After a strong 2025, the first quarter of 2026 was defined by the Iran conflict and an 84% spike in oil prices, which triggered a risk‑off move that pulled the S&P 500 down 4.2% even as international and emerging‑market equities eked out gains and later rallied on news of a ceasefire and plans to reopen the Strait of Hormuz. We see this strength in headline indexes as misleading: U.S. growth looks narrow and fragile, heavily reliant on deficits, an increasingly stretched AI capex boom, and consumption concentrated among the wealthiest households, while the S&P 500 itself is extremely expensive, dangerously concentrated in a handful of mega‑cap tech stocks, and pushed to new highs by an AI‑driven bubble that is out of sync with an economy facing an energy shock, high rates, and a softening labor market. In this environment, we remain underweight U.S. equities and instead favor assets that have historically performed well in modest‑growth, rising‑inflation regimes—international and EM stocks, value equities, hard assets such as gold and commodities, and short‑duration fixed income—while using active risk management and broad diversification to help preserve capital if the current energy shock ultimately pushes the economy into recession

The U.S. equity market ended 2025 on a strong note, with Fed rate cuts, solid earnings, and an AI‑driven capital spending boom pushing the S&P 500 to new highs and rewarding risk‑on assets. Beneath the surface, however, we see a fragile backdrop: growth is increasingly dependent on unsustainable deficits, speculative AI investment, and consumption concentrated among the wealthiest households, while the S&P 500’s extreme overvaluation, narrow tech‑led leadership, and gold’s continuing surge all point to mounting structural risks. As a result, we view long‑term equity risk‑reward as unattractive and have positioned the portfolio for a reflationary regime—favoring international and EM stocks, value equities, hard assets like gold and commodities, and short‑duration fixed income to participate selectively in upside while hedging against a potential AI bubble unwind and policy‑driven shocks.s.

Stocks performed well in the third quarter as trade tensions eased and the economy proved resilient despite lingering uncertainty from tariffs, elevated inflation, and slowing labor market growth. Investors drove equities to new all-time highs and record valuations after the Federal Reserve signaled that labor market softness justified interest rate cuts. Meanwhile, optimism over the AI-driven capital spending boom fueled expectations for productivity gains and improved economic growth. 

 The second quarter of 2025 experienced significant volatility and large market fluctuations. Following a slight loss in the first quarter, stock prices declined sharply after President Trump unveiled his "Liberation Day” tariff plan that was more aggressive than expected. By April 9th, the S&P 500 had fallen 21.3% from its mid-February peak, when President Trump announced a 90-day suspension of new tariffs. Despite a sharp decline early in the quarter, most major asset classes rebounded strongly after tariffs were suspended. Despite ongoing economic uncertainty and geopolitical tensions, the S&P 500 climbed 10.8% to reach an all-time high by the end of the quarter.

 The S&P 500 reached an all-time high in mid-February, then fell by approximately 10%, ending the first quarter down 4.6%, marking its worst quarter since Q3 2022. The decline was driven by economic uncertainty due to the new administration's policies and weaker-than-expected economic data, leading to lower interest rates and a surge in gold prices.  In April, the Trump Administration announced severe tariffs, causing a short-term panic in financial markets, which led to a 15% plunge in the S&P 500 and a significant increase in long-term interest rates. A week later, to soothe the financial markets, the Administration announced a 90-day suspension of the most severe tariffs to provide a window for negotiating new trade agreements.

Equity markets had a mixed performance in Q4 2024. The S&P 500 rose 2.5%, but the equal-weight S&P 500 and S&P 600 Small-cap indexes fell by 1.9% and 0.5%. Foreign markets also struggled, with the MSCI EAFE International down 8.4% and the MSCI Emerging Markets index dropping 7.3%. The weak performance was due to rising interest rates and a strong dollar. Despite the Federal Reserve cutting short-term rates by 1.00% in Q4, long-term rates increased sharply, indicating another potential monetary policy error by the Fed.

We are concerned that the government's massive fiscal deficit and loose monetary conditions provided by the Fed could increase the inflation rate and push the economy into a stagflationary environment. During its monetary tightening phase, the Federal Reserve did not sufficiently reduce its balance sheet after injecting nearly $5 trillion into the economy during the pandemic. This excess liquidity and relaxed financial conditions have inflated asset values, creating a wealth effect. 

The stock market offers a very poor risk-reward. The S&P 500 is significantly overvalued and is not adequately diversified since 30% of the index is concentrated in six technology companies. We are concerned that there is an AI bubble and that any slowdown in capital spending will adversely impact the S&P 500. 

We expect the stock market to trade in a wide range, with the upside limited by high valuations and the downside protected by the "Fed's Put." As value investors, we will add to our equity exposure in periods of weakness and reduce our risk exposure when the market is overbought and investors are too optimistic.

he fourth quarter began with the stock market in a correction. By the close of October, the S&P 500 had experienced a 10.6% decline from its peak in July. Although the S&P 500 maintained a year-to-date increase of over 10%, the S&P 500 equal-weight and the small-cap Russell 2000 were down by 2.5% and 4.6%, respectively. The primary catalyst for this stock market weakness was the sharp increase in interest rates.