Insights

Market Observations

The fourth quarter of 2025 was a productive period for markets despite initial volatility, with all major asset classes, including the S&P 500 (+2.7% return) and the Aggregate Bond Index (+1% return), finishing in positive territory. Markets overcame setbacks such

as a historic government shutdown and concerns over AI valuations to recover by the year's end.
Investors gained clarity on policy fronts, notably with the Federal Reserve implementing two rate cuts during Q4 2025, which supported market performance. Economic data also demonstrated overall resilience, with Q4 GDP growth estimates to be around 5.3%.

U.S. Equity Trends: The quarter broke from previous trends, as value stocks (+3%) notably outperformed growth stocks (+2.2%). Defensive sectors, such as healthcare, were the standout performers, gaining a significant 12% for the quarter, as investors rotated from volatile AI-related sectors into more stable areas.
Global Performance Shift: 2025 marked a significant turning point, as non-U.S. markets outperformed the U.S. during a positive return year for the first time since 2012. While U.S. market breadth improved—with value and small-cap stocks matching growth returns in the latter half of 2025—elevated valuations and concentration risks persist.

Earnings-Driven Returns: For 2026, equity returns are expected to be driven primarily by earnings growth rather than multiple expansion. This environment necessitates tactical shifts, diversification, and a disciplined focus on valuation.

Fixed Income Performance: The Fed's rate cuts were a primary driver for fixed income, with shorter duration segments outperforming as the yield curve steepened. Credit markets had current growth and inflation momentum, a more likely scenario is two cuts. A potential "dovish boost" may occur mid-year with an FOMC leadership change, including a new Fed Chairperson and Atlanta Fed president. This suggests positioning for overall lower rates but maintaining a more neutral stance early in the year.

Historical and Economic Context: The view for lower rates later in the year is supported by the historical pattern in midterm election years, where rates often face early upward pressure before declining after mid-year. This is set against a backdrop of strong economic growth, with Q3 GDP printing 4.3% and Q4 tracking ahead of consensus.

Credit Spreads and Liquidity: Credit spreads are at historically tight levels, leaving allocations vulnerable to shocks despite firm fundamentals. However, changing liquidity conditions, evidenced by global central banks pivoting toward tightening and less bank reserves, necessitate a more cautious approach to credit in 2026.
Cooling Inflation and Widening Gaps: Inflation showed signs of cooling but remained above the Fed's 2% target. Meanwhile, wealth and wage gaps continued to widen in the U.S.
Market Headwinds: Risk appetites faced multiple setbacks, including the record-breaking 43-day U.S. government shutdown, which created economic data gaps, and concerns around the sustainability of AI valuations.

(MSR) Mortgage Servicing Rights Insights

Entering January 2026, MSR buyers maintain a bullish outlook, with strong passion for continued acquisitions to secure steady yields amid persistently low loan origination volumes. However, some holders are expected to offload portions of their portfolios during Q1 2026 to capitalize on current peak valuations and mitigate potential economic volatility.

Throughout the final quarter of 2025, the market for mortgage servicing rights (MSRs) maintained significant momentum, characterized by a steady rise in bulk transfer volumes. Although Servicing Release Premiums (SRP) reached unprecedented levels earlier in the year, the market transitioned toward greater complexity by late 2025. Despite this nuanced landscape, prominent aggregators continued to offer aggressive pricing.

The Federal Reserve’s late 2025 rate cuts including a final 0.25% reduction in December to a range of 3.5% - 3.75% aimed to stabilize a softening labor market but introduced significant complexity into valuations. While lower rates typically heighten prepayment risk and pressure asset values, the resulting shift in the yield curve created a more intricate environment for market participants. Critically, 4Q 2025 valuations were acutely sensitive to fluctuations in float income, a key contributor to total MSR returns. As float income rates declined by approximately 8 basis points late in the quarter, MSR holders saw modest downward adjustments in fair value.

4Q 2025 MSR Market Summary

•Robust Demand: Bulk MSR transfers increased in 4Q 2025, with major players remaining bullish in the asset class.
•Valuation Headwinds: Fed rate cuts lowered float income rates, which directly pressured a significant contributor to MSR value.
•Sector Strength: MSRs remained a high-demand area, with aggregators offering record-level premiums.