumer Price Index (CPI) report offered some relief.⁶ The November CPI showed headline inflation rising 2.7% year over year, cooler than expected and closer to the Federal Reserve’s long-run 2.0% target. Core inflation declined to 2.6% year over year, while shelter inflation, a heavily weighted component, eased to 3.0%. The Zillow Rent index, an alternative measure of housing inflation, also showed cooling, reinforcing the disinflation narrative.⁷

The CPI report was not without controversy. Following a government shutdown that delayed the prior release, month-over-month data were unavailable, and the Bureau of Labor Statistics acknowledged data gaps. As a result, many economists interpreted the report cautiously. Even so, the moderation in inflation remains encouraging. Overall, the U.S. economy is entering 2026 with solid momentum but lingering structural questions. Investors and policymakers alike will be watching whether growth can be sustained through stronger productivity gains and continued progress on inflation.

Data source: Yahoo Finance U.S. Markets and MSCI Emerging Markets

Global equities capped off a strong fourth quarter and an exceptional year in 2025. All major equity indexes finished higher, with international markets outperforming U.S. stocks. After the volatility sparked by the Administration’s April “Liberation Day” announcement, markets rebounded swiftly and pushed to new all-time highs.⁸ Gains were supported by improving trade dynamics, ongoing economic expansion, solid earnings growth, rising forward earnings expectations, and valuations expansion as investors paid higher multiples for future earnings.

While early-year gains were heavily concentrated in large-cap stocks, particularly the “Magnificent 7” highly influential U.S. tech stocks, market leadership broadened meaningfully in Q4. Value-oriented large-cap stocks outperformed, signaling healthier participation across the equity market. Looking ahead, small-cap earnings growth is expected to accelerate in 2026, driven by the economic momentum, multiple expansion, and a more accommodative interest-rate environment. With greater exposure to short-term and floating-rate debt, small-cap companies stand to benefit disproportionately if the Federal Reserve continues easing.

International equities led performance in 2025, driven by stronger earnings trends, expanding valuations, and a weaker U.S. dollar, which accounted for roughly one-third of international equity gains. However, questions remain about the durability of this rally, particularly in developed markets such as the Eurozone, where sluggish productivity growth and demographic challenges may limit longer-term upside.⁹

Data source: U.S. Department of The Treasury

The yield curve shows interest rates across U.S. Treasurys, including bills (0-1 year), notes (1-10 years), and bonds (10+ years). Because Treasury yields underpin most borrowing costs in the U.S., even small changes can have broad economic effects. Mortgage rates, auto loans, and credit cards are all heavily impacted by moves in the Treasury market. Mortgage rates are heavily influenced by the 10-year Treasury, auto loans the 5-year, and credit cards the ultra-short end of the curve.

Since the start of 2025, yields across most maturities have declined, with some stabilization in Q4. Short-term rates, driven by Federal Reserve policy, have fallen roughly 70 basis points (0.70%). The middle of the curve has also moved lower, with the 2-year and 5-year yields down 78 and 65 basis points, respectively. The long end has seen far less movement, with the 10-year and 20-year dropping only 40 and 7 basis points, while the 30-year bond has risen 6 basis points.

Muted movement at the long end has raised questions about whether U.S. fiscal concerns are weighing on the bond market. In most rate-cutting cycles, longer-term yields fall alongside short-term rates.¹⁰ However, those cycles typically coincide with economic unrest. In the current environment of steady economic growth, falling short-term rates are instead supporting a normalization of the yield curve. While the U.S. fiscal trajectory remains unsustainable, there are no clear signs of stress in the Treasury market today.

Corporate spreads represent the yield difference between corporate bonds and comparable U.S. Treasurys of the same maturity. These spreads compensate investors for default risk and the potential loss in the event of default. Throughout 2025, spreads for both high-quality and lower-quality corporate bonds remained very tight. Excluding a brief bout of volatility in April, spreads have remained well below their 10-year averages.

The tightness of credit spreads reflects both fundamental and technical factors. From a fundamental perspective, solid economic growth and strong earnings prospects for U.S. firms have reduced perceived default risk, compressing spreads. In addition, many lower-quality issuers continue to access private credit markets, improving the overall quality of the public bond market. On the technical side, limited corporate bond issuance ahead of the most recent rate-cutting cycle, combined with strong investor demand, has pushed prices higher and yields lower. As a result, current spreads offer limited compensation for default risk.

Data source: Federal Reserve Bank of St. Louis

Data source: Yahoo Finance U.S. Markets

Currency markets were volatile in the first three quarters of 2025. The U.S. dollar declined more than 10% during that period before staging a modest rebound in Q4. The weakness reflected Federal Reserve rate cuts, fiscal policy uncertainty, and shifting growth expectations for the U.S. economy. International central banks also contributed, as increased purchases of gold, an alternative reserve asset, reduced support for the dollar.

The euro and British pound rose sharply in 2025, benefiting from U.S. dollar weakness. Additional support came from increased fiscal stimulus and improving economic outlook. As governments stimulate their economies, capital tends to flow into those currencies, pushing valuations higher. Such moves can overshoot during periods of optimism and often lead to partial reversals in subsequent years.¹¹

The Japanese yen experienced a mid-year decline exceeding 10% before recovering to finish near its starting level for 2025.¹² The weakness stemmed from wide interest rate differentials between Japan and other developed economies. When a country’s interest rates are low, its bonds become less attractive, often resulting in capital outflows and currency depreciation.

Bitcoin struggled in Q4, falling nearly 24% and ending the year down 5.3%.¹³ To function as a true currency, an asset must serve as a unit of exchange, a store of value, and a unit of account. While bitcoin’s use as a medium of exchange has increased, its volatility limits its effectiveness as a store of value, and its adoption as a unit of account remains minimal. Nonetheless, the cryptocurrency’s growing prominence justifies its inclusion here, even if it does not meet the traditional definition of a currency.

Data source: AMPEX Precious Metals Dealer

2025 was a standout year for precious metals. The asset class outperformed stocks, bonds, and real estate, posting gains well in excess of 50%. Momentum carried into the fourth quarter, with metals continuing to rally. Silver led the group, rising more than 54% in Q4 alone.

Gold, supported primarily by demand from central banks, investors, and jewelry fabrication, gained 12.45% in the fourth quarter and finished the year above $4,300 per ounce. Only a handful of periods over the past 40 years have seen gold appreciate this rapidly, and forward returns following such episodes have historically been muted. Periods of euphoria tend to pull demand forward, often resulting in weaker performance in subsequent years. As highlighted in our previous newsletter, there have been 10 instances since 1986 when gold rose more than 100% over a three-year period.¹⁴ In those cases, gold’s average annual return over the following decade was just 2.65%.

Industrial metals such as copper and palladium also posted strong gains in 2025. As global electrification accelerates and data center construction expands rapidly, demand for metals with high electrical conductivity has increased meaningfully. While this structural demand supports a favorable longer-term outlook, industrial metals remain susceptible to volatility. Copper prices surged more than 10% in early July following a tariff announcement by the Administration, then fell as much as 25% by month-end after clarification that refined copper would be excluded from the tariffs. The July episode underscores the elevated volatility in metals markets today.¹⁵

- The One Day In July Investment Desk

Sources:
1. Federal Reserve Bank of Atlanta. (Accessed January 5, 2026). GDPNow. https://www.atlantafed.org/cqer/research/gdpnow
2. One Day In July. (Fall 2025). Quarterly Booklet Issue XXXIII. https://media.onedayinjuly.com/media/pdf/Fall_2025_Quarterly_Booklet_Digital.pdf
3. United States Department of Labor - Bureau of Statistics. (Accessed January 8, 2026). Productivity and Costs, Third Quarter 2025. https://www.bls.gov/news.release/pdf/prod2.pdf
4. The Wall Street Journal. (December 10, 2025). Fed Chair Jerome Powell Says U.S. May Be Drastically Overstating Jobs Numbers. https://www.wsj.com/economy/jobs/fed-chair-jerome-powell-says-u-s-may-be-drastically-overstating-jobs-numbers-741c635d?gaa
5. United States Department of Labor - Bureau of Statistics. (September 4, 2025). Productivity Change in the Nonfarm Business Sector, 1947 Q1 – 2025 Q2. https://www.bls.gov/productivity/images/pfei.png
6. United States Department of Labor - Bureau of Statistics. (Accessed December 30, 2025). Consumer Price Index. https://www.bls.gov/cpi/
7. Zillow. (December 18, 2025). Rents Pull Back and Concessions Rise, Offering Renters Winter Leverage. https://www.zillow.com/research/november-2025-rent-report-35870/
8. Center for Strategic and International Studies. (April 3, 2025). “Liberation Day” Tariffs Explained. https://www.csis.org/analysis/liberation-day-tariffs-explained
9. One Day In July. (Summer 2025). Quarterly Booklet Issue XXXII. https://media.onedayinjuly.com/media/pdf/Summer_2025_Quarterly_Booklet_DIGITAL.pdf
10. Charles Schwab. (December 3, 2025). 2026 Outlook: Treasury Bonds and Fixed Income. https://www.schwab.com/learn/story/fixed-income-outlook
11. International Monetary Fund. (2020). IMF Advice on Capital Flows: Evaluation Report. https://ieo.imf.org/en/-/media/ieo/files/evaluations/completed/09-30-2020-imf-advice-on-capital-flows/cfm-2-context-final.pdf
12. Yahoo Finance. (Accessed December 30, 2025). Japanese Yen Currency Index. https://finance.yahoo.com/quote/%5EXDN/
13. Yahoo Finance. (December 31, 2025). Bitcoins Ends Year Marred By Disappointment – But a Bounce Could be in the Cards for January. https://finance.yahoo.com/news/bitcoin-ends-a-year-marred-by-disappointment--but-a-bounce-could-be-in-the-cards-for-january-211730762.html
14. One Day In July. (December 9, 2025). Gold Rush 2025. https://www.onedayinjuly.com/research-gold-rush-2025
15. CNN. (July 17, 2025). Copper Prices Have Surged to Record Highs – and They Could Jump Higher. Here’s Why. https://www.cnn.com/2025/07/17/investing/copper-prices-us-market-tariffs