Marc Foran, MBA, CFA
Chief Investment Officer
Market Commentary, Q4 2025
December 31, 2025
Global equity markets generally performed positively during Q4, albeit at a more subdued pace than Q3. Top performing equity sectors were banks (due to anticipated deregulation and softening of capital requirements), metals and mining (led by precious and base metal mining companies due to rising commodity prices) and pharmaceuticals (which rebounded following a weak first half of the year due to policy concerns). The quarter’s top performing sectors are a reminder that what’s “working” in financial markets isn’t always what’s best for people and the planet. Sector strength driven by deregulation or commodity tailwinds can introduce impact drift unless portfolios stay anchored to clearly articulated impact theses and guardrails. Meanwhile, global fixed income performance was generally positive though regions such as the US and Europe had negative returns. As the quarter drew to a close, investors became increasingly concerned with softening labour markets on the back of slowing economic growth. When growth expectations soften, impact is often tested in the real economy first, in areas such as affordability, employment quality and access to essential services. This is where active ownership and governance can matter most: ensuring investees protect service quality and avoid shifting costs onto vulnerable communities.
MACRO
On the back of a weakening economic outlook the US Federal Reserve lowered interest rates on two occasions during Q4 with indications that further rate cuts could occur in 2026. Of note, the Fed and global central banks cited reduced concerns regarding inflation while expressing increasing concern regarding softening labour markets and in particular lackluster job creation (albeit global OECD unemployment rates remain relatively stable at present). Softening labour markets typically coincide with rising demand for affordable housing and lower-cost care at the same time as many essential service operators face. A soft labour market can be a precursor to a weakening economy due to declining consumer confidence as job-security fears emerge along with expectations of reduced wage gains, which can affect perceptions of future wealth and purchasing power.
Economic growth during the quarter came in lower than expected in North America. The US posted a 0.7% GDP growth rate (partially impacted by the federal government shutdown but a marked slowdown from Q3) versus an expectation of 3% growth and Canada saw negative 0.6% growth versus flat expectations. In Canada, weaker growth alongside moderating inflation can improve the case for patient, domestic impact capital such as private credit structures that help community-serving organizations refinance responsibly without undermining affordability outcomes. Across Europe and Japan, GDP growth remained subdued with both regions coming in at 1.3% though this rate is an improvement over Q4 growth in 2023 and 2024. Meanwhile, inflation continued to show slow but steady progress, coming in at 2% for Canada, Europe and Japan, while US inflation remained elevated on a relative basis at 2.7% (at least partially due to the impact of tariffs). This divergence also heightens the value of tracking distributional impacts, as inflation at the margin is experienced as cost of essentials, so impact exposures should be evaluated on whether they reduce or inadvertently amplify household cost burdens.
Overall, as growth slowed and inflation declined, expectations shifted in Q4 with investors increasingly pricing in a more dovish interest-rate stance, particularly in the US due to the magnitude of the slowdown in growth. As such, both equity and bond markets began to price in a rising pace and magnitude of interest rate cuts. Shifting expectations towards a lower rate environment can be supportive of long-duration themes such as clean energy and infrastructure, but the path matters. Conversely, more volatile or rising rate expectations can increase the cost of capital and strain private valuations and refinancing plans, so we favour investment opportunities with conservative leverage and explicit downside planning. As of time of writing this commentary (March 2026), shifts in the geopolitical environment due to the war in Iran are causing a short-term (and potentially longer-term) upstream energy supply shock which investors fear could turn into a stagflation scenario (i.e. lower growth combined with higher inflation and consequently elevated interest rate policies). Energy supply shocks tend to show up quickly in transport, heating and food costs, reinforcing the importance of exposure to efficiency / resilience and affordability protections. Central banks across the world could find it challenging to navigate the low growth / high inflation environment should a supply shock last beyond a few weeks or months. Thus far, the elevated risk environment has translated into relatively modest broad-based equity and bond market declines.
PUBLIC EQUITIES
Global equities generally rallied in Q4 across regions though at a far more modest pace relative to the rally of Q3. The MSCI ACWI was up 1.8% during the quarter, outpacing the S&P500 (up 1.2%) as global stocks outpaced the US, which marked a reversal from the prior quarter. In Canada the TSX rose 6.3% while the MSCI Europe and MSCI Japan equity markets rose 4.6% and 1.7% respectively. This is a useful reminder that broad Canadian index exposure can embed significant negative externalities given TSX sector composition. Of note during Q4 was the growth in global corporate earnings that on the whole missed expectations by an average of ~2% (based on MSCI ACWI constituent reports). This contrasts with the prior quarter where the same set of companies posted much-higher-than-anticipated earnings. This strengthens the case for active impact portfolio construction and risk mitigation (i.e. diversification). We prefer companies where the impact thesis and cash generation reinforce each other, rather than relying on sentiment or multiple expansion to drive share prices higher.
Equity leadership broadened beyond mega-cap US tech in Q4 2025 and early 2026, with non-US regions and cyclicals taking larger share of returns as investors sought diversification amid policy uncertainty (e.g. tariffs) and valuation concerns. Valuations across US and Japanese public equity markets remain elevated relative to historical levels at 22x and 23x forward price-to-earnings multiples respectively. However, when we look more closely, we see more favourable metrics among small- and mid-cap stocks, which trade in line with their average historical valuation levels. In our opinion, this creates significant downside risk for mega-cap technology stocks, which could correct materially should negative headlines, policies or news emerge. During Q4, investors had their first glimpse of this reality as several headlines regarding an “AI bubble” caused AI stocks to sell off quickly.
PUBLIC FIXED INCOME
Bond markets ended 2025 with noticeably steeper curves across developed markets as the shorter end of the curve declined, signalling rising investor expectations of interest rate cuts. Most notable, US 2-year treasury yield declined ~15bps while the 20-year yield increased 10bps. In Canada 2-year T-Bill rates increased 10bps and the 20-year increased a more pronounced 20bps. Rates also increased in Japan which saw the 10-year yields jumped ~45bps during the quarter reaching levels last seen just prior to the Great Financial Recession (GFR). The dramatic increase in Japen yields occurred following the election of Prime Minister Sanae Takaichi in October, whose policies were viewed as supporting increasing government spending including a 21.3 trillion-yen stimulus package that was announced in November unnerving credit markets.
In corporate bonds, the Bloomberg Corporate Investment Grade Bond Index rose 3.1% despite declines of 0.3% for US bonds and 1.1% for European bonds. Canadian corporate bonds posted a more modest 0.4% gain during the quarter.
PRIVATE MARKETS
US venture capital deal activity continued to pick up in Q4 2025 following a sharp rebound that occurred in Q3. Total deal activity reached over $90 billion bringing the full-year total to roughly $340 billion. While this activity on the surface is encouraging the market remains highly concentrated, with Artificial Intelligence (AI) and machine learning related deals accounting for approximately two-thirds of all US volume. For impact venture capital, this concentration creates a mismatch: capital can cluster in “hot” AI themes while proven, community facing solutions (care delivery, affordable housing enablement, climate adaptation, inclusive finance) remain underfunded. This is precisely where impact investors can be most additive, in providing patient capital to what is essential even when it’s not where the crowd is investing. We believe that AI investing has entered a euphoric stage as evidenced by soaring valuations particularly amongst later stage companies. Outside of AI, deal activity remains subdued by historical standards. Despite the rise in deal activity, VC remains challenged by a lack of distributions and IPO exits which continue to weigh on limited partners resulting in their sluggish interest in allocating to traditional VC funds. Practically, this reinforces two private market disciplines for impact LPs: assume longer hold periods, and embed mission protection before scarcity of capital increases pressure to trade outcomes for short-term survival. In Canada, while the total value of 2025 VC deals remained consistent with the prior year, the number of deals declined 33%. Of note Canadian VC deal activity picked up notably in Q4, which accounted for almost half of the year’s total deal value. In terms of number of deals, Q4 represented just 15% of total activity. The key takeaway is that larger and later-stage deals are increasingly dominating the market, which can deepen the early-stage funding gap, particularly for diverse founders and regionally rooted models. Blended structures and domestic impact capital can play a catalytic role here by absorbing early risk while preserving inclusion goals.
In terms of private equity, US deal activity significantly rebounded during 2025, with total deal activity reaching ~US$1.15 trillion. Megadeals were the primary theme of Q4, led by multi-billion-dollar sponsor-led take-private transactions. The secondaries market also saw record volumes, helping LPs realize liquidity solutions among an elongated holding period cycle that remains above historical norms. Canadian PE remained active, highlighted by large-scale platform acquisitions and strategic buyouts in the technology and financial sectors. Globally, European PE activity topped $730 billion in 2025, exceeding its 2021 peak. Investors worldwide maintained a flight-to-quality approach, favoring resilient operating models, asset-light businesses and strong cash generation
Globally, private credit markets remain dominated by leveraged buyout (LBO) financings which represented over half of all deal value during the quarter. A key theme during Q4 was the emergence of credit concerns, particularly regarding exposure to software companies that face (or could potentially face) AI disruption. As a result of this concern, private credit spreads among middle market opportunities widened back to historical averages after having been compressed for much of the past few years. Of note, during the first few months of 2026, private credit market concerns have increased as firms such as Blue Owl, Blackrock and Blackstone have recently halted redemptions or capped withdrawals due to portfolio stress and/or dumping of holdings by nervous investors seeking an exit. For impact investors, appropriately structured private credit vehicles (where liquidity terms match underlying loan liquidity) can help avoid forced selling dynamics that undermine both returns and real-world outcomes.
OUTLOOK
2026 is shaping up to be another year of elevated uncertainty due to geopolitical events and global trade tensions. US tariffs remain top of mind for investors and consumers alike, however we believe tariff policy volatility (i.e. the on again, off again nature of certain tariffs) has largely abated particularly following the US Supreme Court’s ruling that Trump overstepped his authority. Regardless, tariffs remain in place and in our opinion continue to be a drag on the global economy including within the US and we believe this will be the case if they remain in place. As the year progresses, if labour markets continue to soften and interest rates remain at or above the neutral rate (i.e. the rate that neither promotes or dissuades growth) we see potential for global governments to seek stimulative measures to promote domestic industries and growth. In particular, the US will have its primary elections in November, which polls are currently predicting to be a resurgence to power in Congress for the Democrats. In response, the Republican Party may introduce several stimulative measures to appease highly dissatisfied voters, which could help reignite growth during the back half of the year, particularly for more traditional industries. Stimulative policies could lead to a mix of higher-than-expected growth but also rising debt and renewed concerns of credit quality deterioration for countries across the world including the US, Canada, Germany and China, all of which are expected to see rising levels of debt-to-GDP ratios according to IMF forecasts.
As we enter 2026, we are evaluating client portfolios with an elevated risk management lens by purposely avoiding frothy areas of the market while simultaneously diversifying across regions, sectors, asset classes and factors to increase resilience during times of elevated uncertainty.
NEW PRODUCT CREATION
We have recently introduced a dedicated public equity dividend impact strategy product that is more defensively oriented than traditional markets and typical impact public equity funds. The strategy provides investors with exposure to higher yielding quality stocks that also deliver strong impact. We note that traditional non-impact dividend strategies and products tend to have high exposure to negative impact sectors such as oil & gas and defense. This is particularly relevant in Canada, where many income-oriented strategies concentrate in high-emitting sectors. An impact dividend approach can provide defensiveness while intentionally avoiding the largest negative externalities. We will also be introducing a dedicated public equity growth strategy product towards the end of March that features high-quality growth impact companies that should achieve higher rates of return during bull markets. This strategy has been intentionally designed to work in tandem with the dividend impact strategy to provide enhanced diversification while allowing investors to make tactical allocation decisions during different market decisions without compromising the impact of their holdings. In addition, we will be launching an evergreen, global Private Equity Inclusion Fund that invests in compelling, often overlooked investment opportunities backing diverse founders and businesses serving underserved markets.
While we generally remain overweight lower beta strategies that feature more defensive and income-oriented sectors such as healthcare and utilities, we acknowledge that sudden shifts in macroeconomic policies (for example stimulus) could result in a re-acceleration of growth. As such we believe investors should maintain some exposure to growth-oriented stocks subject to their risk appetite and tolerance for volatility.
Geopolitical events continue to weigh on credit markets, which have started 2026 in negative territory. Investors should keep a close eye on duration, focusing on shorter terms that have less sensitivity to shifting inflation expectations though seek to selectively add longer duration holdings (i.e. 10 years or more) in the event a material market correction occurs. In particular, investors should focus on investment grade products that provide broad global exposure to diversified sectors.
Investors broadly speaking remain under-allocated to private equity and venture capital which is resulting in fewer new funds entering the market. For impact investors, this provides an opportunity, since those funds that are able to raise capital face less competition for deals which should lower transaction valuations relative to vintages of 3-5 years ago. We also believe that the poor exit environment for VC/PE funds provides an opportunity for investors to acquire LP units on secondary markets and often at material discounts.
For impact investors focused on domestic impact and willing to accept below-market rates of return, we recommend Canadian impact credits with shorter duration maturities and fixed coupon payments. Our expectation is that all else held equal, Canada will ultimately lower interest rates as the economy continues to cool. However, we acknowledge that recent geopolitical events may cause temporary inflation that results in a postponement of rate cuts.
For investors seeking market rates of return, we have become increasingly aware of stress occurring in pockets of the non-impact market that support highly leveraged buyouts. We think caution is warranted in this segment, particularly as several open-ended private credit funds have experienced deteriorating credit quality. However, global impact credit opportunities tend to utilize significantly less leverage and tend to be less sensitive to declining or slowing economic environments. We have identified several opportunities that provide high impact alongside attractive yields without excessive risk and recommend investors selectively add these opportunities to their overall holdings.
We continue to favour natural capital assets, such as Canadian farmland, that are able to weather periods of high inflation and remain stable during weak economic environments. We continue to like (non-office) REITs in non-cyclical sectors, such as health care and to a lesser extent communications. We also believe that investments related to forest management or restoration and clean water scarcity are attractive for long-term investors, given the need to mitigate the impacts of climate change. Notwithstanding specific portfolio targets or impact areas, we would limit exposure to housing-related opportunities, although we note that affordable apartments tend to be less cyclical than market-rate apartments.
We continue to favour market-agnostic investments that have low correlations to other asset classes, thereby reducing portfolio volatility. As an example, we believe that impact litigation funds that provide marginalized individuals and communities access to the justice system should produce returns that are independent of prevailing economic conditions.
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