Going into the new year, the overall economic backdrop is favorable. However, consumer spending (the biggest contributor to the economy) is concentrated among high earners, which may explain why most households are not optimistic. Inflation is not going away. Employment remains stable, but new hiring is slow.
The stock market also started 2026 on a positive note.
Despite the tariff scare in April, the S&P 500 Index® (used as a measure for the U.S. stock market) finished 2025 up 18%. U.S. tariffs are now roughly half their April peak. This walk-back is partly responsible for the market’s comeback. But a small group of large technology companies drove the gains. These companies, along with others tied to the Artificial Intelligence theme remain overpriced. It may be difficult for company earnings to continue supporting these elevated prices.
With an expensive market, persistent inflation, midterm elections, an impending Supreme Court decision on tariffs, and a new Fed chair, we expect higher market gyrations this year. Rarely do we have a year without at least one market “correction” (a decline of at least 10%). This year could bring more than one.
And if corrections occur, the expensive tech stocks are likely to be hit hardest. In addition, any slowdown in the massive AI-related corporate spending would be felt disproportionately by these companies. This poses a real risk for investors heavily concentrated in these names. Reducing exposure to these stocks now would be wise.
We are already seeing other areas of the market going up – namely value, international, and small-cap stocks.
This broadening is a healthy sign, and these areas are where we have proactively shifted more exposure in our client portfolios.
Beyond strategic rebalancing, we build portfolios to balance each client’s need for short-term safety or current income while still managing investments focused on long-term growth. We closely watch economic data and market dynamics like these. Should there be a pullback in the tech names, we may see a buying opportunity, unless it’s triggered by a weakening economy.
Most individual investors don’t have the time, expertise, or appetite to manage this closely. Perhaps, like many people, you recently did a year-end review of your investments. Hopefully, with a strong 2025, you were pleased with the results. If you would like more peace of mind around your portfolio’s construction and ability to weather market dynamics, while still capturing long-term growth, we invite you to reach out. We will be happy to speak with you.
Contact us to discuss your situation.
