How you run the race – your planning, preparation, practice, and performance – counts for everything.
—John Wooden1
For the third year in a row, markets worldwide have ended strongly. One would think that would make writing an investment letter an easy, mostly joy-filled exercise. And in a way it is: The S&P 500 Index has risen 86% in the last three years, almost triple its average 3-year return over the last century. The economy seems to be on solid footing, with corporate earnings increasing at their fastest rate in several years. Interest rates are lower than when 2025 started, and America seems to have escaped the worst-case scenarios surrounding the announcement of blanket tariffs in April.
But looking ahead, investors need to realize that strong markets can have consequences: The robust economy has led to years of above-average market performance, with asset prices in many cases rising at a far faster rate than the growth in cash flow from those assets. That means we are surrounded by much higher asset valuations.
So, along with the good news of past solid performance, this letter seeks to address the important task ahead of us: navigating an expensive market. How should we take advice from John Wooden and run our race in the face of higher risk, less opportunity and perhaps unrealistic expectations? We believe we have a three-part strategy that’s based on experience and prudence: stay invested; stay unpopular; and stay focused on your long-term financial plan, even if that means watching some speculative investments from the sidelines.
Stay Invested. First, we stay invested with our eye on the long term. The longer we do this, the more we appreciate that no one can consistently time the market. Valuations are historically high, but they can stay that way for years. For that reason, we will not use high valuations for the market as a whole as an excuse to sit on the sidelines in cash. But that doesn’t mean we buy everything and anything. Instead, it leads us to the next rule:
Stay Unpopular. The more popular an investment idea, the more likely it has already been fully exploited. Instead, we search for those asset classes or sectors that have not been pushed to extreme valuations. For example, while the S&P 500 has increased 86% in the last three years, and the technology sector is up 167%, the healthcare sector is up only 20% in the same time frame. Many of those companies are languishing at decade-low valuations, even though they may possess strong balance sheets and growing cashflows. Moreover, the sector is recession-resistant, having the dual benefit of being potentially both cheap and reliable in a slowing economy.
Stay focused on Your Plan. Finally, when you are running a marathon, you need a (Wooden-like) race plan. The current market is being led by “sprinters,” who are racing out front, but no one remembers who was in the lead halfway through the race. Instead, we prefer to keep ourselves in the race by staying close, but owning less risky investments. That doesn’t mean we avoid high-growth investments like technology, but it does mean we obsess over how much we pay for them, recalling that there is no investment that’s so good it can’t be ruined by a high enough entry price.
With that as a backdrop, let’s survey the investment landscape.
The U.S. equity market (as measured by the S&P 500 Index) performed strongly, again. Led by the Communications sector (up 34%) and the Technology sector (up 24%), gains were focused especially on AI projections. Yet the gains were more broad-based than the headlines might lead you to believe. Google (up 66%) and Nvidia (up 39%) were the only Magnificent Seven stocks to beat the market, and healthcare, a perennial laggard over the last three years, ended the year strongly, as the best sector of the fourth quarter. Keep an eye on market breadth. This broadening away from technology should be a healthy trend.
International equities also performed well, especially in U.S. dollar terms, as the weakened dollar (the U.S. Dollar Index was down over 9% in 2025, the most since 2017) helped foreign investments. Returns in many European markets were good in their own currency, but when translated into dollars, they were particularly strong. The Euro Stoxx 50 Index was up 22% in local currency but 39% in US dollars. After U.S. outperformance for more than a decade, the pendulum seems to be swinging back towards international equity markets.
Turning to the fixed-income markets, bond returns have been solid this year, with the Bloomberg U.S. Agg Index of investment grade bonds up over 7% for the year. The bond market was supported by higher starting yields and Fed rate cuts that have pulled short and intermediate rates lower. By contrast, the long end of the curve has underperformed shorter maturities as ongoing fiscal concerns, additional Fed easing prospects in 2026, and expectations for increased bond supply have steepened the yield curve. We think this dynamic could extend into 2026, particularly if economic growth becomes more resilient than currently expected as additional stimulus comes online. Notably, in December the FOMC revised its median real GDP estimate for 2026 higher, from 1.8% to 2.3%. Again, the strong economy can have consequences.
Across public credit markets, both corporate and municipal fundamentals remain sound. Despite warnings of corporate cockroaches lurking, default rates have remained low and have even ticked lower recently. Credit spreads reflect this backdrop and remain tight by historical standards. We also have continued to find value in modestly longer-dated municipal structures, where tax-equivalent yields can exceed 6% for investors in higher marginal tax brackets. This is another example of seeking value in unpopular assets.
In the alternatives space, in the fourth quarter we saw the market start to ask some hard-hitting questions around AI infrastructure and private credit. These questions haven’t really had a broad impact on performance yet, but the market does seem to be taking a harder look at questionable stories. We believe we have stayed disciplined regarding both the assets our clients hold and, just as importantly, the partners we’ve chosen to invest alongside. So far, we’re pleased to report we remain positive on both counts.
In the private credit arena, the public bankruptcies of Tricolor and First Brands put markets on high alert for other areas of possible stress. We haven’t seen any systemic issues to date, but nonetheless questions rippled through the private credit industry about underwriting standards. While thankfully we didn’t have any exposure to these names in our portfolios, we do believe this is yet another reminder that we should remain discerning. Stay tuned.
Finally, it is worth a moment to look at interesting price action in the commodities markets. Gold and Silver have broken out to record highs, and other less-precious metals (like copper) have followed suit. We believe that economic growth world-wide is creating demand for essential things like electricity (for which you need copper). But gold and silver seem to be moving on fears of inflation and high debt levels in the industrialized nations. While inflation seems to be calming down, these signals bear watching.
Taking advice from John Wooden, we will focus on our planning, preparation, and performance, knowing that in expensive markets being faithful to our long-term plan, even in the face of speculation, may be the best thing we can do for our clients.
We look forward to reporting back to you at the end of the first quarter, and wish you a happy, healthy and prosperous new year.
Information as of 12/31/2025.
Sources: Bloomberg, Federal Reserve Board
Past performance is no guarantee of future results. All investments are subject to risk, including the loss of principal. Alternative investments are not suitable for all investors. Diversification does not ensure a profit or protect against a loss in a declining market.
Many factors affect the performance of investments at any time, and past results are not necessarily indicative of, nor do they guarantee, any future results. No assurance can be given that the investment objectives will be achieved or that losses will not be sustained.
Equity securities are volatile and can decline significantly in response to broad market and economic conditions. Bonds are subject to interest rate risks. Bond prices generally fall when interest rates rise.
This is not a recommendation to buy or sell any security. Indexes are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested directly. Any statistics mentioned have been obtained from sources we believed to be reliable, but the accuracy and completeness of the information cannot be guaranteed. Any statements nonfactual in nature constitute only the current opinions of the author and not necessarily those of MAI Capital and are subject to change without notice. It should not be assumed that this is a forecast of future events or that any security transactions, holdings, or sector discussed were or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal any investment performance discussed herein. Please consult your legal and/or tax advisor before implementing any legal or tax strategies.
MAI Capital Management, LLC (“MAI”) is an investment adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level of skill or training.
