Q1 2026 Investment Update

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This update is for discretionary accounts.

 

 

Summary:

• The stock market made modest gains in the last quarter of 2025. Strong earnings growth was offset by high valuations.

• With valuations near historic highs, strong earnings growth is needed to generate higher stock prices.

• We believe earnings growth could be strong enough in 2026 to generate modestly higher stock prices.

• The effects of tariffs are starting to show up. Employment data is slowing, while economic growth remains strong. A contradiction that is hard to explain.

• On December 10, 2025, the federal reserve lowered the fed funds rate by one quarter of a percent to the 3 3/4-4% range. It appears the federal reserve will be on hold until they get a better handle on economic strength, employment and inflation.

Economic and Monetary Outlook:

• The economy had been on a slow-growth, low inflation, and full employment trend for several years until recent quarters.

• Q3 GDP was stronger than expected at 4.2%.

• Growth appears to be strong, while unemployment is increasing. These two events rarely occur at the same time.

• Adding to those issues there is a modest increase in inflation.

• Because of all the crosscurrents economists are have a very challenging time forecasting economic growth in the current environment.

 

Equity Market Outlook:

• After several very strong years, the U.S. stock market has not made much progress in second half 2025. Except for the sharp drop in March-early April and the strong recovery since May which appeared to be tariff related, most averages have only made modest progress for the year.

• The averages that are heavily weighted in technology stocks (S&P 500 and NASD 100) have had a strong year. But, the equally weighted version of the S&P 500 is up half as much as the weighed version, which is over 35% weighed in technology stocks.

• Small and mid-cap averages are up modestly in 2025, but only half as much as the S&P 500.

• Stocks are expensive based on historical standards.

• Consensus 2026 S&P 500 earnings estimates are currently $310 a share. This put the S&P 500 at about 22.5 times 2026 estimates at the current price level. This puts valuation back into the upper end of there historical range.

• That combined with the uncertainty related to tariffs, could limit upside potential.

• We believe the market is overdue for another 5% correction.

Fixed Income:

• Long term Interest rates have declined sharply from the middle of 2024 until recently due to the large decline in inflation during that period.

• In the last year longer term rates have been rangebound. While shorter term rates have decline on the expectation of additional rate cuts by the federal reserve.

• After almost a year’s pause, the federal reserve made several additional interest rate cuts. It appears the slowing of the workforce has become more important to the fed than the potential increases in inflation caused by tariffs.

• We believe additional rate cuts could be on hold until more clarity on the effects of the tariffs on the economy develop.

• This could cause interest rates to be rangebound for some time.

• Most of our bond holdings are in the shorter duration range of 2 to 5 years. There prices are less impacted by changes in inflation and appear to be a good place to wait until the above issues are clarified.

Investment Strategy:

• We remain over weighted in terms of U.S. stocks and under weighted fixed income.

• Our primary areas of focus are large-cap domestic equities and mid-cap growth oriented domestic equities.

• Valuations appear to be better in small and mid-cap equities, which is where we would like to increase our exposure now that the federal reserve has lowered interest rates. We will continue to postpone that change until there are signs of small and mid-cap stocks beginning to show more upside momentum.

• We recently trimmed large cap holdings in most client accounts and are waiting for a modest pullback to add to small and mid-cap positions.

• We also see improving conditions in international markets. There valuation are better than the U.S. This combined with improving growth prospects could convince us to shift some money to that area for the first time in more than 15 years.

• We used the recent increase in interest rates to add to our fixed income holding and lengthen maturities.

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Roy Blumberg,

Partner

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. The economic forecasts set forth in the presentation may not develop as predicted

Stock investing involves risk including loss of principal.

The prices of small and mid-cap stocks are generally more volatile than large cap stocks.

International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

 

Bonds (fixed income) are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

No strategy assures success or guarantees against loss.

                Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of         principal and potential illiquidity of the investment in a falling market. The economic forecasts set forth in this    material may not develop as predicted and there can be no guarantee that strategies promoted will be successful