Navigating the Crosscurrents of 2025
2025 was the epitome of contrasts. Economic growth slowed to a crawl, yet stocks soared on the wings of Artificial Intelligence (AI) infrastructure spending. It was a period characterized by sharp market volatility, driven by significant shifts in U.S. trade and fiscal policy, juxtaposed with the booming, transformative march of groundbreaking technology.
The year unfolded against a backdrop of policy uncertainty, including tariff proposals and fiscal negotiations. 2025 underscored the power of diversification. Asset classes such as bonds and commodities moved differently than equities, and international stocks significantly outpaced the U.S., reinforcing the value of a balanced approach.
At Strategic Advisers, we make investment decisions using a myriad of inputs, beginning with the business cycle, but also encompassing trends in specific metrics like corporate earnings, valuations, inventories, credit, and labor to name just a few.
Our resources are wide and deep, including not only Fidelity’s extensive research capabilities but also those of the external managers in which we invest. We believe that our vast resources give us an edge in assessing how events may or may not impact markets and subsequently client accounts.
Market Response to April Tariff News
The stock market experienced significant volatility following the rollout of sweeping new tariffs that surprised most market experts. It was jarring to everyone, including professional investors like us. Our investment teams met continuously to determine what the tangible impacts of these tariffs could be. Our analysis suggested that the initial wave of tariffs was likely a negotiating tactic and based on some reasonable assumptions, the impact on gross domestic product (GDP) and inflation would be contained. With this in mind, we looked for opportunities and picked up some oversold assets in both U.S. and international stocks, as well as high-yield bonds. As we all saw, however, the “on-sale” sign was pulled from the store window quickly with stocks returning to all-time highs by late June. Tariffs continued to feed headline risk along with other exogenous events like military action against Iran, federal lawsuits, and the recent shutdown of the U.S. government.
Throughout all however, the U.S. economy continued to grow, albeit not without nagging issues such as elevated inflation and a softening jobs market. In fact, we saw some meaningful improvement as the year progressed with a tax and spending bill passing, corporate profits outpacing estimates, and the Fed lowering interest rates. Much of the underlying market strength was driven by the technology sector but other industry sectors benefited, and earnings growth broadened.
Navigational Markers: Corporate Earnings and Valuations
Capital expenditures on AI infrastructure was a dominant market theme in 2025, with a handful of tech giants on pace to collectively spend upwards of $400 billion this year alone.1 That is about four times the amount spent in 2021 and according to our research2, represents 1% of U.S. GDP3. Additionally, these tech giants, known as “Hyperscalers” accounted for nearly 80% of earnings growth of the S&P 500.4 Through the third quarter, the S&P 500 earnings grew around 13% from last year and is expected to end 2025 about 10% higher than 2024.5
Granted, the growth engine for earnings is heavily powered by the AI spend and this group, along with several other “mega cap” companies now account for roughly 40% of the S&P 500’s market capitalization.6 Also, valuations are pricing in very high earnings expectations. Consensus estimates put the forward price-to-earnings ratio of these technology giants close to 30 times. While U.S. stocks are subject to concentration and high valuations, they also present potential opportunities for high returns.
Market Rally or Market Bubble?
By some measures, the current stock market picture bears some resemblance to the infamous “dot-com era,” which has many market observers questioning whether a so-called “bubble” exists. This is where our resources inform us, and our decades of investment experience guides us. No one knows for sure whether we’re currently in an inflating AI-induced asset bubble. However, as avid students of market history, we see both similarities and differences to the dot-com era.
A full discussion whether a bubble exists goes well beyond this commentary. The tech sector today generated very robust earnings over the past decade. The high price to earnings valuation of the tech sector reflects the sector’s history of strong earnings and expectations that this growth will continue. Identifying a bubble before it peaks remains a significant challenge.
Our takeaway is that the bubble debate underscores the importance of managing where risk comes from and layering in diversification to help support portfolio durability. Our analytical processes help identify the potential sources of risk so we can fine tune exposures. Diversification has long deemed the only “free lunch” in investing, and our approach is to take multiple servings.
Charting a Course for 2026
As we turn our attention toward 2026, several key themes will likely shape the investment landscape. We expect the AI investment cycle to shift from building infrastructure to applying AI across a wide range of industries. Companies outside the technology sector including industrials, healthcare, and transportation are already beginning to implement AI to streamline operations and reduce costs. While the full economic impact may take time to materialize, early examples suggest potential for long term productivity gains.
Corporate profits are also widely expected to grow meaningfully in 2026, with forecasts suggesting earnings growth will broaden beyond mega cap technology companies. This expansion could reduce reliance on a limited number of market leaders and provide opportunities in segments that have lagged in recent years. Much of this potential will be influenced by interest rates, as the Fed resumed cutting rates following last year’s pause. The path forward will remain data dependent, but a lower-rate environment could support both business investment and consumers. Finally, recent tax legislation may provide an additional boost early in 2026, with refunds likely offering some offset to inflationary pressures.
We positioned client portfolios to take advantage of potential positive developments, but also to prepare for specific risks, namely inflation and volatility. This means that we are slightly above the long-term target for stocks, equal to the target for bonds, and under the target for short-term. Additionally, we hold out-of-benchmark positions in commodities and liquid alternatives.
Within stocks, we are slightly below the target for the U.S. (and slightly above target for international), offset somewhat by a small position in Real Estate Investment Trusts. For bonds, we are moderately underweight broad-market investment grade bonds, but positions in Treasury Inflation Protected Securities, high yield, and long-term U.S. Treasuries bring the overall allocation to neutral. Short-term holdings are modestly below the target. Instead, we took positions in liquid alternatives and commodities. This well-diversified, forward-looking positioning is built to provide durability in a wide variety of potential outcomes.
Putting it all Together as we Set Sail Into 2026
2025 served as a blunt reminder of the market's capacity for both sudden shocks and remarkable resilience. For me, the key takeaway was the enduring importance of a well-diversified portfolio that can withstand periods of volatility while still participating in long-term growth trends.
As we look ahead to 2026, the opportunities presented by the growth and adoption of AI are encouraging, but they must be balanced against the realities of a shifting economic and policy landscape. At Strategic Advisers, our fundamental belief remains the same: a well-diversified, disciplined, long-term approach, grounded in a thorough understanding of markets and economies, will best position our clients’ portfolios to achieve a positive investment outcome. And so, to our clients I say, welcome aboard!