Market Commentary

• Further volatility due to policy uncertainty and corporate earnings uncertainties is likely in the coming weeks.
• We believe the global growth upswing remains intact, and we suggest investors position portfolios more cyclically in an effort to take advantage of improved growth.

If the new year has reminded us of anything, it is that the world can be a volatile place and sometimes hard to predict from a political and economic standpoint. Over the long holiday weekend, financial and political news junkies as well as casual observers were bombarded with a barrage of headlines with potential implications for global security and alliances as well as global economic growth. U.S. stocks and bonds sold off on the first trading day of this week in response to tariff threats and concerns that investors might choose to pull money from our domestic markets in an effort to reduce the perceived risks of exposure to U.S. financial assets. Concerns that Japan has urgent fiscal problems were also a big part of the selloff.

Foreign investors didn’t abandon U.S. markets last year, and we foresee no change this year. Yet, further volatility due to policy uncertainty and corporate earnings uncertainties is likely in the coming weeks, and additional potential geopolitical surprises are at the top of the list of reasons for market setbacks. The president wants broader access than the U.S. already has to Greenland for long-term strategic security and its natural resources and is threatening new tariffs if European leaders do not give the U.S. a freer hand on the island. We think markets sold off mainly because investors were disappointed about the prospect of yet more new tariffs, even if the threatened levies are small and likely to be negotiated down. And investors still seem unaccustomed to seeing tariff negotiations in public, especially when both sides in the negotiation seem to start with maximalist proposals. Markets are susceptible to further headlines this week coming out of the annual World Economic Forum held in Davos, Switzerland, where the president says he is ready to have serious negotiations on a number of these issues.

We continue to be focused on four positive fundamental trends that we believe are solidly in place and will be largely unaffected by the recent, mostly political, headlines. These include artificial-intelligence (AI) related capital expenditures on the infrastructure (data centers, power grid upgrades, etc.) needed to provide the facilities and electricity needed to power this revolutionary technology; the big tax refunds expected to come this spring to consumers along with the business-related tax benefits included in the One Big Beautiful Bill Act; further interest-rate cuts we expect to come from the Federal Reserve; and, finally, the deregulation that will likely reduce costs in a wide swath of segments across the U.S. economy.

We are projecting noticeably better economic growth this year versus 2025 and expect the S&P 500 Index to produce a fourth straight year of record earnings. We believe the AI trend is in the early innings and remain fully allocated to the Information Technology and tech-heavy Communications Services sectors, which together make up nearly 44% of the total market capitalization of the S&P 500 Index. Other sectors we expect to benefit from better growth and the positive trends we see in place include our most favored Financials sector along with the favored Industrials and Utilities sectors.

In our view, the global growth upswing remains intact, and we suggest investors position portfolios more cyclically in an effort to take advantage of this improved growth. 

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility.

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