An Outstanding Quarter & Year

Throughout 2025, equity markets exhibited the ebb and flow of various themes such as artificial intelligence, Magnificent 7, momentum, value then growth – then value to close out an outstanding year.

The outperformance of foreign equities over domestic equities was evident throughout the year, with the final quarter closing out strong. For the quarter, foreign developed rose 4.9%, while emerging markets advanced 4.7%. Overall, the MSCI All-Country World Index ex-USA (ACWI x-USA), which incorporates both foreign developed and emerging markets, increased 5.1% during the quarter.

Returns in the U.S. were solid as U.S. large caps rose 2.4% while U.S. small caps added 2.2%. For the quarter, the Russell 3000 Index, a broad measure of investable U.S. equities, advanced 2.4%.

During the quarter, Value materially outperformed Growth within all broad indexes as investor sentiment waned on the thematic play of momentum associated to Growth.

For all of 2025, emerging markets surged 33.6% while foreign developed advanced 31.2%. ACWI x-USA rose 32.4%, and for the first time since the drawdown of 2022, closed out the year ahead of U.S. equities. It is worth noting that foreign equities outperformed U.S. equities in only three of the last 14 calendar years.

During 2025, U.S. large caps captured a respectable 17.4% while U.S. small caps rose 12.8%. Overall, the Russell 3000 Index climbed 17.2% during 2025.

The Dichotomy Driving of Equity Returns

A dichotomy was evident in the relative performance of U.S. equities versus foreign peers. We have often discussed our focus on a company’s ability to sustain and expand revenues, margins and earnings per share (EPS). One may anticipate that companies exhibiting above market growth in EPS should be rewarded with a higher price to earnings ratio (P/E).

The dichotomy referenced is in the decomposition of return. According to FactSet, for calendar year 2025 analysts project EPS growth of 11.5% for U.S. large cap companies (when incorporating the upcoming fourth quarter earnings reports). This implies the return experienced during 2025 is attributed primarily to EPS growth, which explains 66.1% of the U.S. large cap returns presented above. The remainder is ascribed to a modest expansion in P/E.

Similarly, for 2025, analysts currently estimate EPS growth of 9.7% for foreign developed companies. This projected growth in EPS explains only 31.1% of the index’s return presented above, with the preponderance of return attributed to P/E expansion.

When looking forward to 2026, the probability of prospective outcomes may revert to a premium valuation ascribed to the U.S. due to its projected EPS growth supported by attractive revenue growth.

This dichotomy continues when considering forward estimates of EPS growth. According to London Stock Exchange Group (LSEG) I/B/E/S SmartEstimates®, which favors analysts who (over time) have been the most accurate; for U.S. large cap companies’ analysts project EPS growth of 15.3% year-over-year (YOY) for 2026 and 15.4% YOY for 2027, supported by projected revenue growth of 7.4% YOY and 7.1% YOY, respectively.

Regarding foreign developed, analysts project EPS growth of 5.8% YOY for 2026 and 10.2% YOY for 2027, supported by revenue growth of 3.3% YOY and 3.8% YOY, respectively. These projected growth rates are materially lower than their U.S. peers.

Historically, U.S. equities have exhibited a higher P/E than foreign peers. This may be explained by the perceived relative earnings power of U.S. companies. The analyst revisions ratio remains positive for U.S. equities (upward revisions exceed downward revisions), indicating a degree of optimism. This ratio is negative (downward revisions exceed upward revisions) for foreign developed.

Remaining Steadfast

We remain cautiously optimistic regarding global equities. Our process emphasizes quality growth at a reasonable price, which historically has captured attractive risk-adjusted returns. We remain diligent in monitoring macro and company specific events, executing when appropriate to optimize the risk to reward function.

The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.

This content is provided for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and should not be interpreted as investment, tax, legal, and/or financial planning advice. All investments involve risk, including the possible loss of principal. Investments are not FDIC insured and may lose value.