Another year is almost behind us, and it was an eventful one for the economy and the markets.  We started the year with the inauguration of Donald Trump for the second time in nine years.  The first several months of the year were a dizzying rollout of Executive Orders that both reversed many of the previous administration's economic policies and marked the beginning of a confusing series of trade- and tariff-related Executive Branch actions that cast a chill over markets.  That chill culminated with the "Liberation Day" tariff announcement in early April.  The level of announced tariffs was far worse than the markets had contemplated, and we saw a sharp sell-off in equity markets over the following two weeks.

The very poor reception of "Liberation Day" tariffs caused the administration to dial back its aggressive tariff rhetoric, and the markets stabilized and began to recover by the beginning of May. Over the next several months, concerns over tariff announcements began to recede, replaced by optimism for the tax bill known as "The Big Beautiful Bill," which made permanent many tax provisions from Trump's first-term tax bill that significantly reduced corporate taxes and lowered marginal tax rates for most individuals. The Big Beautiful Bill also largely restored deductions for local and state taxes known as "SALT deductions," which had been eliminated by the first-term Trump tax legislation, and sweetened corporations' ability to accelerate the depreciation of capital investments.

In addition to the markets viewing the tax bill as positive for corporate earnings and economic growth, the Trump administration leaned heavily into domestic Artificial Intelligence (AI) infrastructure investment through a combination of large public-private joint ventures and highly publicized direct government investment in key companies such as Intel. This highly visible "all-in" investment in AI infrastructure by the government spurred huge multi-hundred-million-dollar investments by companies such as META (Facebook), Microsoft, Google, Oracle, Amazon, and privately held OpenAI.  After an initial enthusiastic market response to all this investment, the markets began to sober up by late October, concerned that the size and scope of these investments might portend a market bubble.

In last month's commentary, I addressed the bubble concern by examining these large-scale investments through a pragmatic lens. I concluded that we are not necessarily seeing a valuation bubble like the one in the late 1990s. Still, we are seeing sub-bubble valuation levels built on very optimistic forecasts for the timely deployment of these investments and for converting operational data centers into profit-producing assets. I argue that bubble-level valuations are not present today, but delays in deployment and/or less-than-forecast profit generation over the next several years could elevate today's sub-bubble multiples to levels more akin to bubble-level valuations we have seen in the past.

As we exit 2025 and look ahead to 2026, we do so with our eyes wide open.  There are reasons to be optimistic about near-term market performance. Still, we need to understand the potential risks in this AI-spending-dominated market cycle, which coincides with a stressed U.S. consumer and major geopolitical upheaval. Market sentiment can quickly shift from optimism, with caution taking a back seat, to a more cautious, more tepid outlook. We know that markets can find reasons to be optimistic in the face of mounting risks (AKA climbing the wall of worry) for much longer than many market participants assume. But these walls-of-worry market environments can reverse from a counterintuitive state of optimism to outright pessimism over what, in the moment, might seem like a relatively minor event or data point.

I believe the best analogy for such an environment is a driver who knows conditions are right for "black ice" to form.  When facing this type of risk, most drivers do not pull off the road, but certainly do not speed up.  Instead, the prudent driver heightens their focus, slows down a little, and chooses a route that minimizes the risk of a black-ice-induced accident. It is not a far-fetched possibility that 2026 sees better-than-average economic growth, a more accommodative Federal Reserve, and higher disposable income for middle- and upper-income consumers. This set of outcomes would support higher equity market levels, but we cannot ignore that "black ice" conditions remain. Investors are constantly tested by change. We have navigated many past periods of uncertainty and change and know that change always brings risk and opportunity.

I wish everyone a festive holiday season and a happy and healthy start to the new year, and I look forward to navigating whatever 2026 throws at us.