Once again, we find ourselves entering a new year after consecutive positive years in the market. Despite the tariff scare in early April 2025, the markets have held up surprisingly well. While we still believe the markets are fundamentally overpriced, there has been significant momentum, particularly in the area and the newness of the artificial intelligence space. Massive spending on AI infrastructure is expected to continue driving growth, with some expecting a shift from hype to proven returns. While some may debate this, a strong U.S. economy with healthy corporate balance sheets and ample liquidity provides a solid base for profits. A softening labor market could encourage the Federal Reserve to cut rates again making borrowing cheaper and supporting stocks. As mentioned in the past, we believe the broader market’s health, beyond just mega-cap stocks will widen out.
On the flip side, the market enters 2026 with high valuations, increasing the risk of pullbacks and volatility, even if a crash isn’t expected. Currently, the labor market is softening, and that does indicate a weakening economy. There is always a fine balance between when the Fed lowers interest rates because of economic concerns and the positive effect that lowered rates can have. Political uncertainty with mid-term elections will create risk as will the continued tensions arising from the trade and tariff issues. Persistent inflation will most likely continue to squeeze consumers and could limit Fed rate cuts. Finally, the massive capital flowing into AI needs to translate into productivity gains, which is not a guarantee. Being selective in the AI space has led to a positive outcome and harvesting some of these gains is paramount. Investing those gains into overlooked and undervalued areas will help us diversify as the market’s breath widens.
As the Warren Buffett quote implies, you should pay yourself first by saving before spending. If you don’t save, you might overspend. If you save first, you are “forced” to live within your budget and avoid impulse buying. As we approach 2026, let us be cognizant of where we are within each of our financial “pictures” so as to prepare for the future whatever that may look like. We wish everyone a happy and heathy new year.
