2026 January – The Burning Question du Jour

We will come to the burning question shortly, but first we do the numbers.  We’re happy to report on another very successful year in our plan for the pursuit of your most valued financial goals. Your portfolio continues to be driven by these goals, rather than by any prognostication around the economy or the markets. That will always be the case, throughout the coming year, and beyond.

The Market

• In 2025, the broad equity market completed its third straight year of double-digit returns, driven by a strong business economy and significantly increased corporate earnings. The S&P 500 price ended the year up 16.4%.
• The consensus of analysts’ forecasts is for stronger earnings gains approaching 15% in each of 2026 and 2027 (source: Yardeni Research).
• Somewhat remarkably, profit margins have continued to expand to the highest levels in 15 years (source FactSet). One would have thought that inflation in companies’ costs, colliding with an increasing consumer resistance to price increases, would have been a significant headwind here.

Employment

• The single important weak spot in the economy has been the employment picture, which has continued to soften. There is somewhat of a silver lining though: strong economic growth and slowing employment growth means that per capita productivity has been rising strongly. Unemployment is now 4.4%, but the other 95+% of the workforce is putting out significantly increased products/services per hour; that allows companies to raise wages without triggering inflation.

Inflation

• After six straight rate cuts, Federal Reserve monetary policy is 175 basis points looser than it was a little more than year ago, even with the sticky Consumer Price Index still pushing three percent. It would not surprise us to see the delayed effects of this monetary easing and tariffs to start showing up in the inflation numbers in 2026.

The Burning Question du jour

The burning question all year long has been, “Are we in an A.I. bubble?”  This replaced the previous year’s burning question “When and by how much will the Fed cut rates?”  Which in turn replaced 2023’s  “Will there be a recession?”

• There was no recession, but that’s beside the point. Which is that the universal burning question is usually, if not always, the wrong question, and a distraction to the well diversified long-term investor.
• There can be no question that the broad equity market is more heavily concentrated in a few huge tech stocks, which can’t all win the A.I. race (see Figure below). And this concentration has the S&P500 Index selling at a price/earnings multiple near historic peaks. 

• Our response to this is threefold: (a) Valuation is not, never was and never will be an effective market timing tool. (b) Your portfolio is well balanced between large-, mid-, and small-cap stocks, not just the large companies in the S&P500 Index. You also have a well-diversified allocation in foreign equities, which are now starting to outperform the U.S. market after lagging for the past 13 years.  And (c) rebalancing effectively addresses these higher concentrations.
• All of this suggests to us that the next significant market shock—and there always is one – will probably come out of nowhere. And like all the shocks past, and all those yet to come, it will have very little to do with what is in our control, and will instead provide us with new opportunities.
• You are on an investment path that has historically proven to “work” in the long run, with the focus of ultimately achieving your goals. We do not accept that “this time is different” regardless of what “this” may be at any given moment.

General Principles

We conclude with a restatement of our core principles, which keep us on track and balanced.  

• We are long-term, goal-focused, plan-driven investors. Our core investment policy is to invest in a broad market of well-diversified, high-quality businesses.
• We believe that the economy can’t be consistently forecast, nor the markets consistently timed. We conclude from this that the only practical way to capture the premium long-term return of equities is to ride out their frequent, sometimes significant but historically always temporary declines.
• We do not react to economic or market events. As long as your long-term goals remain unchanged, so will our plan for the achievement of those goals.

Thank You, Again!

We so appreciate your kind support for voting Nest Egg Financial Advisors the best financial advisor in North Tahoe/Truckee for the fourth year.  We love what we do and greatly appreciate all of you! 

With heartfelt best wishes for health and happiness in 2026!

 — Jack and Lisa