Quarterly Market Currents: Turning the Page on 2025
2025 was a whirlwind across markets, marked by rapid advances in artificial intelligence, bouts of equity volatility, shifting interest-rate expectations, heightened geopolitical tension, and uneven deal activity. Amid this constant flow of headlines, distinguishing durable trends from short-term noise became increasingly important for investors. As the year came to a close, several quieter but more consequential shifts emerged—shifting global equity leadership, slowly unlocking private-market liquidity, and reinforcing a higher-for-longer rate environment. These themes provide critical context for how risk and opportunity are likely to be priced as we look ahead.
A Quietly Triumphant Year for Non-U.S. Stocks
Even the most casual observers of market news have likely heard about the dominance of AI in 2025’s stock market rally - a stock rally that pushed the S&P 500 to post 38 record high days in the year. The deluge of headlines may have created the impression for many that U.S. large-cap stocks (i.e., the S&P 500) reigned supreme in global stock market performance. The stock index breaking records throughout the year, driven by surging companies at the forefront of the most revolutionary technological advancement since the advent of the internet, had to have cruised past other stock indexes, right?
That was not the case. Quietly and with little fanfare, non-U.S. developed (+31.4%) and emerging-markets equities (+33.3%) outperformed their U.S. large-cap counterparts (+17.8%). It should be noted that the S&P 500 still delivered a formidable year (well above its long-term average return of 10.7%), but it was non-U.S. markets that led global equity performance. The primary driver of this relative outperformance was the sharp decline in the U.S. dollar, which finished the year down 9.4% as rate cuts, mounting debt, and heightened geopolitical uncertainty prompted a broad recalibration of the greenback.
Last quarter, we noted early signs that the prolonged period of U.S. equity outperformance may be nearing an inflection point, and 2025 has largely borne out that view. With valuation disparities still favoring non-U.S. markets and macro conditions supportive of further U.S. dollar deterioration, we remain constructive on the case for an overweight to non-U.S. equities. Importantly, this positioning is grounded not in short-term market timing, but in a broader assessment of relative valuations, diversification be
Private Equity’s Gradual Liquidity Thaw
Over the past several years, private equity markets have been navigating what we’ve described as a deep “freeze” in liquidity. Beginning in late 2022, the most abrupt interest-rate hiking cycle in decades sharply curtailed both deal activity and exits, effectively freezing capital in place. By late 2024, we began to see the first signs of a slow thaw, supported by a tentative reopening in the IPO market—an important, and historically volatile exit channel for private equity sponsors.
Data through the third quarter of 2025 suggest that this thaw has continued, though progress remains uneven. Deal activity, measured by aggregate buyout and secondary-buyout volume, has recovered steadily over the past two years and is now approaching market highs last seen in 2021–2022. This rebound reflects a market that has gradually adapted to higher financing costs, as buyers and sellers have begun to converge on more realistic valuations and capital structures. Exit activity, however, remains slower to unfreeze - and LP capital remains locked up as a result. While market participants have not experienced the anticipated flurry of deal activity Wall Street hoped for in Trump 2.0, the IPO market (a crucial exit mechanism for private equity exits) has been steadily climbing since activity cratered in mid-2022. Similarly, exit activity is trending modestly higher, but remains materially below 2022 peaks.
Looking ahead to 2026, the tundra appears to be slowly warming, but far from fully thawed. Rate cuts in late 2025 have eased financing conditions and improved deal confidence at the margin, yet geopolitical risk and policy uncertainty continue to cloud visibility. We expect private-equity liquidity to continue thawing gradually, with exits likely to lag deal activity as confidence and capital flow cautiously back into the market.
As the Saying Goes, “Higher for Longer”
Last quarter, we highlighted the increasingly opaque macroeconomic backdrop confronting the Federal Reserve, as a softening labor market collided with persistently sticky inflation. Navigating these crosscurrents, the Fed delivered 150 basis points of rate cuts in 2025 while signaling greater reluctance to extend further easing as it looks ahead to 2026. Notably, longer-term rates responded far less. The 10-year Treasury yield declined just 40 basis points over the year and moved higher by 15 basis points in December, underscoring that investors continue to balance near-term policy easing against unresolved inflation pressures and broader macroeconomic uncertainty. Part of this divergence reflects a rising term premium, as investors demand greater compensation for inflation risk, fiscal deficits, and heavier Treasury issuance (factors that sit largely outside the Fed’s direct control).
Out of this cloudy picture, one consensus has begun to solidify: Treasury yields are likely to remain higher for longer. The Fed’s constrained position between its dual mandates, particularly in the face of sticky inflation, has anchored expectations for the 10-year yield near 4% over the medium term, marking a meaningful departure from the post-Global Financial Crisis era of structurally low rates. Importantly, a higher-for-longer environment is not inherently negative for investors; rather, it represents a shift in where returns are earned and how risk is compensated. Higher, more durable yields recalibrate the relative attractiveness of assets, elevating the role of high-quality fixed income as both a source of durable income and a stabilizer of portfolio outcomes. In contrast, higher financing costs place a more disciplined lens on equity valuations. While fixed income has always played a central role in risk-controlled asset allocation, the evolving rate backdrop presents a timely opportunity to reassess its position within portfolios.
DISCLOSURE: The information presented in this post is the opinion of the author and does not reflect the view of any other person or entity. The information provided is believed to be from reliable sources, but no liability is accepted for any inaccuracies. This post is provided for informational purposes only and should not be construed as an investment recommendation. Past performance is no guarantee of future performance. Align Impact is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration as an investment adviser does not constitute an endorsement by the SEC, nor does it imply any level of skill or training.
