Value Equity WM 4Q 2025

Markets Review

Sources: CAPS CompositeHub^TM, Bloomberg
Past performance is not indicative of future results. Aristotle Value Equity WM Composite returns are presented pure gross and net of the maximum wrap fee and include the reinvestment of all income. Pure gross returns do not reflect the deduction of any trading costs or other fees and are supplemental to the net returns. Net returns are calculated by subtracting the highest applicable wrap/SMA fee, which includes trading costs and custodial fees, from the pure gross composite return. (From inception to 12/31/2015, the highest applicable wrap/SMA fee is 3.00% on an annual basis, or 0.75% quarterly. From 1/1/2016 to 12/31/2023, the highest applicable wrap/SMA fee is 2.00% on an annual basis, or 0.50% quarterly and 0.17% monthly from 1/1/2024 to present.) Aristotle Capital Composite returns are preliminary pending final account reconciliation. Please see important disclosures at the end of this document.

U.S. equity markets reached new all-time highs in the fourth quarter of 2025. The S&P 500 Index rose 2.66%, while fixed income markets also finished higher, with the Bloomberg U.S. Aggregate Bond Index up 1.10% for the quarter. Value stocks handily outperformed growth stocks—the Russell 1000 Value Index outperformed its Growth counterpart by 2.69%. Within the Russell 1000 Value Index, eight out of the eleven sectors posted positive returns. The best-performing sectors were Information Technology, Communication Services and Health Care, whereas Real Estate, Utilities and Consumer Discretionary were the weakest segments.

The U.S. economy continued to demonstrate resilience. Data released during the period showed that real GDP surged at a 4.3% annualized rate in the third quarter—the fastest quarterly growth in two years—driven primarily by robust consumer spending, with additional contributions from rising exports and increased government outlays. Despite this strength, consumer confidence deteriorated toward year-end; economists projected a moderation in spending, and concerns about the labor market persisted. The unemployment rate ticked up to 4.6% in November (a four-year high), though this level remains low by historical standards and is still consistent with an economy operating near full employment. Meanwhile, inflation moderated—the Consumer Price Index was up just 2.7% year-over-year in November, reaching its lowest level since July. Economists cautioned that recent unemployment and inflation figures were likely skewed by technical factors related to the 43-day government shutdown, which disrupted data reporting. This shutdown—the longest in U.S. history—forced approximately 1.4 million federal employees to go without pay and even led to temporary layoffs at some agencies before Congress passed a continuing resolution to reopen on November 12.

Given the mixed economic signals and uncertainty around the data, the Federal Reserve took a cautious stance. The Fed implemented two 0.25% interest rate cuts during the quarter, lowering the federal funds target range to 3.50%-3.75%. Fed Chair Powell emphasized a data-dependent approach, acknowledging risks to both sides of the Fed’s dual mandate. He noted the need to carefully assess incoming information, highlighting that policy would remain cautious and measured going into 2026.

Trade relations between the U.S. and China remained a key focus for markets. Early in the fourth quarter, tensions flared with tariff escalations and export controls. (China had dramatically expanded export controls on rare earth minerals, and the U.S. threatened 100% tariffs in retaliation.) Ultimately, President Trump and President Xi met at the Asia-Pacific Economic Cooperation (APEC) summit in South Korea and reached a one-year trade truce.

Corporate earnings remained robust. S&P 500 companies reported earnings growth of 13.6%, marking the fourth consecutive quarter of double-digit expansion. Of the 11 sectors within the S&P 500 Index, Information Technology recorded the strongest earnings growth of 29%. Artificial intelligence continued to be a major theme—more than 300 S&P 500 companies mentioned “AI” on their earnings calls during the fall. This enthusiasm helped propel mega-cap tech stocks higher and drive the market’s gains. However, as the quarter progressed, scrutiny increased around AI-related revenue circularity (companies buying AI services from each other to boost sales), the massive scale of AI-related capital spending, and the durability of longer-term returns on investment.

Annual Markets Review

The U.S. equity markets extended their momentum in 2025, with the S&P 500 Index posting a full-year return of 17.88%. Similar to recent years, Communication Services and Information Technology were the strongest-performing sectors, rising 33.65% and 24.04%, respectively, as enthusiasm around AI remained a dominant market theme. Reflecting this leadership, the Russell 1000 Growth Index outperformed the Russell 1000 Value Index by 2.65% for the year.

Fixed income markets also delivered strong performance, with the Bloomberg U.S. Aggregate Bond Index advancing 7.30% over the period.

While trends such as AI continued to propel markets forward, 2025 was not without challenges, both new and existing. President Trump’s tariffs, ongoing geopolitical conflicts, mixed economic data and a government shutdown all contributed to heightened uncertainty.

Factors such as momentum and volatility outperformed quality, and while the economic and earnings backdrop was generally supportive, both the Fed and corporate management teams adopted a more cautious tone heading into 2026.

Given the risks and uncertainties surrounding macroeconomic conditions and market narratives, we believe it remains prudent to focus on individual businesses and their long-term fundamentals. By concentrating on what is analyzable, we believe our approach is well suited to navigating a range of market environments while remaining disciplined through full market cycles.

Performance and Attribution Summary

For the fourth quarter of 2025, Aristotle Capital’s Value Equity WM Composite posted a total return of 1.45% pure gross of fees (0.95% net of fees), underperforming the 3.81% return of the Russell 1000 Value Index and the 2.66% return of the S&P 500 Index. Please refer to the table for detailed performance.

Source: FactSet
Past performance is not indicative of future results. Sector attribution shows how much of a portfolio’s overall return is directly attributable to stock selection and asset allocation decisions within the portfolio, highlighting which sectors contributed or detracted to the total return. Attribution includes the reinvestment of income. Attribution is presented gross of fees and does not include the deduction of all fees and expenses that a client or investor has paid or would have paid. Please refer to the pure gross and net composite returns included within to understand the overall impact of fees.

The portfolio’s underperformance relative to the Russell 1000 Value Index in the fourth quarter can be attributed to security selection, while allocation effects contributed. Security selection in Information Technology, Consumer Discretionary and Materials detracted the most from relative performance. Conversely, security selection in Financials, Health Care and Energy contributed. (Relative weights are the result of bottom-up security selection.)

Contributors and Detractors for 4Q 2025

Relative Contributors	Relative Detractors
Parker Hannifin	Lennar
Capital One Financial	Sony
Amgen	Uber
Merck	Microsoft
U.S. Bancorp	Teledyne Technologies

Sony, the global leader in video games, image sensors, music and movies, was a primary detractor for the period. Shares declined following the recognition of a one-time, non-cash charge of approximately ¥50 billion in the Game & Network Services segment related to an impairment and accounting correction of previously capitalized development costs. Importantly, this charge was not recurring and did not reflect a deterioration in underlying operating performance. Excluding this item, operating income would have increased approximately 23% year-over-year, supported by healthy gaming engagement, continued growth in network services and software sales, and strong results in the Music segment driven by streaming growth and recent theatrical releases. The company’s image sensor business also benefited from a favorable product mix and steady end-market demand. Looking ahead, we continue to see opportunity for Sony to capitalize on its unique position as both a content creator and platform owner. The company’s ability to integrate gaming, music, anime and film—and to leverage IP across its ecosystem—supports sustained engagement and recurring revenue. In addition, the recent spinoff of Sony’s Financial Services segment further sharpens management’s focus on its core content, technology and entertainment operations. We believe Sony’s industry leadership and continued focus on operational execution position the company well for long-term value creation.

Uber, a leading rideshare, delivery and shipping technology platform, was one of the largest detractors during the period. Trip volumes reached record levels, and gross bookings grew significantly year-over-year, yet the stock underperformed as investor focus shifted from growth to margin trajectory, regulatory risk and autonomous vehicle (AV) uncertainty. The primary near-term concern among market participants was management’s guidance around profitability. While results exceeded expectations on bookings and FREE cash flow, Uber signaled a deliberate moderation in margin expansion, as incremental profits are reinvested into affordability, cross-platform engagement and early AV initiatives. Regulatory concerns also resurfaced, particularly in Europe, where ongoing debates around driver classification and data protection continue to pose potential cost (and therefore margin) headwinds. At the same time, competitive anxiety around AVs intensified following Lyft’s expanded partnership with Waymo and continued investor focus on Tesla’s long-term robotaxi ambitions. Management acknowledged that autonomous initiatives will pressure near-term margins, as Uber invests to build supply and data infrastructure, even as utilization in early AV markets has been encouraging. Over the long term, however, our thesis remains intact. Uber’s global scale, deepening network effects, growing FREE cash flow and expanding cross-platform ecosystem position the company to compound value as profitability improves and new mobility technologies mature.

Parker Hannifin, the manufacturer of motion and control technologies, was the top contributor during the quarter. The company continues to benefit from strength in its aerospace business, where demand for original equipment and aftermarket services has driven organic growth and margin expansion. The ongoing integration of Meggitt, which Parker Hannifin acquired in 2022, has further expanded the company’s aerospace and defense capabilities while increasing exposure to higher-margin aftermarket revenue—a catalyst we previously identified. Alongside this progress, management has continued to strengthen the company’s balance sheet following a period of elevated acquisition activity, with net debt-to-EBITDA trending lower. In addition, Parker Hannifin’s broad portfolio of motion and control technologies positions the company to benefit from secular trends such as factory automation, electrification of industrial equipment, digitization, and increased complexity and modernization across commercial and defense aerospace platforms. The company continues to execute its Win Strategy, driving operational excellence, pricing discipline and strong cash flow generation. We believe these catalysts support a more resilient earnings profile and will allow Parker Hannifin to continue improving profitability and FREE cash flow generation over time.

Capital One Financial was a primary contributor during the quarter. Following the completion of its all-stock acquisition of Discover, the company reported strong results in its first full quarter post-transaction, including net interest margin expansion driven primarily by the addition of Discover’s credit card portfolio. The acquisition positions Capital One as one of the largest U.S. credit card issuers and adds ownership of the Discover payment network, which we believe has the potential to improve payment economics and enhance operating leverage over time. During the quarter, the company also announced increased capital returns through a new share buyback program and a higher quarterly dividend, reflecting confidence in its balance sheet and earnings power. In addition, resilient consumer spending, stable credit quality and a strengthening deposit base contributed to performance. We believe Capital One’s scale and integrated payments capabilities support a more resilient earnings profile and position the company to continue generating attractive returns over time.

Recent Portfolio Activity

During the quarter, we sold our positions in Commerce Bancshares, Constellation Brands and Sony Financial.

We first invested in Commerce Bancshares, the Kansas City-based bank, in the fourth quarter of 2019. We were attracted to the bank’s conservatively run franchise, disciplined approach to credit, well-diversified revenue mix with a meaningful contribution from fee-based businesses, and long-tenured management team that has historically operated with a “private company” mindset. At the time of purchase, we identified several catalysts, including continued loan growth—particularly in core Kansas markets—prudent expense management, sustained strong credit underwriting, and the accretive deployment of excess capital through dividends and share repurchases. Over our holding period, Commerce executed consistently against these objectives, demonstrating resilience through multiple operating environments while maintaining strong credit quality, disciplined cost control and steady capital returns, including a long history of dividend increases. As these catalysts played out, we chose to sell our position and redeployed the proceeds into what we view as a more attractive investment opportunity in Wells Fargo, which we purchased in the third quarter of 2025.

We first invested in Constellation Brands, the premium beer, wine and spirits company, in the fourth quarter of 2021. At the time, we believed the company was well positioned to benefit from its dominant share of the fast-growing Mexican imports segment of U.S. beer, supported by iconic brands such as Modelo, Corona and Pacifico, hard-to-replicate production assets in Mexico, and a management team with a strong track record of building brands and marketing imported brands to mainstream U.S. consumers and expanding  distribution. Over our holding period, Constellation continued to benefit from the growing popularity of Mexican beer in the U.S and its core beer segment remained a clear source of strength.  However, the timing and magnitude of several key catalysts evolved. Expansion of shelf space and overall distribution progressed more slowly than expected, while improvement in the Wine & Spirits segment proved more challenging, pushing meaningful margin recovery further into the future. As a result, while the long-term strategic rationale for the business remains intact, we determined that Constellation was the most appropriate candidate for sale to fund a new investment in the first quarter of 2026, to be discussed in greater detail next quarter.

We received shares of Sony Financial following its spinoff from our long-term holding Sony in October 2025. Sony Financial is a Japan-based financial services company with operations in life insurance, banking and digital payments. While we view Sony Financial as an attractive, well-managed business, its operations are focused primarily on the Japanese market. Given this focus, we elected to sell the shares received in the spinoff.

Conclusion

Markets and economic conditions will continue to evolve, often in ways that are difficult to anticipate. While we remain attentive to these developments, our work is ultimately centered on understanding individual businesses—how they compete, how they allocate capital and how their economics change over time. We recognize that progress in business fundamentals and investment outcomes do not always align over shorter periods. Thus, we approach our investment process with patience and a willingness to reassess our views as circumstances change. Rather than react impulsively to every macro headline or try to time short-term market moves, we focus on what is analyzable and enduring: the long-term fundamentals of the companies we own. We believe this careful, fundamental approach remains the most reliable way to add value for our clients over the long run, across a wide range of market environments.