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Trends in portfolio construction

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Q4 2025 investment landscape

The global economy remains in a solid, albeit unsynchronized, expansion against a backdrop of policy crosscurrents. The U.S. demonstrated a mix of cycle dynamics, with solid mid-cycle activity amid some areas of continued weakness in housing and labor markets. While China displayed signs of slowing cyclical momentum, Europe and Canada exhibited early signs of strengthening, though further improvement may depend on progress in economic policy implementation. Global equities rallied amid a constructive expansionary backdrop and strong corporate fundamentals. The U.S. Federal Reserve once again cut rates amid signs of softer employment conditions, and the U.S. fiscal package provides an additional tailwind for corporate earnings growth. The near-term outlook appears favorable for continued economic and business expansion, but policy uncertainty, inflation persistence, and elevated asset valuations warrant continued emphasis on portfolio diversification.

 

A common composition of an advisor-created portfolio

 

Source: FI Portfolio solutions (3,371 Portfolio Reviews and Portfolio Quick Checks conducted between 10/1/25 and 12/31/25) and Morningstar.

ETF Usage

Fifty-nine percent of incoming portfolios in Q4 have some allocation to ETFs. On average, 54% of an advisor’s portfolio is allocated to ETFs which shows the popularity of the investment vehicle. We see the highest use of ETFs within the US equity sleeve, where the average allocation is around 33%. However, majority of this comes from index ETFs where advisors are looking to get low-cost exposure to the broad market. That said, Active ETF usage in on the rise in all major asset classes. In Q4, we saw 37% of incoming portfolios with allocation to active ETFs. To put this in context, this number was 13% in 2022. New active ETF products are being launched across the industry and advisors will continue to increase their appetite.

We observed the average portfolio has:

13
holdings
6
different asset managers
49
bps of underlying blended fees

Domestic Equity
Domestic Equity

In Q4, the average equity sleeve of a portfolio increased slightly to 72%. In Q4 of 2024, this number was at 67%. Advisors have been reallocating to equities over the past year showing their bullish expectations of above trend growth in the economy. However, most of this increase has come in U.S. equities. Seventy-nine percent of the equity sleeve is allocated to U.S. equities versus 21% in international. US allocation continues to remain high, compared to 73% in 2021. Within U.S. equity, the average portfolio has 64% allocation to large-caps, 23% to mid-caps and 13% to small caps. Growth exposure ticked up to 29%, which is similar to Q4 2024 levels. Value had a 29% exposure and the remaining 41% was allocated to core. We recommend overweight US equities relative to international given strong fundamentals. Large caps remain the highest quality in the domestic market with earnings expectations expected to accelerate in 2026. Decelerating inflation, potential for tariff clarity, lower rates, and economic acceleration could result in a potentially favorable scenario for small caps, which have higher momentum relative to other equity categories.

Insights:

  • Within U.S. equities, some rotation to health care and value stocks occurred during Q4, but growth stocks in the communications services and information technology sectors posted another year of leadership.
  • Stock prices of the seven largest U.S. companies by market capitalization—concentrated in the technology and communications sectors—led the broader stock market for the third year in a row, but the degree of outperformance waned from the previous years. Higher earnings drove most of the market’s return. The historically high equity valuations and the market concentration may call for increased diversification, especially in less tech-heavy foreign markets.
  • Corporate earnings revisions increasingly moved upward during the second half of 2025. Price momentum built across most sectors, even beyond the largest hyperscalers driving AI-related capex spending. The market expects technology-led, double-digit earnings growth in both 2026 and 2027, and is also optimistic smaller companies can achieve higher profits.
Alternatives
Alternatives

In a higher inflation environment, the correlations of stock and investment grade bond turned positive, where the performance of stocks and bonds moved in the same direction. This lack of diversification between stocks and bonds led advisors looking at alternatives as an option. In 2025, alts continued to showcase low correlation to stocks and bonds. Given the policy and geopolitical uncertainty in the current climate, alternatives can provide a good opportunity for valuable diversification.

Insights:

  • In this quarter, 15% of incoming portfolios had allocation to Liquid Alternatives. This is an increase of 4% compared to the previous quarter showing increasing adoption of liquid alts to act as a hedge in advisor portfolios. The average allocation was around 6.%. The most popular categories are multistrategy and market neutral products.
International Equity
International Equity

Twenty-one percent of the equity sleeve is allocated to non-U.S. equities – which remains consistent to what we saw last quarter. This level is still a far way off from the 27% exposure to international we saw in 2021. Advisors have 84% of their international sleeve in Developed markets and 16% in Emerging markets. Almost 32% of portfolios had no international equities exposure in Q4. Non-U.S. equity markets spearheaded the rally in global equity prices for both the quarter and year amid a constructive expansionary backdrop and strong corporate fundamentals. Lack of exposure to international equity may pose a huge missed opportunity for diversification benefits. While we are neutral on international equities relative to the US, the inherent cyclical sector exposure of the category plays well with improving global economy.

Insights:

  • International equities posted strong gains for Q4 and the full year across both developed and emerging markets (EM). EM debt led during Q4 and 2025 in a strong year across all fixed income sectors.
  • Emerging markets achieved double-digit year-over-year earnings growth, while non-U.S. developed markets experienced slower but still positive profit-growth results. Investors continue to anticipate double-digit earnings in all regions and accelerating momentum over the next 12 months.
  • Outside of the U.S., the share of countries reporting improved manufacturing conditions rose, suggesting global industrial activity may be improving after a three-year soft patch. A number of countries have implemented various policies to support domestic growth, ranging from favorable fiscal initiatives in Europe to policy efforts to bolster consumption and the equity market in China. Fiscal policy is expected to remain supportive and turn even more stimulative in 2026 for several major economies.
  • Prospects for continued dollar weakening increase the attractiveness of diversification in non-U.S. assets. While Non-U.S. P/Es are above their long term averages, they are substantially lower than those in the U.S. making non-U.S. valuations relatively attractive across all metrics.
Fixed Income
Fixed Income

Fixed income allocations consisted of 23% of the portfolio. This is near the lows of fixed income allocations we have observed in the last 2 years. Advisors continue to reallocate from fixed income to equity to participate in the resilient and growing economy. Investment grade allocation is at 80% of the fixed income sleeve, and 20% to high yield. This breakdown has been generally consistent quarter over quarter in 2025. U.S. Treasuries look relatively attractive on a risk-reward basis due to tight spreads in other sectors. The intermediate portion of the yield curve appears most attractive due to yield curve steepening.

Insights:

  • Credit-sensitive categories, such as emerging-market and high-yield corporate bonds, led widespread gains across major fixed income sectors.
  • Nominal 10-year U.S. Treasury bond yields finished Q4 effectively unchanged at around 4.2%, completing a relatively rangebound year. A number of crosscurrents continued to influence yield movements, including softer labor-market data, Fed easing, sticky inflation, and medium-term fiscal challenges.
  • During 2025, fixed income performance benefited from lower Treasury yields and tighter credit spreads across all major fixed income categories. Credit spreads in the U.S. Aggregate Bond Index and high-yield sector begin 2026 in the lowest decile of their historical range, providing limited compensation for taking on credit risk.
  • The Fed eased monetary policy during the second half of 2025, cutting its short-term policy rate by 75 basis points and ending quantitative tightening (after reducing its balance sheet by $2.5 trillion since 2022). The market and Fed expect two more rate cuts during 2026 due to expectations for soft labor markets and short-lived inflation.
  • The yield curve steepened significantly in 2025 amid concerns of elevated fiscal deficits and political influence on Fed decision-making, which could challenge the Fed’s ability to reduce longer-term yields.
  • Overall, many fixed income category yields ended Q4 around their 50th percentile, suggesting overall bond valuations are roughly in line with long-term averages and provide solid income within a balanced portfolio. The elevated U.S. policy uncertainty underscores the importance of diversification in fixed income to hedge growth risks and provide reasonable yields.

All data points are based on Fidelity portfolio construction reviews and Portfolio Quick Checks (PQC), from 10/1/25 to 12/30/25.

In conclusion

It is important to maintain a well-diversified portfolio and employ discipline to reach investment objectives and embrace volatility to create portfolio opportunities. Reach out to our portfolio construction guidance team to help you build portfolios for this new market environment.

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Diversification does not ensure a profit or guarantee against a loss.

ETFs are subject to market fluctuation, the risks of their underlying investments, management fees, and other expenses.

Stock markets, especially non-U.S. markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. The securities of smaller, less well-known companies can be more volatile than those of larger companies.

Although bonds generally present less short-term risk and volatility than stocks, bonds do contain interest rate risk (as interest rates rise, bond prices usually fall, and vice versa) and the risk of default, or the risk that an issuer will be unable to make income or principal payments.

Additionally, bonds and short-term investments entail greater inflation risk—or the risk that the return of an investment will not keep up with increases in the prices of goods and services—than stocks. Increases in real interest rates can cause the price of inflation-protected debt securities to decrease.

Alternative investments are investment products other than the traditional investments of stocks, bonds, mutual funds, or ETFs. Examples of alternative investments are limited partnerships, limited liability companies, hedge funds, private equity, private debt, commodities, real estate, and promissory notes. Some of the risks associated with alternative investments are: Alternative investments maybe relatively illiquid. It may be difficult to determine the current market value of the asset. There may be limited historical risk and return data. A high degree of investment analysis maybe required before buying. Costs of purchase and sale may be relatively high.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the authors and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

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