The past twelve months were another great period for investors, as every major asset class generated positive returns and global equity markets delivered double-digit returns for the third year in a row. U.S. stocks, as measured by the S&P 500, rose 16.4% for the year and are now up 78% over the past three years. Tech stocks , especially leaders tied to artificial intelligence (AI) , remained major drivers of equity returns, with large AI-linked names contributing disproportionately to index gains. One, perhaps surprising, anecdote is that only two of the so-called Magnificent 7 stocks – Google and Nvidia – outperformed the S&P 500 last year. The other five – Apple, Meta, Amazon, Microsoft and Tesla – all generated positive returns but lagged the index for the year. As a group, the Magnificent 7 still had a heavy influence on the S&P 500's overall return, given they account for nearly 35% of the index. However, after two years in which each of the Magnificent 7 outperformed the market individually and the stocks seemed to move as a group, the narrowing of leadership within the Magnificent 7 and the massive surge in smaller AI-related infrastructure stocks (memory, storage, power etc.) was a notable development.
For the first time in a while, international markets , particularly European and emerging markets , outperformed U.S. equities, aided by a weak dollar and supportive local conditions. Emerging market equities, as measured by the MSCI Emerging Markets Index, were the top performing asset class for the first time since 2017, rising over 30% for the year.
| Equity Indexes | 2025 | 2024 | 2023 | 2022 | 2021 |
|---|---|---|---|---|---|
| S&P 500 | 16.4% | 23.3% | 24.2% | -19.4% | 26.9% |
| Russell 2000 (Small Cap) | 11.3% | 10.0% | 15.1% | -21.6% | 13.7% |
| MSCI EAFE (Developed) | 27.9% | 1.1% | 15.0% | -16.3% | 8.8% |
| MSCI Emerging Markets | 30.6% | 5.1% | 7.0% | -22.3% | -4.6% |
| MSCI ACWI Ex USA | 29.2% | 2.9% | 12.6% | -17.9% | 5.5% |
Note: All returns exclude dividends
| Fixed Income Indexes | 2025 | 2024 | 2023 | 2022 | 2021 |
|---|---|---|---|---|---|
| Bloomberg Barclays US Agg Bond | 7.3% | 1.3% | 5.5% | -13.0% | -1.5% |
| Bloomberg Barclays Municipal Bond | 4.2% | 1.1% | 6.4% | -8.5% | 1.5% |
Source: Orion
Fixed income markets also had a good year – the best year since 2020 – due to relatively high starting yields and a falling interest rate environment. The yield on the benchmark 10-Year Treasury bond began the year at 4.57% and finished at 4.16%. This 41bps decline in yields supplemented the starting yield (bond prices rise when yields fall) such that the Barclays Aggregate Bond Index generated a 7.3% return for the year. It is also important to note that rates were falling (and bond prices were rising) during the equity market sell-off in April of last year, so in addition to generating a meaningful return for the year, bonds also helped reduce the volatility of balanced portfolios.
One asset class that we don't often discuss – commodities – generated a lot of attention during the year, particularly precious and industrial metals such as gold, silver, copper and uranium. These four commodities were up 64%, 145%, 50% and 20%, respectively, significantly outperforming both stocks and bonds. While we don't typically own commodities directly, we did participate in the strength of these markets through several of our equity holdings including Newmont Mining, a large gold and silver miner, Cameco Corporation, a large uranium miner and the iShares Copper Mining ETF. All three investments performed very well, increasing 174%, 78% and 72%, respectively.
To sum things up, it has been a remarkable time to have invested, almost anywhere, over the past few years. In fact, these types of returns represent a "top decile" market event (meaning they happen less than 10% of the time). This is an environment most investors are lucky to experience four or five times in a 50-year career.
When the market is "this good for this long," it is only natural to wonder what happens next. Is this as good as it gets? There have only been eight times in history (including our current run) where the S&P 500 returned 10% or more for three consecutive years. In the prior seven examples, returns were positive in the fourth year four times (57% positive) and negative three times (43% negative). The most striking thing about these examples is that "Year 4" is rarely boring. It is almost never just a "typical year". In 43% of cases, the fourth year was a significant correction or the start of a bear market (1929, 1966, 2022). In 43% of cases, it was another massive "blow-off" rally (1945, 1952, 1998). Only once (2015) was the fourth year relatively flat. Basically, history suggests the odds of another good year in 2026 is a coin-flip (though a coin-flip with potentially significant implications).
Given the lessons of history are not particularly decisive, what about the fundamentals? Let's begin with our concerns. The first major concern we have is that equity-market valuations are currently expensive. The forward P/E of the S&P 500 ended 2025 at 22x, which compares to a 30-year average of 17x. Over the past 30 years, the S&P 500 has only been more expensive two times – 2021 and the late 90's. Moreover, when measured by the price to sales ratio of the S&P 500 or the market capitalization-to-GDP ratio (Warren Buffett's favorite), the stock market is more expensive today than the peak in 2000. As a predictor of future returns, starting valuation does not have a good track record when it comes to forecasting next year's returns (almost anything can happen), but it does have a very good track record forecasting returns over the next ten years. Historical data suggests that when the forward P/E of the S&P 500 is at 22x as it is today, the annualized forward 10-year return is in the low-single digit range.
The other major concern we have is the growing dependence on AI-related investment for both financial markets and the U.S. economy. According to J.P. Morgan, capital spending associated with AI (investments in data centers, software, semiconductors and other hardware) added 1.1 percentage points (20%+) to overall GDP growth in 2025, surpassing consumer spending which typically drives the U.S. economy. Moreover, when you consider that the top 10 stocks in the S&P 500, most of which are beneficiaries of AI spending, now account for over 40% of the market capitalization of the entire index, the AI theme is having an even greater impact on financial markets. While we have no doubt that AI is going to be a revolutionary technology (like electrification in early 1900's or internet/broadband data transmission in early 2000's), history shows that the investment buildout will take many years and there is a material risk that at some point there will be an over-build phase where the supply exceeds demand, necessitating a pause in the investment boom. Critically, the historical pattern in financial markets is that the stock market often peaks approximately midway through investment booms, in some cases – as in 2000 – before peak capital expenditures. For example, the Netscape IPO in August 1995 is often viewed as launching the internet boom, and the stock market peaked 4 ½ years later in March 2000 even though capital expenditures didn't really begin to decline until 2002. By comparison, if you mark the beginning of the AI boom to the March 2023 announcement of MSFT's investment in OpenAI, we are approaching the end of the third year of this investment buildout. Obviously, every cycle is different, and it is possible that we are still in the early stages of the AI investment cycle. However, we believe the risk that we may soon be entering an overinvestment phase of the AI investment cycle is a very important risk to monitor, especially considering the elevated valuation levels and the heavy concentration of AI beneficiaries in the market indices.
On the other hand, what makes us cautiously optimistic, is that the economy appears to be on sound footing as we enter 2026. Unemployment is still relatively low, inflation showed signs of easing last fall, GDP growth has been solid and corporate earnings for 2026 are expected to grow 13%-15%. Moreover, and this is probably the most important point, the current fiscal and monetary policy framework should be further supportive of the economy and financial markets. The Federal Reserve has been lowering rates since late 2024, and the Administration is poised to appoint a new Federal Reserve Chairman that is likely to advocate an even more aggressive effort to lower interest rates. There also is a sense that economic growth will continue in 2026 as the tax cuts from the One Big Beautiful Bill Act and rollback of regulations may provide additional support for both consumers and businesses. History suggests that economic momentum and market bubbles don't pop because they become expensive, they pop when they run out of cash because monetary and fiscal policies become more restrictive. If that thesis holds it would suggest that we do not currently have the conditions for a big market downturn.
Taking all of this into account, we expect higher volatility and lower returns over the next several years. As such, we feel it is prudent to begin reducing exposure to riskier assets in the current environment. To this end, we are trimming positions where valuations have become stretched or where our position size has become outsized versus our risk/reward assessment. Balancing this out, we believe that increased volatility will provide an environment that favors active management and a disciplined investment process. One positive is that we are finding several great companies that have been "left behind" in the current environment, despite demonstrating strong growth and stable margins/returns. We have been reallocating funds to these "quality compounders". Three recent examples include Copart, Honeywell and Paychex. We expect these types of businesses to be able to weather the risks we discussed better than the high-flyers. Overall, we are encouraged by the strong results we have experienced over the past few years and are positioning ourselves to take advantage of upcoming opportunities as they manifest to help you meet your financial objectives.
As always, please do not hesitate to contact us with any questions or concerns you may have regarding your individual investment portfolio.
Your Whitney Advisor Team
Disclaimer: We recommend you review and consider any recent market news. All expressions of opinion are subject to change without notice in reaction to shifting market or other conditions. Its accuracy, completeness or reliability cannot be guaranteed. Nothing contained in this message should be construed as a recommendation.
