Markets navigated a complex environment in the fourth quarter. The quarter began with a government shutdown, which lasted 43 days and delayed key economic data releases. The lack of timely information made it difficult to assess the economy’s strength and contributed to periods of volatility as the market reacted to incomplete information. The Fed cut interest rates by a total of 0.50% but signaled a pause, hinting that it could cut less than the market expects in 2026.
Investors remain excited about the potential of artificial intelligence, but they’ve become more focused on which companies are best positioned to turn AI demand into near-term profits. Additionally, investors are concerned that the lofty valuations of the AI sector could parallel the early days of the internet and be a catalyst for a market decline should multiples contract. Nonetheless, the S&P 500, Dow Jones Industrial Average, Nasdaq, and small-cap stock indices each set new highs in 2025.
In this commentary, we recap the fourth quarter’s defining themes and events, review performance across key market areas, and look ahead to 2026.
Government Shutdown Creates a Lapse in Economic Data
An important event this quarter was the government shutdown and its impact on economic visibility. The shutdown started on October 1st and immediately disrupted the release of key reports on employment, inflation, and growth. To fill the data gap, the market and economists turned to corporate earnings reports and surveys from non-government sources. The shutdown lasted through mid-November, making it the longest in history, and resulted in a data backlog that is still being cleared as the new year begins.
The labor market continued to soften in the fourth quarter, with unemployment rising to a four-year high as hiring slowed. However, the consumer’s resiliency to spend remained. Consumer spending has cooled since 2022, but it remains steady despite affordability challenges and persistent inflation. The homebuilder sentiment index moved slightly higher in the fourth quarter, but it remains below 50, an indication that housing activity continues to run below pre-pandemic levels.
Most importantly, GDP growth rose to 4.3% in the third quarter, up from the second quarter’s 3.8%. This represents the strongest consecutive quarters of growth since 2021, before the Fed’s aggressive rate-hiking cycle.
The data reveals a late-cycle economy that is slowing but not breaking. Labor market conditions are soft, consumer spending is slowing, and housing is under pressure, but the economy shows few signs of significant stress. The strong third-quarter GDP reading indicates the economy reaccelerated after slowing in the first quarter, suggesting consumers and businesses altered their behavior in 2025 due to shifting trade policy and tariffs.
Now that trade policy uncertainty has eased, there’s a debate about where economic activity will settle in 2026. The uncertainty explains the Fed’s cautious tone and the market’s heightened sensitivity to updated data releases.
Want to read more? Click below to download our entire 4th Quarter 2025 Market Commentary…
Q4 2025 Market Commentary
Markets navigated a complex environment in the fourth quarter. The quarter began with a government shutdown, which lasted 43 days and delayed key economic data releases. The lack of timely information made it difficult to assess the economy’s strength and contributed to periods of volatility as the market reacted to incomplete information. The Fed cut interest rates by a total of 0.50% but signaled a pause, hinting that it could cut less than the market expects in 2026.
Investors remain excited about the potential of artificial intelligence, but they’ve become more focused on which companies are best positioned to turn AI demand into near-term profits. Additionally, investors are concerned that the lofty valuations of the AI sector could parallel the early days of the internet and be a catalyst for a market decline should multiples contract. Nonetheless, the S&P 500, Dow Jones Industrial Average, Nasdaq, and small-cap stock indices each set new highs in 2025.
In this commentary, we recap the fourth quarter’s defining themes and events, review performance across key market areas, and look ahead to 2026.
Government Shutdown Creates a Lapse in Economic Data
An important event this quarter was the government shutdown and its impact on economic visibility. The shutdown started on October 1st and immediately disrupted the release of key reports on employment, inflation, and growth. To fill the data gap, the market and economists turned to corporate earnings reports and surveys from non-government sources. The shutdown lasted through mid-November, making it the longest in history, and resulted in a data backlog that is still being cleared as the new year begins.
The labor market continued to soften in the fourth quarter, with unemployment rising to a four-year high as hiring slowed. However, the consumer’s resiliency to spend remained. Consumer spending has cooled since 2022, but it remains steady despite affordability challenges and persistent inflation. The homebuilder sentiment index moved slightly higher in the fourth quarter, but it remains below 50, an indication that housing activity continues to run below pre-pandemic levels.
Most importantly, GDP growth rose to 4.3% in the third quarter, up from the second quarter’s 3.8%. This represents the strongest consecutive quarters of growth since 2021, before the Fed’s aggressive rate-hiking cycle.
The data reveals a late-cycle economy that is slowing but not breaking. Labor market conditions are soft, consumer spending is slowing, and housing is under pressure, but the economy shows few signs of significant stress. The strong third-quarter GDP reading indicates the economy reaccelerated after slowing in the first quarter, suggesting consumers and businesses altered their behavior in 2025 due to shifting trade policy and tariffs.
Now that trade policy uncertainty has eased, there’s a debate about where economic activity will settle in 2026. The uncertainty explains the Fed’s cautious tone and the market’s heightened sensitivity to updated data releases.
Want to read more? Click below to download our entire 4th Quarter 2025 Market Commentary…
S&P 500 Index is a capitalization-weighted index calculated on a total return basis with dividends reinvested. The index includes 500 widely held U.S. market industrial, utility, transportation and financial companies.
Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values.
Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
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