Over the 25 years of providing investment advice as an Registered Investment Advisor, I’ve often explained that in exchange for peace of mind, a balanced approach requires this tradeoff: during equity bull markets, a balanced approach will appear to underperform, simply because by design there is less than 100% equity exposure. The reward for remaining balanced is to see your portfolio retain most of its value when inevitable bear markets, often rapid and violent, appear. I’ve worked with other people’s money through the bear markets of 1987, 1996, 2000 – 2002, 2007-2009. These were epic, life changing experiences for investors. Bear markets are inevitable and they can quickly reduce the lifestyle of overly aggressive investors.
In 2025 there was a bear market of short duration, one that could have turned deeper and longer. As the graphs below illustrate, four months into the year, an executive order promulgating high tariffs on all imported goods and a threatened trade war with China frightened investors. The most widely held shares, leaders of the market, saw devastating reversals – 35% for Apple (from $260 to $170), down 22% for Microsoft (from $450 to $350) and a 41% slide for Nvidia ( from $161 to $87). We own all three, for example, but a rational allocation prevented the weakness from presenting too much damage to your portfolio value. As a steward of your invested assets, equity exposure was reduced, but our holdings of these powerhouse names remain.
Then the president had a change of heart and a head spinning rally for most tech issues ensued, pulling up the broader market as well (see top graph above.)
The president was motivated to modify his initial executive order on tariffs (“Liberation Day”) by his advisors, especially Treasury Secretary Scott Bessent which sparked a dramatic resumption of the bull market of the previous two years. Many investors had panicked out of stocks before this change of heart. I did not panic but instead took reasonable precautions by reducing some equity holdings. We already held a high portfolio allocation to cash like, dividend paying funds not tied to the stock market and this proved a wonderful tonic when things were melting down in the early part of the year. But I failed to rush back into stocks, a decision I’d repeat given the uncertainties at that time.
As a result, clients experienced growth, avoided some gut-churning sell-offs, and meanwhile collected interest and dividend income.
Your statistical quarterly and year-end report will offer figures net of fees to give you an accurate reading on how you’ve done. In virtually every client situation, returns exceeded inflation, meaning your actual buying power improved.
In the end, US markets powered ahead based primarily upon ongoing and massive investment in artificial intelligence related infrastructure. The Standard & Poor’s 500 index put in a rare third year bull market, producing about a 17% total return.
Top technology performers, all related to artificial intelligence had been funding data center construction with their own free cash flow, but during the fourth quarter a number of so called “circular” deals were initiated with Nvidia – the Leader of the Pack, lending money or taking equity interests in its customers. Meta (Facebook parent company) even floated a bond issue to raise funds. This prompted worries that we may be seeing a repeat of the debt fueled speculation that led to the Dot Com Bubble and subsequent collapse.
Kara Swisher, a widely followed writer who has been providing commentary on Silicon Valley companies since the mid 1990’s, is not enthralled by the moguls of Silicon Valley, having known most of them when they were young guys heading startups that later became dominant players. She suspects a sale is coming, because not all of the money being spent on data centers and AI infrastructure will produce profits. By contrast, Dan Ives of Wedbush Securities, (they acquired Noble, Cooke, & Co. in 1969) has been a cheerleader of the sector for at least three years, and his successful predictions have made him a highly sought commentator on TV and podcasts. Ives compares the current AI frenzy to the early hours of a “party” that will go on until 4 AM. In his opinion the current time is about 10:30 PM. In other words, he believes we have a lot longer to party. Perhaps both Swisher and Ives are right.
Because there is now significant worry in the markets, with regular, manageable pauses and sell offs (Nvidia, Meta and Microsoft have been flat to weak for the past four months), I believe the bull market is not yet over. There is a Wall Street axiom: “bull markets climb a wall of worry.” There seems to be plenty of worry going around right now. With over $7 trillion of investor cash sitting in CD’s and money market funds, on the sidelines, and a significant amount of rational caution in the minds of investors, we do not appear to have the conditions for a major crash at this time. I continue to have a reasonable bet that the equity markets are going higher for much of 2026.
International Implications
There appears to be a realization by foreign governments, especially in Europe, that socialistic policies, the welfare state, high taxes on the successful, high levels of regulation and stifling bureaucracy result in sub-par economic growth. Oddly, here in the States, a president who often claims to bask in the legacy of free marketeer Ronald Reagan is imposing “industrial policy”, trying to pick winners and losers in the private sector. This is a shock – something socialist Bernie Sanders of all people advocates. For example, the president has, without much participation from the legislative branch, determined to funnel billions of federal dollars to a failing chip company, Intel, while at the same moment demanding a 25% commission for permitting Nvidia, to sell its H200 to China. He just issued an edict to ban expansion of wind energy farms, despite the fact that private utilities, like Dominion Resources have already committed large dollars to such project.
This past year the United States bombed Iranian nuclear sites, threatened to take over the Panama Canal and is blowing up alleged drug smuggler in boats in the Caribbean. As the war in Ukraine drags, with Russia fighting a war of sabotage on western Europe, Europeans are investing more in defense some of this increasing demand for US war tools. China’s government, asserting hegemony over the the so called South China Sea, is incentivizing Japan, Taiwan and the Philippines to buy defensive equipment. I’ve not bought any defense/aerospace companies so far but they may soon be on the menu.
A key platform of the current administration is to pressure American companies to “onshore” much of the manufacturing capacity that has migrated abroad over the past thirty or forty years. This may be a noble goal, but for many manufacturing processes the cost of union labor, weak domestic component production and U.S. environmental regulations make such onshoring impractical, or something for the distant time horizon. None-the-less the administration moved forward with the president’s favored tool, higher tariffs, believing this will bring manufacturing back to the USA. This return to mercantilist policies of the 19th and early 20th centuries worries economists who reflect upon the disastrous results of the Smoot-Hawley tariff legislation, signed into law by President Hoover in 1930. Aimed at protecting American farmers from cheap imports, instead it led to a prolonged global financial depression. Fearing that high tariffs may cause a repeat of the 1930’s experience, the stock market swooned, as mentioned from January through early April.
The rapid recovery of the stock market from April forward was not simply based on relief that tariffs were delayed or subject to nation-by-nation negotiation. First, there was a burst of inventory stocking by US based companies in anticipation of the tariffs. Then consider that Baby Boomers, the wealthiest demographic group, are spending money on leisure in their retirement, sustaining restaurants, hotels and the service economy. Further, this demographic is helping drive demand for the healthcare sector. Also consider that a baby boom is happening for the Millennial generation. Young families tend to be spenders: clothes, toys, educational goods, team uniforms and medical. Finally, as mentioned, there is the factor of business spending on and deployment of AI related tools.
One example is Walmart (WMT), added to client portfolios in recent weeks. The company has invested heavily in creating an online marketplace, and challenging Amazon’s (AMZN) dominance. Amazon is expanding use of robots in its warehouses, is laying off middle management and may soon see its margins expand due to technology.[1]
By contrast, Costco (COST) seems to have failed to fully embrace the online battle. This popular (perhaps too popular) stock has been trading at a very high price earnings ratio, and so we made some profit but we retain a smaller position in a company that I still view as a retail fortress.
Added to International
The U.S. dollar fared poorly in 2025, giving up about 10% of its buying power compared to a basket of developed nation currencies. Relentless pressure has been applied to the US Federal Reserve by an administration that wants lower interest rates. If this pressure is successful, US T-bills and other dollar denominated assets then become less attractive to foreign buyers. The second factor, mentioned earlier, is liberalization of some key foreign markets, especially Japan, but also Europe, which is trying to reverse some hidebound socialist regulation and is spending big on defense. These may be drawing international investor funds away from US equities.
As a result, I shifted some of your fallow cash toward international equities. My previous efforts to pick specific non-US companies or regions have been a disappointment (French toll road company Vinci comes to mind, Dutch tech company ASML, iShares Japan and Mathews India fund all come to mind ), so I’ve determined it was smarter to let a well-established international manager take over this segment and placed many clients into one or more of the First Eagle funds with some nice results.
Looking ahead, technology stocks are likely to lead the market for a while longer. Major players are consolidating capabilities to build end-to-end platforms, increase pricing power, and defend against rivals. In the last few trading days of the year, Nvida purchased Groq which specializes in application specific integrated circuits (ASIC’s), demonstrating that even giant Nvidia appears worried that Google could drain business away with their ASIC offerings.
Over the past three years, Nvidia (NVDA) has enjoyed monopolistic dominance in AI model training with its industry-leading Graphics Processing Units (GPU) and CUDA software ecosystem. However, in mid-November, Alphabet (GOOG) released its Gemini 3 family of AI models, entirely built (trained) on Google’s Tensor Processing Units. Effectively, Alphabet took foundational LLM model leadership without relying on Nvidia, using its application-specific integrated circuits. Google’s TPUs are somewhat use-case limited compared to Nvidia’s GPUs, but they feature lower total cost of ownership and are more energy efficient. Nvidia felt it had to respond, paying a huge premium for Groq, about 3X compared to its valuation as indicated by a private equity raise held just months ago.
As mentioned, for 2025 the broad market returned about 17%. Remove the top ten performers, and the numbers reveal that the remaining 490 non-technology stocks of the S&P 500 Index provided a 10% total return. This is in line with the long term average annual rate of return for US equities, revealing that this three year bull market is almost entirely about AI and technology, while the rest of the economy is not expanding at a remarkable rate.
GDP is likely to get a meaningful boost in 2026: salaried workers are expected to enjoy nice tax refunds due to OBBA tax credits especially no tax on tips. Seniors are eligible for a generous Senior tax deduction of $6,000. Tax refunds are anticipated to be good for retailers, auto sales and perhaps even home sales.
Further, there is an imminent change of guard at the Federal Reserve. Jerome Powell, who was appointed by President Trump in 2018 has resisted pleas from the president to lower short term interest rates, fearing an inflation rebound. But Powell’s term expires in May 2025 and the president will likely appoint a dove as the new chairman, someone who may well push the Board to lower interest rates, despite inflation being stuck near 3%[2]. Lower interest rates may improve the attractiveness of stocks for a while, but a resulting inflation surge could spoil the party, unless…unless rapid adoption of artificial intelligence improves productivity to offset the inflationary impulse. This is a big Unknown.
Over the past three years of rising equity markets, your returns were less impressive than if you’d allocated 100% to stocks. The balanced approach is warmly welcomed when an inevitable bear market arrives, when more speculative investors quickly surrender much of their gains. Although optimistic about 2026, I’ve seen my share of financial downturns. I try to always remember that protecting your money is my primary assignment.
My wife Eileen and I send best wishes for your health and prosperity in 2026.
Gary Miller
[1] Some believe that robots will soon be delivering those familiar Amazon boxes to your front door/
[2] Note that at 3% inflation the buying power of a dollar declines by about 35% in ten year’s time.
