First, HAPPY NEW YEAR!
With 2025 now behind us, the year served as a continuum for many investment themes from 2024. US stocks posted double-digit gains, highlighted by the S&P 500’s nearly 18% return, making it three consecutive years of above-15% annual returns for the Index. The “AI boom” continued to be a major force driving equities to new heights as investors remained optimistic about AI significantly transforming companies across all sectors. For fixed-income, after posting generally positive returns in 2024, bond markets continued this trend with the Barclays US Aggregate Bond Index rising 7.3% and the international Barclays Global Aggregate Bond Index appreciating by 8.2% in 2025. As for commodities, gold was an astounding winner as the precious metal soared by 64% in 2025, trouncing its already-impressive return of 27% in 2024.
So what can we expect for 2026? As I’ve written in past year-end investment letters:
With the advent of a new year, we can expect to see the usual deluge of market outlooks and annual forecasts from Wall Street strategists. And at this time I always recall more than one such strategist privately confessing that he/she hated putting together these outlooks, admitting it was more or less educated guesswork trying to predict what would happen during the year, but that they were pressured to do so because clients expected it. In fact, a good argument can be made that it’s easier to predict what will happen either next week or in ten years than it is to forecast what will occur in the next twelve months.
With that caveat in mind, we will offer what we anticipate could happen this year and in the near future.
Starting with AI, the following quote is from Ian Bremmer, founder of research and consulting firm Eurasia Group, taken from his recently-released “Top Risks of 2026” report:
But AI can't live up to investors' expectations in the short term. Even after hundreds of billions of dollars of investment, the most advanced models still hallucinate. Their capabilities are jagged: dazzling at some tasks, unreliable at others (and often unpredictably so). That inconsistency makes them hard to deploy in high-stakes applications where errors are costly. Business adoption has been uneven, with only about 10% of US firms using AI to produce goods and services, according to the Census Bureau. Many companies report significant productivity gains, but surveys suggest most have yet to see meaningful bottom-line impact. Real productivity increases will arrive through wide diffusion of the technology across the economy, but that takes time. Yet markets have priced in revolution, not evolution.
We would especially agree with that ending statement, “markets have priced in revolution, not evolution.” Assuming we can all agree that we’re in an AI bubble, what in large part has been supporting this bubble is the belief that the many billions of dollars to be invested in the space will translate into exponential profits due to massive cost savings. And I emphasize the word “belief.” To date, there’s been very little real or meaningful evidence of a sizeable uptick in profits due solely to AI. This year, if such evidence doesn’t start pouring in at a consistent rate, investors may become impatient and this belief that has been supporting AI could start to fall apart. If that happens, stocks could correct, significantly, as it’s the promise of future productivity growth that has been driving much of the market higher. Once that assumption becomes doubtful, the bloated P/Es and valuations currently awarded to these companies could likely compress. Again, investors are eagerly expecting and counting on revolution, not simply evolution.
Also, as I wrote in the November investment letter, the much-hyped “Magnificent 7” stocks are as a group showing signs of possibly fracturing. From September 1st through the end of 2025, a few of these stocks (META, MSFT) actually experienced negative returns whereas others (GOOG, TSLA) posted 30+% returns in that time. Perhaps even within this once close-knit group of stocks, we’re starting to observe some developing separation, suggesting that investors may be trying to identify which of these companies will become the big future winners versus relative losers.
When viewing 2026, it’s adamant that one revisit the topic of valuations. There’s an old Wall Street saying, "valuation is a poor market timing tool... until it matters," and given the degree to which many valuation metrics are stretched, we would argue that this coming year could be when valuations (finally) matter.
As an example, the following chart shows the Shiller CAPE Ratio for the S&P 500 Index:
“CAPE” stands for Cyclically Adjusted Price-to-Earnings ratio, which was developed by economist Robert Shiller, and it’s a valuation tool that divides the S&P 500 price by the average of its last 10 years' inflation-adjusted earnings, helping to smooth out business cycles and reduce the noise from excessive volatility. As depicted in the chart, the current CAPE ratio is 40.7, reaching the second highest level in over 100 years, just behind the highest level ever attained during the 2000 internet-tech bubble.
Another example of market valuation is the so-called Warren Buffett indicator, shown in this next chart:
Mr. Buffett reportedly has preferred this metric, which compares the total value of the entire US stock market to the nation's economic output (GDP), using it as a gauge to help decide if stocks are over- or undervalued. As shown, the indicator is currently at 211.5%, the second highest level since 1950 and well-above the regression trend line, implying excessive overvaluation.
We could show more valuation charts making the same point, but in the interest of brevity, we think it’s fair to conclude that stocks are richly valued or “priced for perfection,” leaving very little room for disappointment or adverse surprises. While such extremely elevated valuation levels serve as a possible danger to equities this year, the more certain and proven risk relates to expected returns in the long-run.
The chart above plots the CAPE ratio on the horizontal axis and the subsequent forward 10-year real return of the S&P 500 on the vertical axis. Given the current CAPE ratio is about 40 (see red box in chart), we can expect that over the next ten years, the S&P 500 will generate a negative (below 0%) real annualized return. Note that when the CAPE ratio was even higher at 44 in March 2000, the next ten years did in fact see the S&P 500 Index earn a negative annualized real return (-2%).
This analysis begs the question, “So if the S&P 500 will likely no longer be the predominant winner in the next 10 years, what will be?” Great question, and the answer is it’s too early to tell exactly. That will be our job to ascertain over time through our rigorous investment process. But again, it’s helpful to realize that what has worked in the recent past will probably not achieve the same results in the near future.
To offer an example of a potential future winner, US large cap stocks (S&P 500) outperformed US small cap stocks (Russell 2000) by about 5% in 2025, making it the fifth straight year that large caps beat small caps. However, the last time large caps enjoyed such a long streak of outperformance over small caps (1994-1998), it was followed by six consecutive years of small-caps outperforming large-caps. Historically, extended winning streaks tend to not last forever.
We’ll conclude by saying what we’ve been saying for the last few quarters. With respect to client portfolios, we remain defensively positioned as we are always being as mindful and vigilant about preserving capital as we are about striving to achieve significant relative performance gains.
If you have any questions, please feel free to call or email.
As always, the entire team at Measured Wealth wishes to thank you for entrusting us to deliver on your financial goals.
Edward Miller, CFA, CMT
Chief Investment Officer
Measured Wealth Private Client Group
Important Disclosures
Historical data is not a guarantee that any of the events described will occur or that any strategy will be successful. Past performance is not indicative of future results.
Returns citied above are from various sources including Factset, Bloomberg, Russell Associates, S&P Dow Jones, MSCI Inc., The St. Louis Federal Reserve and Y-Charts, Inc. The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Investing involves risks, including possible loss of principal. Please consider the investment objectives, risks, charges, and expenses of any security carefully before investing.
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