Market Summary 2025 was a noisy year to say the least. All the bold policy announcements and reversals from the new Trump administration kept investors’ heads spinning. If one would have told us a year ago that the U.S. would be launching the biggest tariff increases since Smoot-Hawley, dropping bombs on Iran’s nuclear facilities, and enduring a six-week federal government shutdown, we would have expressed strong skepticism about the prospects for the stock market. Yet here we are - having just completed a third consecutive year of double-digit gains for the S&P 500 Index with a resilient economy and rising corporate profits. The S&P 500 finished the year on a positive note, rising +2.65% in the fourth quarter, which brought the full year’s gain to +17.9%. The three-month and full-year returns for the equal-weighted S&P 500 were +1.4% and +11.2%. The market’s advance this past year was again led by the “Magnificent 7” 1 (i.e. Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla) which in aggregate rose nearly +23% for the year, but the performance gap with the rest of the market narrowed significantly in the fourth quarter. The performance of our Clients’ portfolios for the year versus the cap-weighted S&P 500 can be explained primarily by poor performance by many of our software holdings. Healthcare and consumer discretionary were also negative contributors to performance for the year. Economic Outlook The economy in 2025 was largely underpinned by another year of heavy investment in AI data centers and sturdy consumer spending, especially among upper-income households enjoying robust gains in their stock portfolios. Therein lies the vulnerability for the economy and the stock market, however. So much still hinges on a continuation of the AI investment cycle – both the spending itself and the associated wealth effect. We have no reason to expect an imminent slowdown in AI spending, but it would be healthier to see more broad-based economic participation that included lower-and-middle income households, along with the important housing and manufacturing sectors. The hope is we will see more of that in 2026 as a result of stimulus from the One Big Beautiful Bill Act (“OBBBA”), additional deregulatory actions, and recent interest rate cuts from the Federal Reserve. The U.S. economy entered the fourth quarter with a good deal of positive momentum after another strong showing in the third quarter. Real GDP grew at a +4.3% annualized rate in the September quarter driven by healthy consumer spending and higher net exports. After wide swings in imports distorted reported growth in the first and second quarters, net exports had a lesser, though still positive, impact in Q3. Importantly, real final sales to private domestic purchasers, a measure of underlying demand for the economy, showed further acceleration to +3.0% in the third quarter. The initial GDPNow estimate for fourth-quarter GDP from the Atlanta Fed is +3.0%, another solid showing. Economists have been forced to revise their estimates for the economy higher for this year and next. At the same time, inflation has continued to come in more muted than initially feared following Trump’s tariff announcements. The most recent estimate for November year-over-year CPI 2 increase was +2.7%, well-below expectations. However, this number was likely depressed due to technical issues associated with data collection both during and after the government shutdown. Still, it is fair to note that softening service sector price increases, especially within housing, have been offsetting higher prices for tariff-affected goods. For all of 2025, we now estimate the economy grew +2.4% year-over-year and that inflation exited the year rising at a +2.7% rate. Looking ahead to 2026, we expect the real economy to grow +2.5-3%, and we expect inflation to moderate to +2-2.5%. Corporate earnings continue to surprise on the upside. After bottoming in May soon after Liberation Day, consensus EPS estimates for the S&P 500 have moved steadily higher, propelled mostly by the technology and communications services sectors. Encouragingly, we are starting to see evidence of broadening earnings growth across more sectors including financials, health care and industrials. We have raised our full-year estimate for S&P 500 EPS from $266 to $272, +11% year-over-year. Our initial estimate for 2026 S&P 500 EPS is $310, +14% y/y. At its most recent meeting the Federal Reserve Open Market Committee (FOMC) lowered the federal funds rate for a third time since September, reducing the rate to 3.5-3.75%. However, it was a deeply divided group and the subsequent communication signaled that the Committee may pause its rate-cutting stance for a period of time while awaiting fresh data that more decisively tilts the debate about which is the more pressing concern for the economy – a soft labor market or firmer-than-desired inflation. The imminent announcement of President Trump’s replacement for outgoing Fed Chairman Jerome Powell will not likely quell concerns about Fed independence. Tariff uncertainty, which has been lessening, may be poised to raise its head again once the Supreme Court renders its judgment on the legality of Trump’s tariff authority under the International Emergency Economic Powers Act. If the justices rule them to be unlawful as many legal scholars expect, a growing source of government revenue that was expected to backstop the deficit-expanding OBBBA will suddenly be at risk. The Trump team likely has been busy behind the scenes planning for this contingency. We would expect a host of new tariffs using different authority. However, these replacement tariffs are likely to be more targeted and possibly burdened by additional investigation requirements, raising doubts about the timing and ultimate revenue. Countries may also want to use this opportunity to revisit previously negotiated trade frameworks. All this points to the possibility of renewed uncertainty for investors and business leaders. The market successfully surmounted a “wall of worry” in 2025 related to tariffs, immigration policy, geopolitics, Fed independence, and AI “bubble” talk. The economy appears to be entering the new year with solid momentum, backed by stimulative fiscal and monetary policies. As such, the market can continue to advance in the near term, supported by rising profits, an accommodative Fed and robust AI spending. However, the S&P 500 continues to sell at historically elevated valuations and is highly concentrated, which raises the risk profile should we encounter any unanticipated shocks. We believe that a diversified portfolio of reasonably priced, high-quality growth companies offers the best combination of offense and defense for our Clients. We continue to emphasize attractively valued issues within technology, communication services, health care, and financials, where profits are growing the fastest. We see interesting opportunities potentially emerging in industrials and consumer discretionary in the new year.