As we reflect back on 2025, the year stands out for defining moments that sought to reshape markets and the global economy. From rapid policy shifts on Liberation Day to the return to rate cuts by the U.S. Federal Reserve and renewed hopes for peace in Europe and the Middle East, the year was anything but static.
If you’ll excuse a little self-congratulation, our 2025 themes of Fragility and the Importance of Diversification proved highly relevant. The near-bear market in April exposed market fragility but fixed income provided ballast when trends turned negative. Bonds delivered their strongest performance in the last few years as prices adjusted to evolving macro conditions. And after several years of underperformance relative to domestic stocks, foreign markets (both developed and emerging) enjoyed impressive returns that far outpaced the broader US market. Proponents and practitioners of diversification, therefore, were rewarded in 2025.
Below we outline several key themes that we anticipate will remain central this year and beyond:
- Noise Resistance reviews economic and external factors influencing markets. While the existential weight of AI and elevated valuations present challenges, many indicators point to growth and additional stimulus ahead.
- AI Playbook dives into the nuance of managing a narrow and exuberant market.
- Navigating Valuation explores how to manage markets that appear richly valued and identify where green shoots of opportunity may exist.
Noise Resistance
Investors digested a steady stream of headlines last year: tariffs and Liberation Day in the spring, the passing of the “One Big Beautiful Bill,” the Federal Reserve resuming rate cuts after a nine-month pause and in autumn, the longest US government shutdown on record which delayed key economic data. Despite the noise and uncertainty, the economy continues to grow, consumers continue to spend and the corporate backdrop remains healthy.
Tariffs dominated the conversation early in the year, starting with threats and uncertainty before settling near an average level of around 17%. While inflation has eased from post-pandemic highs, it still sits above the Fed’s long-term target of 2%. Inflation may ultimately move lower, but the path is likely to be uneven.
The labor market showed cracks as the year progressed, with downward revisions in the summer and shutdown-related disruptions. Job growth remains muted which set the stage for the Fed to resume rate cuts in September after a nine-month pause. The government shutdown delayed critical data releases, fueling volatility around the December decision and more uncertainty for 2026 rate expectations, but markets continue to price in additional accommodation. Debate over Fed independence has added noise and will only increase in the months to come, but market data should remain the key driver of Fed decisions.
Despite layoff headlines grabbing attention, the overall employment picture remains stable and the consumer remains resilient. Early data suggest consumers spent nearly $12 billion on Black Friday, a roughly 9% increase from 2024. Additional stimulus from the “One Big Beautiful Bill” (tax refunds are estimated to approach $150 billion for 2026) and a central bank that is more accommodative lay the groundwork for economic stability.
In summary, the prospects for growth this year are positive, but it’s clear that signs of moderation are becoming more pronounced and uncertainty in the market persists.
AI Playbook
Public equity markets, particularly in the U.S., are highly concentrated in AI-related exposure, and we’ve previously written on several occasions about the risks associated with such a high percentage of return concentrated in so few companies in one industry. Given the dramatic rise of AI in such a short period of time, many pundits are now posing the question: is AI in a bubble?
Classic bubbles share a familiar pattern: displacement, boom, euphoria and bust. Displacement often begins with a breakthrough that is genuinely transformative. That spark fuels the boom and the exuberance that follows. History offers numerous examples: the invention of radio, the expansion of U.S. railroads and the fiber-optic buildout that laid the foundation for the internet, just to name a few. Each innovation changed the world, created extraordinary market opportunities and ultimately led to sharp price declines in related stocks and industries after the euphoria took it too far.
So where are we in this cycle? The boom is clear: adoption, demand and massive investment in research and infrastructure. Euphoria, however, is where the real debate begins.
On one hand, some believe AI-related companies have taken a measured approach. Capital expenditures, estimated at more than $1 trillion, have been largely funded by existing cash flow of these businesses rather than debt, a sign of discipline rather than speculation. Demand also continues to outpace supply, a dynamic rarely seen in the late stages of a bubble.
On the other hand, extremes certainly exist. Consider Thinking Machines, an AI startup founded by a former OpenAI executive. It raised $2 billion in “seed” capital which valued the company at roughly $10 billion without a product and reportedly unwilling to disclose to investors what it plans to build. A month later, they went through a second round of investment, valuing the company at $50 billion. Still no product. Still no revenue.
If you own U.S. equities, you have already made an AI bet, and it may be considerable. Roughly 38% of the S&P 500 is tied to companies connected to artificial intelligence. For perspective, ahead of the Global Financial Crisis, financials were the largest sector representing about 20% of the index. In 2000, technology peaked at 34%. This does not mean AI is a bubble, but it does showcase the market’s enthusiasm for transformative technologies.
Notable investor Howard Marks, who recently wrote on the topic of an AI bubble, stated this: “Since no one can say definitively whether this is a bubble, I’d advise that no one should go all-in without acknowledging that they face the risk of ruin if things go badly. But by the same token, no one should stay all-out and risk missing out on one of the great technological steps forward. A moderate position, applied with selectivity and prudence, seems like the best approach.”
AI is already embedded in portfolios, likely in a meaningful way. Yet our approach emphasizes measured exposure and thoughtful diversification, acknowledging that capturing some upside is preferable to risking a severe drawdown from overexposure.
Navigating Valuation
Across a wide range of metrics, valuations look full relative to history. When viewed over the last 20 years, most markets are trading near historically full valuations. High valuations reflect the generally optimistic market environment and earnings outlook but also means that markets are “priced for perfection”. At current valuations, the market is essentially assuming that profits will continue to grow by double-digits, which certainly isn’t sustainable over the long term. A slowdown in growth would likely put pressure on valuations which would then put pressure on prices.
Fixed income remains compelling on both an absolute basis (attractive yields) and a risk adjusted basis (relative to the outlook for equities). But the direction of interest rates this year, based on Fed actions, could be a concern. Many expect the Fed, under new leadership, to be more dovish this year which could keep the economy running hot. This matters because this could put upward pressure on long-term interest rates (on account of higher inflation and growth expectations) which has tended to put downward pressure on stock prices and valuations (bonds become more attractive relative to stocks when yields are higher, causing stocks to re-price to stay attractive).
Publicly listed real estate also looks more appealing after a modest showing last year. Supported by falling rates, real estate investments often behave like fixed income in rate-cutting cycles. Power infrastructure and other real assets may also benefit if AI-driven demand for computing capacity continues to accelerate.
Valuations are important over the long-term and help determine what level of risk is warranted given portfolio objectives and risk tolerance. But it’s important to remember that even in a rich environment, opportunity exists.
Final Thoughts
We approach the remainder of the year with both optimism and realism. Continued stimulus from a more accommodative Federal Reserve and a resilient economy provide a strong foundation for the markets. That said, we recognize that current valuations and pockets of exuberance around innovation (and AI concentration) introduce risks which should not be ignored. In such conditions, diversification remains as important as ever.
As we weigh the possibilities ahead, we remain mindful of our entrusted role with clients. Ultimately, we are stewards of capital, and it is our duty to protect capital and not speculate with assets that have been placed in our care. We greatly appreciate and value your business and trust in our process.
The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding investments, sectors or markets in general. The above statistics and/or commentary have been obtained from sources we believe are reliable, but we cannot guarantee their accuracy or completeness. Past performance is no guarantee of future results.
Specific securities discussed herein are illustrations and do not represent securities purchased, sold or recommended for client accounts. Such information does not constitute, and should not be construed as, a recommendation to buy or sell specific securities.
This is not a complete analysis of every material fact regarding any company, industry, or economic condition. Due to shifting market conditions, all expressions of opinion are subject to change without notice.
The information contained in this document does not cover all tax strategies that may apply, is not a complete guide to tax planning, and does not constitute the rendering of legal, accounting, or other professional advice or opinions on specific facts or matters. Before implementing any ideas suggested here, consult with your tax advisor regarding your specific tax situation.
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