December Market Commentary

2025 Recap & 2026 Outlook

Drama, What Endures, and the Case for Broadening

Looking back on 2025, what stands out is not any single event, but the pace at which they arrived. Policy shifts, geopolitical developments, technological advances, and market reactions followed one another in rapid succession. For investors, the year felt demanding less because of the scale of any one shock and more because of the constant stream of headlines competing for attention.

Markets, however, reinforced a familiar lesson. While short-term drama can move prices, sometimes sharply, lasting outcomes are driven by structural forces and secular trends that influence economic growth, the cost of capital, and relative valuations over time. Distinguishing between noise and durable signals is difficult in real time, but 2025 underscored that markets ultimately respond not to headlines, but to what endures.

Attached is our Fourth Quarter 2025 Market Review for your reference. U.S. equity markets finished the quarter with low single-digit gains after rebounding from a mid-to-late November pullback driven by a reassessment of AI-related valuations. For the full year, the Russell 3000 rose 17.15%. Market leadership remained concentrated in large AI-related companies, while international and emerging markets delivered nearly double the returns of U.S. equities.

A Year That Felt More Dangerous Than It Was

Entering 2025, investors faced elevated interest rates, lingering inflation concerns, and unusually narrow market leadership. These conditions were exacerbated by a fast-moving, often unpredictable policy environment that dominated headlines. The challenge was not a lack of information, but the volume of it.

Ultimately, the critical question for investors was whether these developments would persist long enough to influence economic behavior, corporate earnings, or capital allocation. In most cases, they did not. This disconnect between short-term intensity and long-term impact shaped market outcomes and serves as a reminder that enduring fundamentals, not fleeting disruptions, drive investment results.

Liberation Day: When Drama Met Reality

The defining market moment of 2025 arrived on April 2, dubbed as “Liberation Day.” The announcement of broad new tariffs triggered an immediate and violent market reaction. Equity markets sold off sharply, volatility surged, and recession probabilities increased. Within days, the media narrative turned decisively pessimistic. Inflation fears resurfaced, supply-chain disruptions were widely anticipated, and corporate earnings expectations were marked down.

This episode became one of the clearest examples of what we would later describe as a new era in which policy volatility increasingly begets market volatility. Escalating trade tensions, particularly between the U.S. and China, pushed the S&P 500 (1) down by roughly 10% peak-to-trough in a matter of days, while volatility measures spiked to levels not seen since the early stages of the pandemic. Importantly, this shock differed from crises like 2008 and 2020 because it was policy-driven rather than systemic, and policy shocks stem from human decisions that are changeable.

That distinction proved critical. In the weeks that followed, a 90-day de-escalation period, pivots, exemptions, and softer rhetoric emerged, shortening the expected duration of the “Liberation Day” shock. Investor confidence returned quickly, fueling a powerful rebound that included a single-day gain of approximately 9% on April 9^th, the strongest daily advance since 2008, and a full recovery of losses within weeks. Markets stabilized not because headlines improved, but because the conditions investors feared did not last long enough to materially affect earnings, inflation, or consumer behavior.

Throughout this period, we cautioned clients against abandoning their long-term investment strategy and instead encouraged a disciplined approach, viewing volatility spikes as opportunities rather than reasons for panic. Episodes like Liberation Day reinforce a fundamental truth of investing: markets can absorb temporary shocks, but they struggle when the disruptions become structural.

Trade, Inflation, and Adaptation

As 2025 progressed, trade policy evolved from confrontation toward negotiation. While tariffs remained higher than pre-2025 levels, they ultimately settled well below the worst-case scenarios markets initially priced in.

Inflation concerns followed a similar trajectory. Dire forecasts faded as businesses adapted, supply chains adjusted, and cost pressures were absorbed rather than passed through. Importantly, tariffs acted more like a tax on demand than a sustained inflationary force. Simultaneously, tighter immigration policy and reductions in federal spending further moderated demand.

Inflation continues to glide lower from the post‑pandemic highs, with headline CPI now firmly back in the upper‑2% range and core CPI easing more gradually. The narrowing gap between the two measures signals that underlying price pressures are cooling, though not uniformly across categories. This dynamic supports the view that disinflation remains intact, but the persistence in core components may keep policymakers cautious as they assess how quickly inflation can sustainably return to target.

Source: U.S. Bureau of Labor Statistics; Data as of Jan. 13, 2026

The Economy Beneath the Headlines

Markets stabilized not because headlines improved, but because the conditions investors feared did not last long enough to materially affect earnings, inflation, or consumer behavior. The unemployment rate crept modestly higher than in 2021 and 2022, into the low 4% range, indicating some cooling, but it remains well below the 14% crisis range experienced during the pandemic in 2020. Businesses adapted rather than panicked. Corporate America continued to invest throughout this period, with uneven but positive earnings growth and accelerated capital expenditures, particularly in automation, infrastructure, and technology.

One of the most underappreciated developments of the year was the gradual normalization of the yield curve. After years of inversion driven by aggressive monetary tightening, long-term rates began to stabilize relative to short-term rates. This shift supported healthier banking conditions, improved credit availability, and encouraged more rational capital allocation.

Further steepening ahead? With expectations for a more accommodative Federal Reserve in 2026, short-term interest rates may continue to decline. At the same time, firmer economic growth could place upward pressure on longer-term yields, supporting a continued and healthy normalization of the yield curve.

Source: U.S. Department of the Treasury; treasury.gov; Data as of Jan. 13, 2026

Artificial Intelligence: A Trend That Endures

Artificial intelligence remained the dominant market driver in 2025, not as a short-lived trade but as a durable investment cycle. Capital spending across the AI ecosystem continues to accelerate, supporting earnings growth well beyond mega-cap technology. Adoption is expanding into manufacturing, logistics, healthcare, and professional services, translating AI investment into broad-based economic demand.

From an investment perspective, the impact of AI-related investment (a.k.a.: CapEx) is increasingly visible in cyclical sectors tied to the buildout. Utilities benefiting from data center power demand, materials essential to semiconductor supply chains, and industrial infrastructure providers are seeing sustained tailwinds. While valuation concerns around AI leaders remain valid, the opportunity set is widening as spending flows, and anticipated productivity gains spread through the broader economy.

Looking ahead, AI’s significance lies in its potential to drive productivity and margin expansion over a multi-year horizon. Periods of hype, excitement, and overinvestment are likely to fade, as they often do with major innovations, but the underlying adoption cycle appears enduring. In our view, what ultimately matters is not the narrative surrounding AI, but the productivity gains it delivers over time.

The charts below highlight how this dynamic has played out in markets. Since January 2023, AI-focused stocks and large-cap growth have dominated performance, with the Global X Artificial Intelligence & Technology ETF (AIQ) and the Russell 1000 Growth Index significantly outperforming the Russell 2000 and Russell 1000 Value (1). This reflects both the strength of the AI investment cycle and the unusually narrow market leadership that has driven returns.

More recently, however, a shift has begun to emerge. As shown in the second chart, leadership started to broaden in late 2025 and early 2026, with the broader market and value stocks (red arrow) outperforming both large-cap growth and AI-focused equities. This rotation suggests a healthier market environment, where performance is becoming less concentrated, and gains are increasingly distributed across a wider range of sectors and styles.

From a K-Shaped Cycle Toward Broadening

Much of the post-pandemic cycle was defined by a K-shaped economy and market, where growth and returns were concentrated in a narrow set of sectors. At the same time, more cyclical, capital-intensive industries lagged. Asset-light, technology-driven companies thrived, while traditional cyclicals absorbed the cost of higher rates, excess capacity, and muted demand.

However, we believe that the imbalance is beginning to correct.

2026 Outlook: What Endures

Building on the trends that emerged in late 2025, we expect the news cycle in 2026 to remain active and, at times, unsettling. Geopolitical uncertainty, policy shifts, and episodic market shocks will likely continue to generate volatility. Although volatility risk remains elevated, the probability of sustained fundamental deterioration appears limited. The distinction is important: volatility affects sentiment, while structural decline impairs value creation.

Several forces entering 2026 strike us as both virtuous and enduring that, when taken together, create a constructive backdrop for corporate earnings and support the potential for a continued broadening of economic and market leadership:

• Moderating inflation pressures, supported by reduced fiscal impulse and anchored expectations
• A normalized yield curve, improving access to capital and lending conditions
• Sustained capital investment, driven by technology adoption, tax incentives, and a more supportive regulatory environment

As we look ahead to 2026, we are largely maintaining our existing portfolio positioning while making selective adjustments as opportunities emerge, including an increased emphasis on materials. After a prolonged global manufacturing slowdown that began in 2022, early signs of stabilization are becoming more evident.

Expectations for easier financial conditions should support a gradual improvement in cyclical activity, including housing and bank profitability. Years of restructuring and capacity discipline across financials, industrials, and materials have left these sectors leaner and more sensitive to improving demand. As a result, earnings power in these areas appears well-positioned to improve with even modest economic growth, while valuations continue to discount limited upside.

Our investment discipline remains unchanged. Portfolios are constructed around each client’s long-term objectives and risk profile, with strategic allocations established first and tactical adjustments made deliberately and incrementally. For 2026, we are maintaining an equity-oriented posture with selective emphasis on industrials, financials, and materials, while participating thoughtfully in long-term themes such as artificial intelligence and robotics.

As Warren Buffett, who retired this year after one of the most enduring investment careers in history, often reminded investors, the stock market is “a device for transferring money from the impatient to the patient.” His focus on durable businesses, strong cash flows, and long-term compounding remains particularly relevant in an environment shaped by frequent headlines and rapid market reactions. We continue to believe that long-term results will be driven not by responding to every shock, but by staying focused on fundamentals, disciplined capital allocation, and patient portfolio construction as economic growth broadens and market leadership expands.

____________________________________________________________________________________

1. The DOW,  NASDAQ, S&P 500 and Russell Indexes are unmanaged groups of securities considered to be representative of the stock market in general