2026 Portfolio Management Highlights 

During the fourth quarter of 2025, we maintained our constructive stance on both domestic and foreign equities while emphasizing discipline given elevated valuations. Our core allocation to large-cap U.S. equities remained intact, supported by durable earnings growth, strong balance sheets, and continued investment in AI productivity enhancing technologies. Despite tariff risks, we see potential interest rate cuts later this year being supportive of U.S. equities.  We also maintained selective international exposure, particularly in developed markets where valuations remain more attractive, and fiscal tailwinds should be positive for long-term growth.   

In fixed income, we have begun to shift from shorter maturities out to the intermediate part of the Treasury curve where we can lock in attractive yields without adding too much duration. We remain cautious about the long end of the curve given persistent deficit spending, increased volatility, and potential international selling.  Despite rate cuts, front-end yields continued to offer historically attractive income, while Private Credit still offers an attractive risk-return profile, especially when measured against Corporate and High-Yield spreads that remain extremely tight.  This positioning allows us to generate current income, while retaining flexibility should yields move meaningfully higher or growth conditions change. 

What to Watch in 2026 

The market outlook for 2026 is defined by continued growth tempered by rising structural risks. Mild optimism for a fourth-consecutive year of positive equity returns is increasingly sensitive to shifts in policy, geopolitics, and valuations. Artificial intelligence remains a primary engine of growth, but skepticism around the massive capital expenditures announced in 2025 is growing. Market concentration also remains a key risk, and questions remain as to if and when market returns will spread beyond a small group of dominant technology firms. 

Central bank policy will also be scrutinized, especially as a new Federal Reserve chairman takes the helm in May. The Federal Reserve continues to face the complex challenge of supporting a softening labor market in the face of enduring inflation pressures. While the market expects additional rate cuts in 2026, global monetary policy is likely to diverge, with Japan potentially tightening rates, while the European Central Bank maintains a more cautious stance. This divergence could lead to further depreciation of the U.S. dollar. At the same time, fiscal sustainability remains a central macro concern as rising government debt in the United States is putting pressure on the bond market. Investors are increasingly sensitive to the long-term implications of persistent deficits, so a lack of meaningful fiscal consolidation could result in a steeper U.S. Treasury curve and greater interest rate volatility in the coming year. 

Finally, geopolitical and trade developments are likely to remain a persistent source of market volatility in 2026. Ongoing U.S.–China tensions, particularly around technology and national security, continue to pose risks, especially with key trade agreements set to expire in late 2026. In addition, unresolved conflicts in the Middle East and Ukraine, along with heightened tensions in the Taiwan Strait, South America, and Greenland, have the potential to disrupt energy markets, global shipping routes, and investor sentiment. These geopolitical flashpoints increase the probability of episodic volatility and reinforce the need for resilience and diversification within portfolios.   

Market Review 

Equity markets finished 2025 with another strong performance, driven by a favorable combination of moderating inflation, stable economic growth, and improving financial conditions. For the third straight year, all major indexes were up in 2025.  The S&P 500’s Q4 gain of roughly 2.7% brought its full-year return to approximately 17.9%.  The Nasdaq posted a similar gain, rising approximately 2.7% for the period and finishing the year up 22.4%, driven by continued leadership from mega-cap technology, AI-related optimism, and strength in semiconductor companies.  Meanwhile, the Dow Jones Industrial Average posted best-in-class quarterly returns of 4.0%, ending 2025 with an annual return of 14.9%, benefiting from improved sentiment around industrial activity and financial services. Though elevated equity valuations, geopolitical uncertainty, and fiscal imbalances remain persistent risks, corporate fundamentals and earnings expectations remain supportive heading into 2026. International equities also had a very strong year, aided by a weaker U.S. dollar, improving growth expectations, and fiscal spending packages.  

In fixed income, the 10-year U.S. Treasury yields ended the quarter roughly where they started, around 4.16%.  However, the quarter saw increased volatility, as the market digested continued deficit concerns, a protracted government shutdown, and trade policy tensions. With the two Federal Reserve rate cuts during the quarter, the yield curve continued to modestly steepen as short-term yields adjusted lower. Credit spreads remained tight, signaling confidence in corporate balance sheets despite pockets of stress in lower-quality issuers and a handful of well publicized multi-billion-dollar bankruptcies. 

The Fed and Looking Ahead 

During the fourth quarter, the Federal Reserve cut rates twice, in October and December, following September’s initial cut, which brought the overnight rate down to 3.5%-3.75%. These cuts were in response to a weakening labor market, which outweighed inflation risks despite Core PCE still hovering closer to 3%, rather than the Federal Reserve’s 2.00% target. It is also suspected that the Federal Reserve cut rates in October to give itself insurance after the government shutdown caused a “data blackout” that delayed official inflation and unemployment reports.   

Chairman Jerome Powell emphasized that while interest rate policy has moved away from a restrictive territory, the Fed remains focused on ensuring inflation continues to trend sustainably toward target. Following the final rate cut in December, the post-meeting statement pointed toward a pause on additional rate cuts, reflecting a measured approach due to tariff uncertainty, persistent inflation, and a stabilizing labor market. Market expectations entering 2026 now reflect one to two additional rate cuts coming during the second half of the year, but these are expected to be highly data-dependent. For investors, the key takeaway is that monetary policy is becoming less of a headwind, but not yet a tailwind, placing a premium on diversification, quality, and active risk management. 

Market Implied Path of the Fed Funds Rate (Based on 30-day Fed Funds futures)