Market Recap

Since April’s tariff-related market volatility, global equities have rallied in dramatic fashion, although US equities have lagged their international counterparts.  Fixed income has also found its footing, handily outperforming cash equivalents as long-term rates edged slightly lower.  Since April, US equity valuations and market concentration levels have returned to lofty heights.  Ultimately, the market’s worst fears surrounding tariffs were never realized.  While the trade-related turmoil was jarring, the remainder of the year revealed a global economy characterized by its resilience and adaptability.

Looking Ahead

In the second half of the year, we saw more inclusive equity market participation, boosting small caps, US value and international equities.  In the near term, risks appear more tilted towards a slower growth regime rather than an elevated likelihood of a recession.  As we saw in 2025, the best defense against volatility is a broadly diversified portfolio.  Outside of the concentrated neighborhood of US large cap growth equities, valuations are near historical norms.  US GDP growth is expected to remain positive but slower than in recent years, due to inflationary concerns, a weaker consumer and broader economic uncertainty.  Fixed income yields remain attractive, particularly relative to cash.  The Fed has signaled their willingness to continue easing financial conditions, which is likely to further erode cash yields.

Asset Allocation

2025 illustrated the resilience of capital markets and the tangible advantages of a global investment approach.  US equity markets remain in a precarious position, given elevated levels of concentration and inflated valuations.  We find that the optimal time to review investment allocations is during periods of market tranquility, where planning drives portfolio construction rather than fear or prognostication.  No one knows what 2026 will bring.  As such, we prefer to remain exposed to the largest number of potential growth catalysts, rather than betting on a single trend.  Please don’t hesitate to reach out to your advisor to schedule time to discuss your financial plan, including your goals and planning assumptions.  Allowing planning to drive the investment approach, rather than reactions to market fluctuations or predictions, helps ensure that your portfolio remains aligned with your vision for the future.

Leading Topics

Economic Fundamentals

While there’s been much discussion around the weakening employment outlook, signs point more towards a tentative equilibrium than a collapse in labor demand.  Although the unemployment rate has increased slightly, it remains near historically average levels while new jobless claims have yet to tick up.  Unimpressive job creation figures are more likely attributable to demographic factors than underlying economic frailty.  The consumer has remained resilient, although discretionary spending growth has become increasingly concentrated in a narrow subset of households.  If the US is to continue to expand GDP at a reasonable pace, productivity is likely going to have to make up for a lack of labor force expansion.  The global outlook is more compelling, with the IMF estimating 3%+ growth globally in 2026.

The Federal Reserve, Inflation & Fixed Income

Markets are pricing in approximately 2-3 rate cuts in 2026, following three cuts in 2025.  Inflationary risks persist and may be inflamed if the Fed continues to ease monetary policy in an environment where the fiscal stimulus nozzle is already wide open.  The slight decline in long-term rates during 2025 and elevated starting yields set the stage for impressive fixed income performance.  In 2025, fixed income proved its value as both a yield generator and as a volatility dampener.  While yields remain appealing, it’s important to ensure that your fixed income portfolio is appropriately positioned.  Treasuries currently offer minimal term premium out to the 10-year portion of the yield curve.  Extending duration along the Treasury curve reduces reinvestment risk but doesn’t offer a compelling yield improvement.  We believe that a moderate approach to both duration and credit quality is called for, as the yield curve is likely to continue to steepen.  Investors with outsized cash holdings are the most vulnerable to reinvestment risk and should consider duration extension.

Global Equity Markets

International equities outperformed their domestic counterparts by over 10% in 2025.  While valuations have expanded slightly, they remain near historical averages and well below US multiples.  Domestically, concentration remains a concern, with 10 companies making up approximately 40% of the S&P 500 market cap.  Many of the largest US companies have substantial exposure to artificial intelligence.  While AI certainly seems to be a transformative technology, elevated valuations imply a rapid growth in adoption and productivity gains.  Should these fail to materialize at the pace that the market demands, concentrated exposure leaves investors vulnerable to outsized volatility relative to a more diversified equity portfolio.  The narrow equity performance of the past decade was partially fueled by a strong Dollar and ultra-low interest rates.  That narrowly concentrated performance may not persist if those structural trends shift.  Exposure to regions with different economic catalysts and varied demographic trends allows portfolios to better weather economic uncertainty and opens multiple avenues for growth.

US Economic Outlook: Tepid Resilience

US GDP growth maintained a strong pace in the third quarter, after an impressive showing in Q2.  The consumer continued to drive economic activity, along with exports.  Net exports have increased over the past two quarters as tariffs have slowed import activity.  Consumer health is bifurcated, with the top 10% of households by income representing over 50% of consumer spending.  Lower income consumers continue to struggle as COVID-era savings have been depleted.  Consumer debt has returned to pre-COVID levels while delinquencies have risen sharply.  Specifically, auto loan and credit card delinquencies are near 20-year highs.  Wealthier consumers have been beneficiaries of the “wealth effect”, as unusually strong market performance in recent years has bolstered balance sheets and driven vigorous spending.   While a slowdown in US growth is expected, a recession in the near term appears unlikely, given stimulative fiscal and monetary policy as well as the torrid pace of corporate investment.

While many pundits have raised the alarm around the low levels of job creation in recent months, the labor market has proven to be resilient, with labor force participation for workers aged 18-64 near all-time highs.  The reduction in the number of jobs added has not been accompanied by a material jump in new jobless claims or a meaningful increase in the unemployment rate.  As such, the lack of growth in the number of workers may have more to do with structural factors rather than employers’ reticence around their growth prospects.  Two structural factors are weighing on the size of the workforce: an aging population and dwindling immigration flows.  While immigration figures are difficult to determine with precision, various sources indicate that between 500,000 and 1.5 million immigrants left the workforce in 2025.  The domestic labor force isn’t filling the void.  In 2024, about 4 million Americans turned 65, while only 3.6 million children were born.  A similar level of retirements is expected to continue through at least 2027, suggesting that a shrinking labor force is likely to be a persistent trend in the coming years.  Developments in the AI-sphere may aid in closing the productivity gap, although precise figures on productivity benefits have been elusive.

US Equities: Valuation & Concentration

In 2025, we experienced firsthand the perils of concentrated equity markets.  A reliance on a narrow group of companies to drive returns, particularly when the performance of many of those firms is driven by similar factors, presents a tremendous risk.  In April, if your equity allocation was invested in the S&P 500, you experienced substantially more volatility than a portfolio with a broader, more global allocation.  Currently, concentration risk is even more substantial than it was in April, with 10 companies making up over 40% of the S&P 500 market cap.  The valuations of the largest companies in the US are elevated relative to historical averages as well as other equity market segments.  While valuations are not great predictors of short-term returns, they have a reasonable negative correlation with long-term outcomes.  Historically, the S&P 500 has never experienced positive forward 10-year returns starting from current valuation levels.  As such, we encourage you to review your equity exposure and ensure that your allocation is adequately diversified.

Perhaps the most concerning aspect of the current concentration level in US equity markets is the fact that many of the largest US companies are relying on the same tailwinds for growth.  While artificial intelligence certainly seems like a compelling technology that provides tangible productivity benefits, it’s unlikely that every AI-related company will win the current capital investment arms race.  Our concern around concentration is less a fundamental call on the prospects of these companies, but more an assessment of the risk that these equities are likely to move together in the event of market weakness.  While AI has caught the attention of many investors, there are plenty of quieter trends that have performed as well or better in recent years.  For example, international equities outperformed the Magnificent 7 in 2025 by a meaningful margin, while providing a much smoother investor experience.  In April, the Magnificent 7 bottomed out down nearly 25% since the beginning of 2025, while ex-US equities barely broke through a 5% downside threshold.  We believe firmly in the prudence of broad diversification.  There are plenty of compelling global growth opportunities that don’t rely on the risk of chasing a few concentrated names whose valuations indicate that a tremendous amount of growth is already being priced in.

International Equities: Growth at Value Prices

In a reversal of the trend of the past 15 years, international equities dominated their US counterparts in 2025.  A few likely contributing factors include the concentrated and expensive nature of US equity markets, higher US interest rates, a weaker Dollar and a recognition of the substantial growth opportunities that exist outside of the US.  Additionally, a global investment approach has provided compelling diversification benefits.  Adding non-US exposure is not necessarily a bet on US underperformance, but an insurance policy against the concentrated and expensive nature of US equity markets.

In Europe, earnings expectations have improved dramatically due to increased infrastructure spending and reduced trade concerns.  In April, tariff fears peaked, with an announced tariff rate of about 25%.  Those rates never materialized due to a series of deals and delays.  The effective tariff rate is now closer to 11% and the amount of uncertainty has declined meaningfully.  Germany has committed to investing 500 million Euros in infrastructure over the next decade and NATO increased the defense spending pledge for member countries from 2% to 5% of GDP.  In Asia, tariffs had far less impact than some feared.  China has done an excellent job of diversifying its trading partners, with the US making up only about 15% of exports.  Chinese exports rose 5-6% in 2025 despite mounting tariffs.  Part of the compelling opportunity set in Asia is the growth of the middle class.  Brookings estimates that by 2030, two out of three members of the global middle class will reside in Asia.  The rise of a new consumer class in China and India is likely to continue to propel the shift from a goods-based to a service-based economy.  Valuations in China are particularly appealing, at about 13x forward earnings.

Two constants during the 15-year era of US equity market exceptionalism were a strong Dollar and historically low interest rates.  As both of those dynamics have shifted, so has the global economic landscape and the relative attractiveness of various investment opportunities.  While no one knows what 2026 will hold, global diversification seems prudent given the elevated valuations and substantial level of concentration present in US equity markets.

Inflation & The Federal Reserve

US inflation was fairly static in 2025, bouncing between 2.3% and 3%.  The shelter component of inflation has continued to ease as housing supply improves.  Goods and services now appear to be the primary inflationary drivers.  Barring a re-escalation of the trade war, some of that impact is likely to diminish in the middle of 2026, as tariffs tend to produce a one-time increase in prices rather than sustained inflationary pressure.

Regardless of the above-target inflation level, the Fed has continued to ease financial conditions, with three rate cuts in 2025.  Markets anticipate another 2-3 cuts in 2026.  In addition to reducing short-term rates, the Fed also announced an end to their quantitative tightening program.  This concludes the shrinking of the Fed’s balance sheet that began in 2022, nominally to preserve liquidity in the financial system.  Continued loosening of monetary policy at a time when fiscal policy is historically accommodative may prevent inflation from reaching the Fed’s 2% target in the near term.  The downward pressure on short-term rates is likely to be beneficial for consumers with revolving loans, like credit cards, but harmful to savers sitting on record-high money market balances.  However, Fed policy will do little to alleviate the strain on homebuyers waiting for mortgage rates to decline meaningfully.  Increasing Treasury issuance or a lack of faith in the Fed’s commitment to inflation reduction may drive long-term yields higher even as short-term rates decline, akin to the yield curve steepening that occurred in 2024 and 2025.

Fixed Income Opportunities

Fixed income was one of the unsung heroes of 2025, with the Bloomberg Aggregate Global Bond Index providing a return of over 8%.  Bonds have reprised their dual role as an income generator and a volatility mitigator.  The yield curve has steepened dramatically over the past year and is likely to continue to do so if the Fed persists in cutting short-term rates.  Currently, core bonds provide a yield premium of 50 to 75 bps above money market rates.  While that sounds insignificant, the added benefit of extending duration is a reduction in reinvestment risk.  When the Fed cuts rates, as they’re expected to do several times in 2026, money market rates fall immediately.  Given the shape of the yield curve and anticipated path of interest rates, reinvestment risk appears to be more substantial than duration risk.  Additionally, investors no longer need to accept a yield discount to shift from cash equivalents to core fixed income, reducing the perceived friction for cash-heavy investors.

While we believe that shifting outside of cash is prudent for investors with excess cash balances, we recommend a measured approach.  Credit spreads remain well below long-term averages, although recent defaults have also been remarkably low.  We believe that a moderate approach to both duration and credit quality is called for, as the yield curve is likely to continue to steepen.  Some areas that look particularly appealing include international fixed income and, for higher tax bracket investors, municipal bonds.  International bonds provide protection against Dollar depreciation and add an element of diversification, which has become more valuable as global monetary policy regimes diverge.  Municipal bonds offer compelling after-tax yields for high tax bracket investors, particularly at the longer end of the curve.  Most municipalities remain well-funded thanks to generous Federal aid during COVID.  Although fixed income has had an impressive year, the opportunity set remains compelling, largely due to elevated absolute yields.  The relationship between starting yields and subsequent returns has proven to be historically strong.  Investors with outsized cash holdings are vulnerable to reinvestment risk and should consider duration extension.

Behavioral Finance: The Folly of Forecasting

Invariably, the turning of the calendar is accompanied by a deluge of Wall Street firms and market commentators making their prognostications for the following year’s returns.  These estimates vary from a nearly flat year to a rally of around 15%, with the consensus around 7% upside.  For context, the S&P 500 has averaged approximately a 10% return since 1926.  However, the Index’s return has only been within 2% of that average in six calendar years out of 100.  Annual returns of the S&P 500, and other equity indices, are far from normally distributed and are characterized by fat tails and a substantial number of outliers.  Just look at the past five years of S&P 500 returns: a gain of 27%, a decline of almost 20%, followed by gains of 24%, 23% and 19%.  Most years tend to look very different from the average, although analyst forecasts tend to cluster much closer to the mean.  The takeaway is that short-term equity performance is extremely unpredictable, which is why we don’t attempt to predict or act on expected short-term outcomes.

Equity performance tends to become much more consistent over longer periods.  While any single year can vary wildly, historically, long-term sequences of returns have clustered into a relatively narrow range.  That’s a key reason why we don’t advise allocating to equities to fund short-term needs.  We recommend investing in equities with a long-term lens rather than attempting to chase the latest trend.  Furthermore, evaluating equity performance over a short period of time is akin to evaluating a multi-course meal over a single bite or an athlete’s performance over one game.  While it can be tempting to obsess over annual or even shorter-term figures, they’re largely irrelevant to your long-term plan.  While no one knows what 2026 will bring, we know that a diversified allocation designed around your personal financial plan helps minimize the temptation to chase trends or jump in and out of the market on a whim.

What it All Means

Economic Outlook

US economic data points toward an outlook of slower growth rather than a meaningful recession risk.  The labor market appears stable, with slower hiring being offset by sluggish labor force growth. The consumer has remained resilient, although discretionary spending growth has become increasingly concentrated in a narrow subset of households.  If the US is to continue to expand GDP growth at a reasonable pace, productivity gains are going to have to make up for slower labor force expansion.

Fixed Income Opportunities

Fixed income offers attractive yields without the need to accept substantial credit risk.  These yields are appealing on a relative basis given elevated equity valuations and diminishing cash yields.  Given modest yield curve steepness and tight spreads, we recommend a moderate approach to duration and credit risk.  Municipal bonds look particularly appealing for those in higher tax-brackets.  Investors with outsized cash holdings are vulnerable to reinvestment risk and should consider duration extension.

Inflation & The Federal Reserve

Progress on inflation reduction largely stalled in 2025, as an uptick in goods and services inflation has offset the favorable trends in other categories.  The Fed executed three rate cuts during 2025, and markets expect 2-3 more in 2026.  While rate cuts will benefit consumers with floating-rate debt, those sitting on substantial cash reserves are likely to be negatively impacted.  Reductions in short-term rates may not translate to long-term yields, due to elevated Treasury issuance and concerns around the path of inflation.

Equity Outlook

After a sharp pull-back in April, US equity valuations and concentration levels have once again become a concern. The tailwinds that have propelled US market exceptionalism over the past decade, including Dollar strength and ultra-low interest rates, appear to have shifted. We believe that a meaningful allocation outside the largest S&P 500 constituents, including international and value equities, offers diversification benefits as well as exposure to multiple growth catalysts.

Relevant Disclosures: This information was prepared by FSM Wealth Advisors, LLC d/b/a Journey Wealth Management, LLC (“Journey”), a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Journey’s Form ADV Part 2A and Part 2B can be obtained by written request directly to: 22901 Millcreek Blvd., Suite 225, Cleveland OH 44122. 

The information herein was obtained from various sources. Journey does not guarantee the accuracy or completeness of information provided by third parties. The information provided herein is provided as of the date indicated and believed to be reliable. Journey assumes no obligation to update this information, or to advise on further developments relating to it.

Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance is not indicative of future results. Neither the information nor any opinion expressed herein should be construed as solicitation to buy or sell a security or as personalized investment, tax, or legal advice. For advice specific to your situation, please consult an appropriately qualified professional investment, tax or legal adviser.