As we enter 2026, it is worth reflecting on a year that challenged assumptions, shifted market leadership, and redefined where real opportunity emerged. 2025 was characterized by rapid shifts in narrative, leadership, and sentiment, with artificial intelligence influencing much of the discussion but not all of the opportunity.
AI remained an important thematic driver, but the market's focus evolved meaningfully over the year. Early enthusiasm centered on semiconductors broadened into the infrastructure required to support AI at scale, including data storage, power, and systems reliability. That shift mattered. Companies tied to the physical build-out of data capacity and reliability saw improving fundamentals as demand moved beyond theory and into deployment. Several of our portfolios benefited from exposure to companies positioned at the intersection of AI infrastructure and real-world deployment. Infrastructure-related holdings tied to data capacity, power, and systems reliability also contributed meaningfully, as the market began to price in the scale of the build-out ahead.
At times, optimism ran ahead of reality, leading to sharp pullbacks. Yet earnings across many industries held up far better than expected, reinforcing that technological investment was translating into real economic activity. What became increasingly clear is that the next phase is execution. The long-term winners will not simply be associated with AI, but will be those able to deploy technology to improve productivity, reliability, and margins. That opportunity is still emerging with uncertainty around which companies will win or lose.
Market leadership reflected this uncertainty. Growth and value rotated repeatedly throughout the year. Any pause in technology enthusiasm quickly brought defensive and value-oriented stocks back into favor, only for leadership to swing again as earnings reasserted themselves.
This environment rewarded portfolios that blended growth and value rather than relying on a single style, and it created opportunities in areas often overlooked during headline-driven markets. A variety of non-tech holdings, unrelated to the AI narrative, contributed meaningfully during our holding periods, highlighting the breadth of opportunity beyond the market's most talked-about names.
Markets also experienced a meaningful pullback in April following the initial tariff announcements on "Liberation Day." Fear escalated quickly, but as negotiations progressed, exceptions were carved out, and earnings remained resilient, markets stabilized and recovered to new highs by late June. In hindsight, the immediate economic impact proved far less severe than initially feared.
Rates and inflation added another layer of complexity. Inflation moderated unevenly in the first half of the year but ticked higher in the second half as tariff effects flowed through. Job data softened. The Federal Reserve held rates steady through August before cutting three times in the final four months of the year, bringing the fed funds rate to 3.50–3.75%. Our view is that interest rates will ultimately need to move lower to support continued growth, but the timing remains tied to how productivity gains, including those driven by technology adoption, feed through to the broader economy. In the meantime, businesses with pricing power, disciplined capital allocation, and strong balance sheets have been better positioned to navigate uncertainty.
What Mattered Most for Equity Investors
First, diversification within equities mattered. This was not a year where one sector or one factor dominated consistently. Portfolios needed exposure to both growth and value, and the flexibility to rebalance as conditions changed. That flexibility allowed participation in emerging growth while maintaining resilience during rotations. A range of growth-oriented holdings contributed meaningfully to performance across strategies, particularly in areas tied to innovation, health, and semiconductors. Our strategies that blend growth and value characteristics led our lineup this year (Market Income and Market Quality), outpacing both our pure growth and pure value offerings—a direct reflection of the environment we have described.
Second, balance-sheet strength regained importance. The scale of capital required for data centers, electrification, and infrastructure build-out is significant. Companies entering this phase with leverage or weaker cash flow profiles faced greater risk when sentiment cooled or timelines extended. Capital discipline increasingly separated durable performers from speculative ones.
Finally, market concentration narratives overstated reality. While the largest technology companies drove index returns by virtue of their size, opportunity extended well beyond the most crowded names. Many stocks outside the largest index constituents delivered strong absolute performance during our holding periods, reflecting the breadth of opportunity beneath the surface of the indices.
Looking Ahead to 2026
We enter 2026 with conviction in our process but humility about the path ahead.
The AI narrative appears poised to shift from build-out to implementation. The infrastructure phase rewarded chipmakers, storage providers, and power companies. The next phase should reward companies that successfully deploy these tools to improve productivity, margins, and competitive positioning. But implementation is harder than it looks, particularly in large, complex organizations where culture, legacy systems, and execution risk can blunt the benefits of new technology. The winners of this next phase are not yet obvious, and we expect meaningful dispersion between those who adapt effectively and those who do not.
Beyond AI, the macro environment remains difficult to forecast with precision. Tariff policy, economic growth, inflation, and interest rates all carry meaningful uncertainty. We would not be surprised to see the same rotational, narrative-driven market behavior that defined 2025 continue into the new year. But we are cautious about predicting it with confidence.
What we can control is how we respond. Our process is built to learn continuously, processing new data as it arrives and evolving our views as conditions change. We do not rely on static predictions about which sectors or factors will lead. Instead, we focus on identifying emerging opportunities and managing risk as market leadership shifts—because it will.
Thank you for your continued partnership. We look forward to navigating 2026 together.