Market Reflections and Portfolio Positioning for the Year Ahead
Markets rarely move in straight lines, and 2025 was a powerful reminder of the value in diversification. Amid heightened uncertainty, shifting leadership, and rapid technological change, investors faced a landscape that rewarded flexibility over concentration.
As we reflect on the year behind us and look ahead to 2026, several themes stand out: diversification across asset classes and geographies proved additive, concentration risk remains elevated, and while artificial intelligence continued to dominate headlines and market returns, questions around valuation, monetization, and long-term return potential became increasingly important.
This outlook highlights the key lessons from 2025, outlines the investment crosscurrents shaping 2026, and explains how we are positioning client portfolios in a highly uncertain environment.
2025 Market Recap – the Case for Balance and Breadth
International equity markets experienced a strong resurgence in 2025, significantly outperforming U.S. equities after several years of relative underperformance. Improving fundamentals, combined with more attractive starting valuations and favorable currency effects contributed to strong returns. Our strategic allocation to international equities reinforced our long-standing commitment that global diversification enhances portfolio resilience across full market cycles.
Gold also emerged as a particularly effective contributor. Our strategic allocation to gold delivered strong absolute returns while also helping to moderate portfolio volatility during periods of market stress. Gold’s performance underscored its value as both a return contributor and portfolio stabilizer.
Within U.S. equities, market leadership broadened while volatility increased. Mega-cap concentration risk remains elevated, with the top 10 names accounting for roughly 41% of the S&P 500 and 36% of the Russell 3000 index. Looking at valuations, the forward P/E ratio is at the 95th percentile and the Shiller CAPE ratio at the 99th percentile from a historical perspective.
Concentration risks and historically high valuations make broad market indexing susceptible to corrections. While we plan on maintaining a broadly diversified portfolio, we intend to maintain a tilt to the large-cap value space within the U.S. component of our strategies to help mitigate risks. We are confident in this positioning as we enter 2026.
2025 Market Highlights
U.S. equities: The Russell 3000 Index experienced notable volatility, marked by a sharp pullback in April followed by a swift recovery, finishing the year up 17.1%.
International equities: International stocks, represented by the MSCI ACWI ex-U.S. returned 32%, supported by valuation differentials and a weaker U.S. dollar.
Gold: Gold prices surged 63.5% in 2025, its best annual performance since 1979. Fiscal/monetary concerns, geopolitical uncertainty and sustained central bank demand all contributed to this high demand.
Domestic bonds: The U.S. Aggregate Bond Index proved a nice boost to balanced portfolios, increasing 7.3% for the year. The fixed income backdrop materially improved relative to recent years, and we believe will play an important stabilizing role as we enter the late cycle of this bull market.
2026 Investment Landscape
As we enter 2026, markets sit at a critical juncture. Elevated valuations and signs of economic moderation coexist with expectations for continued earnings growth and productivity gains driven by artificial intelligence. Rather than positioning portfolios for a single outcome, we are focused on managing risk across a wide range of plausible scenarios.
Key Themes
1) Elevated asset valuations and aggressive earnings expectations: U.S. equity markets enter 2026 priced at a 22x forward price-to-earnings (P/E) multiple. Referencing the table below, this would make the second highest P/E multiple of the past 25 years, only trailing levels seen in March of 2000.
S&P 500 Price Index
2) A cooling labor market and elevated inflation: The U.S. labor market has softened, with the unemployment rate rising to 4.6% in late 2025, a trend expected to continue into early 2026. At the same time, inflation remains persistent at around 3%, well above the Federal Reserve’s long-term target. This combination complicates monetary policy decisions and increases the risk of policy missteps that could pressure both economic growth and financial markets.
3) Fiscal deficits and higher long-term rates: Federal deficit spending remains substantial, with the national debt exceeding $37 trillion. Although short-term rates have begun to ease, long-term rates remain elevated, reflecting inflation concerns and heavy Treasury issuance. Higher borrowing costs pose a potential headwind to economic growth and place additional pressure on asset valuations.
4) Consumer pressure from student loan repayments: The resumption of wage garnishment for defaulted student loans is expected to weigh on consumer confidence and spending in 2026. Reduced discretionary spending and higher default rates represent additional headwinds as economic growth moderates.
5) AI, data centers, and the OBBBA to spur economic growth: Investment in AI and data centers served as a major tailwind in 2025, driving GDP higher by an estimated 1.3%. In addition, the "One Big Beautiful Bill Act" (OBBBA) is anticipated to provide a near-term economic bump to GDP of approximately 0.9%.
The Artificial Intelligence Debate: Productivity Breakthrough or Capital Intensity Risk?
Artificial Intelligence was the most frequent topic of client discussion in 2025, reflecting both its outsized influence on market performance and the scale of investment underway. AI-related companies accounted for a disproportionate share of recent equity gains and global spending on AI infrastructure reached unprecedented levels. The key question facing markets is whether 2026 marks the inflection point where these investments begin to deliver tangible economic returns, or they ultimately expose signs of excess capacity and diminishing marginal benefits.
Supporters of the bullish case view the current investment cycle as foundational, arguing that elevated capital spending is necessary to unlock future productivity gains, margin expansion, and sustained economic growth. The more cautious perspective centers on sustainability and ultimate return on investment (ROI), highlighting the challenges of hardware obsolescence, rising energy/regulatory constraints and increasing competition from smaller, more efficient models.
The Bull-Case on AI:
Earnings leverage emerges: Major cloud and semiconductor leaders convert CapEx into high-margin service revenue as utilization increases.
Productivity translates to margins: Enterprises deploying AI for code generation, automation, and analytics begin reporting meaningful efficiency gains.
Economic reacceleration: Labor shortages and demographic drag are partially offset by AI-driven output growth, supporting GDP and elevated equity multiples.
The Bear-Case on AI:
CapEx exhaustion: AI infrastructure spend reached unsustainable levels in 2025, with AI hyperscalers spending 60% of their operating cash flows on AI related investments and CapEx. This compares to just 15% in 2012. Without a clearer picture of tangible returns on investment (ROI), enterprise investment may slow:
Hardware churn: Rapid hardware obsolescence and fierce competition among model developers erode profitability. It is currently estimated that the viability of chips used in the AI buildout will range anywhere from 18-36 months. Will companies continue to reinvest in new hardware as these units degrade?
Energy and regulatory headwinds: Power constraints, environmental scrutiny, and rising input costs threaten operating margins.
Smaller models undercut the giants: Efficient, open-source models reduce pricing power for hyperscalers, potentially compressing earnings expectations.
Economic viability remains low: Monetization remains narrow and broad deployment begins to plateau.
We believe both viewpoints warrant careful consideration. Rather than positioning portfolios for a single outcome, we have incorporated a measured degree of skepticism through diversified exposure, valuation discipline, and reduced reliance on the most crowded segments of the market.
The AI buildout has had an outsized impact on the economy and markets. Whether it turns into the panacea that investors are expecting or ultimately fails due to the reasons outlined, the result will have an equally important impact going forward. According to multiple analysts, AI related investment is estimated to have reached approximately $400 billion in 2025, adding roughly 1.3% to GDP growth. It also accounted for roughly 75% of the S&P 500’s gains over the past 3 years. We believe 2026 will show us whether these investments will begin to have tangible ROI’s or the buildout resulted in excess capacity and hardware obsolescence.
Investment Strategy Considerations
Given these crosscurrents, our global multi-asset approach will continue to provide:
Global equity exposure: We continue to look beyond U.S. mega-caps and maintain an allocation to international equities, which offer compelling valuations relative to the U.S.
Fixed income as a stabilizer: High-quality, intermediate-term bonds remain an important source of income and diversification. We do not anticipate extending duration absent a material shift in the investment backdrop.
Real assets for risk management: Maintain an allocation to real assets such as gold to help diversify portfolios and manage downside risk in a market characterized by elevated valuations and policy uncertainty.
Conclusion
The experience of 2025 reinforced several core principles that continue to guide our approach: diversification matters, concentration risk should be actively managed, and high-quality fixed income and real assets play a critical role in portfolio stability.
While markets may be supported by earnings growth and continued AI-related investment, current valuations leave little margin for error. Rather than positioning portfolios for a single outcome, we remain focused on building resilient portfolios that balance participation in long-term growth with disciplined risk management.
Heading into 2026, We remain objective, patient, and forward-looking while being anchored in data, valuation, and long-term fundamentals. We believe this balanced approach enables client portfolios to navigate volatility, manage downside risk, and participate prudently as opportunities emerge.
