Happy New Year and Where to Now?

One of the ways I establish my opinions and to an extent, investment leanings and preferences, is by having a firm understanding of how most prominent investment strategists are thinking.  These strategists set and lead the investment thought leadership and investment direction for their firms.  Generally speaking, most strategists remain positive and constructive on the markets for 2026.  As we receive and digest more information on these firms’ capital market expectations for this year, the notion of “higher for longer” is more or less the consensus.  Mix in some volatility from overall uncertainty and you get the general gist.

This theme is supported by the backdrop and expectations of the general environment we are in.  Which involve a lower tax environment, interest rate cuts (we will have a new FED Chair this Spring), decent earnings momentum, reindustrialization domestically (further onshoring), heightened US investment, the continuation of an AI super cycle – all of which should lead to higher productivity and ultimately margin expansion.

It is difficult to argue against these strong themes, driving the markets higher.  Where we might differ from some firms is in the “who, how & where” the returns will be generated.  2025 by any standards was a solid year.  The S&P 500 was up roughly 18% for the year.  Driven once again by large cap technology stocks.  In fact, technology sectors drove 60% of the S&P 500’s return and earnings growth.  Large cap value and small cap stocks underperformed growth as much of the money flow and investment interest remained concentrated in large cap growth.

As someone who has spent his career (over 30 years) in the investment industry, I get leery when certain sectors drive most of the performance for an extended period of time.  That statement may not come off as technically grounded as one might like to hear, but the reality is that cycles change and valuation levels can limit further upside.  This is potentially what might be happening at the moment.  Many of the prominent tech names that have been moving dramatically higher (with exceptions) have faced some resistance as of late.  Wall Street favorites like Nvidia, Meta, Microsoft & Amazon have not seen the same level of price appreciation in the shorter run.  Do not get me wrong – these tech names will move higher in time but will likely need to show positive fundamentals through Q4 earnings before they advance higher.

We believe rebalancing with a leaning toward large cap value is sensible at the moment.  This effort supports what we feel will be an emerging theme for 2026 and where we witness a broadening of the market.  The underperformance in value is what makes it attractive.  Valuations matter, plain and simple.  With the S&P trading at roughly 22 times forward earnings, driven higher by tech and communication services names, lower expectations for return (and some volatility) should be assumed.  Bonds, which returned 7.3% last year (US Aggregate Bond Index) in a rate-cutting environment remains a viable diversifier going forward.

I commonly conclude these write ups with a comment like “diversification remains very important given the current backdrop”.  And at risk of sounding like a broken record, diversification is critical at this time.  International markets, general fixed income (investment grade bonds), alternatives and quality dividend payers are smart components to address volatility as we move into 2026.