Portfolio Management Winter 2026

The bull market is likely to continue into next year, with the economy expanding and activity accelerating. Fed easing should stabilize employment and support credit growth, sales, and corporate profits, while fiscal policy remains stimulative after recent legislation. Consumers and businesses are financially strong, keeping spending high.

S&P 500 earnings estimate for 2026 are rising due to less restrictive monetary policy and ample Fiscal stimulus. Value and small-cap stocks are outperforming growth stocks, implying faster economic growth ahead. Lower rates and inflation may broaden the market beyond top performers. Quality stocks remain solid long-term investments, but value stocks have recently outperformed, so I’m increasing my holdings in value stocks while retaining quality positions.

Asset Allocation Strategy

I hold more equities than bonds, investing in economically sensitive equity sectors but keeping investment-grade bonds for stability. Steeper yield curves benefit economically sensitive sectors over defensive ones such as consumer staples. Lower rates also favor cyclical stocks and small caps due to their sensitivity to interest rates.

US Mid-to-Small-caps

Lower yields and interest rates have led to more favorable financial conditions for small-sized companies, providing a supportive environment for economic growth. Historically, Smallcap stocks, which depend on easy access to credit, have demonstrated stronger performance and present attractive growth valuation opportunities compared to other, more expensive market segments. Accordingly, I am increasing exposure to profitable small-cap stocks.

Mid- and small-cap equities typically benefit from low-interest rate environments due to reduced costs of debt and operational financing. The current expansion beyond the MAG-7 stocks represents a sustainable trend for this year. Earnings estimates among Small-cap firms are improving, and factors such as lower interest rates and the re-shoring of jobs are supportive of sales growth. Small caps continue to offer compelling absolute and relative valuations. Notably, the S&P MidCap 400 and SmallCap 600 Indices are trading at relative P/E discounts of 30% and 35%, respectively, compared to their 20-year averages, while the S&P Value Index remains 8% below its long-term average versus the S&P 500.

Sector Positioning

Analysts are most optimistic about Energy, Communication Services, and Information Technology, while Consumer Staples has the most Sell ratings (FactSet).

Technology

I reman overweight in Technology sector. Technology is projected to lead in 2026 with 29% EPS growth, 17% revenue growth, and a sector price target 25% above current levels. Supported by lower market yields and strong AI-driven earnings. Tech valuations are higher than in other sectors, driven by superior earnings, revenue growth, and profit margins. High valuations and disruptive innovation make the stocks in the sector vulnerable to corrections. While Tech may not always outperform, it tends to deliver solid results during economic expansion and serves as a strategic driver of long-term portfolio returns among the nine other sectors to invest in.

Health Care

Despite ongoing investor concerns—such as the impending patent cliff, lower drug prices, reduced Government Medicare payments to Healthcare firms servicing Medicare/Medicaid—the Health Care sector presents long term opportunities. Nevertheless, Health Care continues to be supported by robust long-term growth drivers, including an aging global population, increased demand for managed care, and rising pharmaceutical consumption. According to Morningstar analysts, Health Care equities are currently trading at their most attractive valuations in over five years.

The sector’s forward price-to-earnings ratio stands at approximately 1.4 standard deviations below its historical average. Should the market fully discount the recent negative news affecting profit margins, I believe there is significant potential for valuation multiple expansion within Health Care resulting from higher sales growth. Furthermore, persistent underperformance during the current cyclical bull market has led to an extremely oversold condition; the sector has trailed the S&P 500 by nearly 60% over the past three years—a record relative underperformance since 1973. Historically, instances where relative strength approached or exceeded two standard deviations have coincided with sector lows. FactSet forecasts a 10% price appreciation by year-end. Additionally, accelerated growth in healthcare spending across emerging markets provides additional support for the sector’s outlook.

Utilities

Utilities provide current income and some growth potential, serving as a hedge against heavy tech exposure. Independent utilities powering AI are showing growth characteristics, unlike traditional regulated firms. Rising US energy demand—especially for AI—and grid improvements support long-term sales growth. Lastly, Utility dividends become more appealing in a low-rate environment as economic activity increases. The sector is expected to grow revenue at 6.53%, outpacing the S&P 500’s 5% projection, though analysts estimate a 3% sector gain versus the S&P 500's 7.7%.

Financials

I remain positive about Financials. A steeper yield curve benefits banks. Banks earn more net interest income when the yield curve is positive. Credit lending accelerates during expansionary times underpinning growth in revenue. De-regulation supports higher profit margins. The Fed’s stress tests confirm strong bank capital positions, enabling reduced reserves, greater lending, and greater shareholder returns via buybacks and dividends. The current U.S. administration’s deregulatory stance may also further cut costs.

Energy

I maintain my investment in energy stocks for the long term because they can help protect against inflation, geopolitical risks, and capitalize on increasing energy demand fueled by AI growth in the U.S. economy. Energy stocks not only diversify my portfolio and offer appealing yields, but also often move independently from the overall market. Additionally, they can benefit from rising oil prices and act as a strong hedge against inflation.

Gold

Maintaining and increasing gold allocations remains a strategic decision, as gold continues to serve as an effective portfolio diversifier and a hedge against various economic uncertainties. Structural bull cycle forces supporting gold include US Federal Reserve (Fed) easing, robust central bank and retail demand, ETF inflows, elevated stock/bond correlations, and global debt concerns. Central bank and retail demand have been primary contributors to the appreciation of gold prices. Additionally, a weaker U.S. dollar—driven by lower relative interest rates and the reduction of U.S. Treasury holdings—has provided further support for gold's upward trajectory. Foreign investors are increasingly choosing gold over the U.S. dollar as a defensive strategy against inflation, currency depreciation, expansive global fiscal policies, and heightened geopolitical tensions. Currently, gold constitutes 18% of global official reserves, up from an average of 11% between 2014 and 2023 and has overtaken the Euro as the world's second-largest reserve asset according to State Street Global.

International Equities

In 2025, the US dollar's decline boosted international stock indexes performance over major U.S. equity indexes. Although oversold, the dollar may remain weak n 2026 as global markets diversify away from it, potentially benefiting U.S. investors with stronger returns abroad. Domestic stocks remain expensive, making international equities—currently at a 20-year low relative to U.S. stocks—more attractive. The All World Equity Index EX US Equities (MSCI ACWI ex USA Index) trades at 14.6 times earnings, below its 10-year average and significantly discounted compared to the S&P 500 at 22.8. Earnings abroad are accelerating from a low base as economic conditions improve due to pro-business policies. Emerging markets are projected for the highest earnings growth at 18.1%, compared to 14.9% in the U.S. and 11.1% in Europe.

Bond Allocation Update

Bonds continue to serve an essential role in portfolio diversification by mitigating equity market risks. With yields now at normalized levels, bonds present decent risk-adjusted returns. The current environment of monetary easing supports both fixed income and equity assets. Longer maturities beyond Treasury bills presently provide moderately higher income, consistent with this stage of the monetary easing cycle. Last quarter, the yield curve moved lower as the Federal Reserve indicated possible rate reductions in response to increased downside risks in labor markets. Even following a rate cut, yields on short-to-intermediate bonds remain above inflation, which enhances the relative attractiveness of fixed-income securities. The short-to-intermediate segment of the curve offers an improved balance between yield potential and duration risk. Whereas there are risks to buying Long term bonds due to growing national debt.

A tactical overweight in investment grade short-to-intermediate-term corporate bonds is advisable, while long-duration exposures should be underweighted unless recession risks intensify. These segments help protect against inflation and typically perform well during periods of economic expansion. Long-term bonds are less favorable given the expectation that the Federal Reserve will implement fewer rate cuts amidst ongoing economic and labor market strength.

Historically, short-term-to-intermediate bonds have outperformed cash during periods when the Federal Reserve has maintained or reduced policy rates. Preference is given to high-quality short-term credit instruments, particularly investment grade corporate bonds. Securities with maturities of one to ten years offer attractive yields coupled with limited interest rate sensitivity, providing portfolios with resilience against sell-offs impacting longer-dated maturities.

Bond Sectors

Currently, an overweight position in intermediate-term corporate bonds is favored, as these securities effectively address interest rate, purchasing power, and credit risks while delivering competitive yields.
In addition, selective investments continue in non-investment grade U.S. bank loans, which yield more than traditional high yield bonds and offer compelling income relative to their volatility profiles. Although credit spreads widened in December after approaching cyclical lows, they remain below long-term averages. Default rates among non-investment grade issuers remain low and have declined further into 2025, suggesting default risk is concentrated within CCC-rated distressed issuers.

Mortgage-backed bonds have been added for enhanced income and price stability, supported by the Reserve’s accommodative stance, tighter but elevated spreads, and improving market technicals. Notably, the recent announcement of a $200 billion mortgage-backed securities purchase program by Fannie Mae and Freddie Mac significantly strengthens the outlook for the sector.

Treasury Inflation-Protected Securities (TIPS) have historically provided effective hedges against unexpected inflation increases. Allocations to TIPS have been increased as they currently appear oversold due to declining inflation trends and can serve as a safeguard against inflation surprises. Furthermore, TIPS may offer meaningful diversification benefits when included alongside intermediate investment-grade bonds in a portfolio.

Cash Equivalents

Reduce cash equivalents. Portfolio allocations include:
- ETFs holding inflation-indexed Treasury Bills. Offer current income and price stability.
- Investment-grade floating rate notes with minimal duration risk (0.02). Offer higher income than Treasury Bills. Income is adjusted higher with increases in inflation.

Commodities

Accounts have some exposure to materials and commodity investments such as copper, rare earth materials, etc. due to their role as a potential hedge against inflation, geopolitical risk, national security, and fiscal uncertainty. The supply and demand backdrop is also favorable.

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Past results are not predictive of results in future periods. While money market funds seek to maintain a net asset value of $1 per share, they are not guaranteed by the U.S. Federal government or any government agency. You could lose money by investing in money market funds. The market indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index. The S&P 500 Index is a market capitalization-weighted index based on the results of approximately 500 widely held common stocks. The S&P 500 is a product of S&P Dow Jones Indices.