Before I get started, I wanted to add my line from our September CIO report since I feel we are getting so close to a normal market cycle correction and/or a buying opportunity.
So, What Do We Do Now?
Even with this broader market participation, it’s wise to take a balanced approach.
- For those fully invested: consider trimming positions where appropriate, especially if in a retirement plan to avoid capital gains. Realizing gains in 2025 might prepare you better for opportunities in 2026 and beyond as you have funds to add to any asset class that may be on sale not just stocks.
- For those with high cash positions: we’re happy to help you reallocate strategically. With markets near all-time highs, we prefer using below-market limit orders to buy quality names and sectors at better value. The focus would be in industry groups or international markets you may be underweight in.
- For retirement accounts: You have the flexibility to adjust risk without worrying about tax consequences—take advantage of it.
What I want investors to try and do now is to be disciplined. If a 10 to 20% drawdown in stocks is going to keep you up at night or change your long-term financial planning goals, then lower risk now. Do not wait until after the market is dropping since that is a compounding effect as institutions and individual investors have a history of selling into weakness after the fact. We have been very tax sensitive in our portfolios this year. Taking some gains in taxable accounts may be the right thing to do for some investors. If not, making a capital gains budget for 2026 can be a good strategy. The best idea is to wait until January and prolong the capital gain tax for another 16 months but, calling the market short term is near impossible.
Plan on how to handle a down year or two in the markets. We just had 3 nice years in a row so having a down year or two in a row would not be unheard of. Most of you know I have been tired of hearing about the MAG 7 and their dominant performance on the S&P 500, well now just replace that term with AI. Artificial Intelligence is part of all our futures but the incredible capital commitment from the top 10 companies is worth watching. Plus, now they are raising money through debt to fund this investment so their balance sheets will not be as strong. AI hyperscalers have issued nearly $90 billion of investment-grade bonds according to Dealogic. Some are saying the U.S Economy has become hooked on AI Spending.
Don’t get me wrong, AI will be great for many industries not just tech, but getting there it can get over its skis in a hurry, so be patient. Use fundamentals when investing and do not follow the herds. If you think power companies will benefit from all the energy AI companies and data centers will need then do the research. Would I buy that company on fundaments, good management, cash flow, and history of performance? That is what we are doing every day for your portfolios.
If the market rally continues in 2026 you have quality companies that will continue to grow. If the market corrects and the economic cycle ends, you will have cash to deploy in other asset classes or stocks at better values.
2026 will be the second consecutive year of rate cuts. Historically in the second year there is some outperformance:
- Financials up 23.1%
- S&P Midcap up 18%
- Healthcare up 14%
The research firm, CFRA has 3 overweighted sectors for 2026
- Communication Services- Ongoing shift to digital ad spend, 2026 events: Winter Olympics, mid-term elections, World Cup, AI monetization.
- Financials- Lower rates continuing through 2026; Improving credit quality; Expected M&A turnaround; Declining credit spreads.
- Information Technology- Compelling valuations, strong EPS growth improving CapEx visibility, plus beneficiary of lower rates and rising M&A
I do think healthcare and value stocks will be important in 2026. Energy valuations are good, and dividends are high but will need some catalyst to drive returns so will need some patience. If the AI machine continues to rule, then industrials could have another excellent year.
Cash rates are going to be lower. Money market funds were getting near 5% in 2025 and around 4% most of the year, now they are in the mid 3% range. Rates may go lower. One strategy would be CDs and Treasuries. If rates do fall, the value of bonds and treasuries will rise.
A recession is looking a little more unlikely than earlier in the year. Indicators look to slight economic slowdown but no recession with first Q GDP and maturity of 2026 in the 2.2% range.
Putting my CFP hat on please reach out if you have any year-end tax questions. One thing I do want to point out is charitable giving and less favorable rules for 2026. Deductions will be subject to .05% of AGI if you itemize so check with your CPA on bunching multiple donations this year then spread out those donations in future years. Donor Advised Funds are a good option here but check with your tax professional.
One last thought on AI is that Open AI’s ChatGPT is still the most popular with 800 million users per week, compared to Gemini’s 650 million monthly users but Gemini 3’s advances last week may change things. And as far as shareholder participation, if you are reading this you either own Alphabet/Google directly or indirectly in your retirement plans and the stock performance year to date and last week is supporting this leadership position. Open AI is not a publicly traded company the same as Anthropic.
To quote Salesforce CEO Marc Benioff “I’ve used ChatGPT every day for 3 years and just spend 2 hours on Gemini 3. I’m not going back. The leap is insane- reasoning, speed, images, video…everything is sharper and faster. It feels like the world just changed, again.”
Wishing you a lovely Thanksgiving week and a joyous holiday season!
Bill
