Fourth Quarter 2025 Market Update

Global equity and fixed income markets posted positive returns in the fourth quarter, with the MSCI All Country World Index returning +3.3% (+22.3% YTD) and the Bloomberg U.S. Aggregate Bond Index gaining +1.1% (+7.3% YTD). During the period, the U.S. Federal Reserve (“Fed”) implemented two additional 0.25% rate cuts, lowering the target range to 3.5% – 3.75%, and extended the easing cycle that began in September. These policy adjustments lowered short-term borrowing costs, supporting risk assets despite ongoing concerns about moderating economic growth and labor market softness in the United States.

Domestic equity markets, as measured by the S&P 500 Index, returned +2.7% (+17.9% YTD), supported by expectations of continued monetary easing, earnings strength among mega-cap technology companies, and resilient consumer spending. U.S. small cap equities, as measured by the Russell 2000 Index, advanced +2.2% (+12.8% YTD), while mid cap equities were essentially unchanged, with the Russell Mid Cap Index returning +0.2% (+10.6% YTD). From a sector perspective, health care (+11.7% Q4, +14.6% YTD) and communication services (+7.3% Q4, +33.6% YTD) led performance for the quarter. After lagging earlier in the year, health care benefited from a rotation into defensive companies that reported stronger than expected earnings. Rate- sensitive sectors such as real estate (–2.9% Q4, +3.2% YTD) and utilities (–1.4% Q4, +16.0% YTD) lagged, driven by a late quarter increase in U.S. Treasury yields that weighed on valuations. For the year, the S&P 500 Index delivered its third consecutive year of double-digit gains, fueled by persistent enthusiasm around artificial intelligence (“AI”). The top performing sectors for the year were communication services (+33.6% YTD) and technology (+24.0% YTD). Consumer staples (+3.9% YTD) and consumer discretionary (+6.0% YTD) sectors underperformed for the year. In 2025, U.S. consumer spending was characterized by a sharp divide, or “k- shaped” economy, where resilient spending by affluent households helped offset a broader slowdown among lower-income groups. This dynamic created a performance gap across equity markets as continued inflationary pressures on lower-income households, tariff uncertainty, and a decline in investor sentiment served as headwinds for consumer-oriented sectors for the year.

Developed international equities, as measured by the MSCI EAFE Index, gained +4.9% (+31.2% YTD). Emerging markets also advanced, with the MSCI Emerging Markets Index returning +4.7% (+33.6% YTD). International markets outperformed U.S. equities in 2025, supported by a weaker U.S. dollar, improving corporate earnings across Europe and Asia, and targeted fiscal initiatives that helped bolster regional demand. Emerging markets were further supported by countries tied to AI related supply chains, improving technology fundamentals, and region-specific policy developments. Both indices ended the year with some of their strongest results in more than a decade. Attractive relative valuations across both developed and emerging markets remain a source of investor interest

Fixed income markets were positive for the quarter as yields moved lower following the Fed’s rate cuts and credit conditions remained stable. The Bloomberg U.S. Aggregate Bond Index returned +1.1% (+7.3% YTD). High yield credit outperformed investment grade, supported by solid corporate earnings and favorable supply and demand dynamics. Credit spreads, a valuation metric measured as the difference in yield between a corporate bond and a “risk-free” governmental bond, remained at historically tight levels for both investment grade and high yield credit. Municipal bonds also delivered positive performance, with the Bloomberg Municipal Bond Index returning +1.6% (+4.3% YTD). Overall, the fixed income environment reflected greater stability compared to earlier in the year, with investors gaining renewed confidence in the trajectory of interest rates and the resilience of corporate and municipal borrowers

Beyond traditional asset classes, commodity markets were mixed, with the Bloomberg Commodity Index finishing the quarter up +5.6% (+15.8% YTD). Precious and industrial metals strengthened, while energy and agricultural commodities declined. Gold continued to benefit from safe haven demand, expectations of continued monetary easing, and ongoing central bank purchases. Energy markets were weaker, reflecting shifting demand expectations and evolving supply conditions. Agricultural commodities also softened, driven by varied production and inventory trends.

2025 Year in Review | Artificial Intelligence | Market Valuations

The S&P 500 Index concluded a remarkable three-year run in 2025, posting a gain of +17.9% for the year and lifting its three-year annualized return to +23.6%. The third consecutive year of double-digit gains for the index was accomplished despite “Liberation Day” tariff volatility, the longest government shutdown in history, and a softening labor market. Policy relief, including tariff exemptions and pauses, and the beginning of a Fed easing cycle that lowered short-term interest rates, helped drive gains for financial markets despite the aforementioned concerns. Enthusiasm for artificial intelligence was a dominant theme for the year, led by companies levered to AI infrastructure spending , spanning semiconductors, cloud services, data centers, and power. “Hyperscalers”, cloud service providers that offer large scale computing, data storage, and networking services that are essential to AI, committed approximately $400 billion to AI initiatives in 2025. Some projections estimate that global AI expenditures could scale to $3-4 trillion annually by 2030. Investors believe certain hyperscalers, including Amazon (Amazon Web Services), Microsoft (Azure), Alphabet (Google Cloud), as well as Meta, have ample free cash flow to fund and service the debt associated with the announced AI investments. However, questions linger about financing sustainability should the massive level of investment fail to meet the aspirational AI efficiency gains and/or the applications cannot be commercialized to generate profits. Investment managers utilized by Prairie Capital maintain balanced views, which are generally supportive of the companies levered to the build out of AI infrastructure, while acknowledging there is undoubtedly some froth in valuations. It is generally believed the AI investment cycle will ultimately generate productivity gains and returns, though the path is unlikely to be linear.

Throughout 2025, concerns related to elevated U.S. equity valuations were top of mind. The S&P 500 Index entered the year trading at a 21.5x forward price-to-earnings (“P/E”) ratio and ended the year at 22.0x, well above its 30-year average of 17x. Elevated valuation metrics traditionally signal compressed forward-looking returns; however, an encouraging development was that recent market appreciation was supported by fundamentally stronger factors. As quoted by JP Morgan, in 2023, stock price increases were largely attributable to multiple expansion—investors paying higher prices for companies without corresponding earnings improvements. By 2025, however, the dynamics shifted significantly: 84% of market returns were driven by actual earnings growth, compared to just 27% in 2023. The earnings growth reported represents a healthier foundation for market returns experienced during the year. The positive outlook is further supported by expected pro-growth policies in 2026, including the implementation of the One Big Beautiful Bill Act in the United States. The positive outlook is also met with skepticism, mostly centered around continued (albeit lower) inflation weighing on lower-income households, concentration risk of AI themes represented in the S&P 500 Index, and global geopolitical risks.

While U.S. large-cap equities trade at historically high valuation metrics, ex-U.S. equity valuations remain near historical lows relative to the United States. Even after a +31.2% return in 2025, the MSCI EAFE Index ended the year trading at a 31% valuation discount to the S&P 500, while the 20-year average discount has been 18%. The MSCI Emerging Markets Index also ended the year trading at a 40% discount to the S&P 500 Index relative to its 20-year average discount of 29%. Investment managers continue to be constructive on ex-U.S. opportunities, driven by an expected continued trend of a weaker U.S. dollar and supportive fiscal initiatives, notably in Europe, which are supportive of future earnings growth.

As always, we continue to advocate for diversification across portfolios, positioning for a range of potential outcomes while maintaining a steady focus on long-term objectives. A well-defined long-term plan, coupled with prudent risk management and close collaboration with your advisory team, provides the strongest foundation for ensuring your portfolio is well-positioned to meet your goals, especially during challenging market conditions. We remain committed to helping clients navigate turbulence in markets and are available to discuss your specific circumstances. As always, we appreciate the trust and confidence that you have place in Prairie Capital.

Sincerely,

Prairie Capital Management Group, LLC

Important Disclosures
Past performance is not an indication of future results. This publication does not constitute, and should not be construed to constitute, an offer to sell, or a solicitation of any offer to buy, any particular security, strategy, or investment product. This publication does not consider your particular investment objectives, financial situation, or needs, should not be construed as legal, tax, financial or other advice, and is not to be relied upon in making an investment or other decision.

Certain information contained herein has been obtained or derived from unaffiliated third-party sources and, while Prairie Capital Management Group, LLC (“Prairie Capital”) believes this information to be reliable, makes no representation or warranty, express or implied, as to the accuracy, timeliness, sequence, adequacy, or completeness of the information. The information contained herein, and the opinions expressed herein, are those of Prairie Capital as of the date of writing, are subject to change due to market conditions and without notice and have not been approved or verified by the United States Securities and Exchange Commission (the “SEC”), the Financial Industry Regulatory Authority (“FINRA”), or by any state securities authority. This publication is not intended for redistribution or public use without Prairie Capital’s express written consent.

Definition: “YTD” = Year-to-Date.