Market strategists are expecting a continued strong stock market this year, but what are we supposed to do about it? How is the answer different if you’re continuing to save versus spending during retirement?

One obvious answer if you’re still saving is to keep buying. Stocks, of course, and this is even more true when the market is volatile. The answer gets complicated if you’re retired or planning to retire soon, so we’ll save that for next week.

IRA contribution limits for 2026 are $7,500 for those younger than 50 and $8,600 for those 50 or older. If you’re still funding for 2025, the limits are $7,000 and $8,000, respectively.

401(k) limits for this year are $24,500 with an over 50 catch-up of $8,000, plus $11,250 more if you’re aged 60-63.

So, you have room to save if you can afford it, but what do you buy?

If your aim is to invest in the US stock market, you’d usually buy an S&P 500 index fund, a “large cap” US fund, or total market fund. By far, index funds are the most straightforward way to access the stock market, and I’ve been using them for a long time. For good reasons, asset growth of these funds has more than doubled in the last ten years to something like 40% of all fund assets.

That said, S&P 500 index funds track the 500 largest stocks traded in the US across 11 sectors and (typically) simply organize them by size, regardless of their sector. For a while now, index performance has been driven by the Technology and Communication Services sectors, since that’s where the AI and AI-adjacent companies live and that’s what investors are excited about. Taken together as of last Friday, those two sectors are worth 46% of the S&P 500. Of that, 35% is the Tech sector, which itself is dominated by AI-related names. NVIDIA, Apple, Microsoft, Broadcom, and Micron Technology collectively make up nearly half of the Tech sector, while NVIDIA, Apple, and Microsoft alone represent 38%.

The combined 46% market weight of these two sectors was almost this high during the Tech Bubble, but we’ve also seen it move around a lot, even to less than half that if we look back over a few decades. The two sectors comprised barely 15% of the S&P 500 before Netscape’s ill-fated browser and Microsoft’s Internet Explorer were launched in the mid-90’s, and around 30% pre-Covid, for example. Our economy has changed a lot over that time span, and many argue that the growth of these two sectors shouldn’t be worrisome because it represents our evolution as a tech-based economy.

While that makes sense, one of the issues for investors is knowing what you’re buying and how the holdings and risk profile of these index funds change over time. The Tech sector itself, for example, has different top holdings than ten or 20 years ago and is about 50% more volatile than the S&P 500. This extra volatility feeds into the broader index and helps to amp up risk as the Tech sector weighting grows. In other words, the S&P 500 fund you bought a decade ago looks different today and is often more volatile.

So, if you’re still growing your nest egg, having most (or all) of your money in a broad US stock market fund has worked and will work because it’s primarily a bet on our economy, and for all our bumps and bruises it’s long been a bad idea to bet against America. That said, at least in the near term it’s also looking like more of a bet on the future of AI. At this point slightly more than half of the S&P 500 is still invested across nine other sectors, but will we see that flip to AI-related sectors not just driving performance but also holding most of the index value? It’s possible.

Interestingly, that balance has shifted over the last few months. S&P 500-based funds that “equal-weight” their holdings instead of by size have been outperforming the traditional version, and dividend-oriented funds that naturally avoid the big tech names, have also been outperforming. This may be some reasonable reshuffling after such a good run, but it’s also a reminder that there are 11 sectors, not just two.

I guess the point I’m endeavoring to make is that index funds are useful tools for accumulating wealth, but they’re continually changing beneath their static label. It’s best to understand those changes to know what your investment exposure is within the fund or funds you own, if it’s still appropriate for your situation and what you might be missing, all while keeping the peddle to the metal when it comes to saving.

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Although the stock market closed the fourth quarter (Q4) with a bit of a whimper, last year was a good one. We saw surges of volatility throughout, especially in the second quarter, but much of the year was surprisingly quiet (at least in terms of volatility) and productive, with major indexes gaining double digits. The evolving AI landscape continued to lift markets while news of tariffs and shifting expectations for interest rates acted as counterweights. Myriad issues impacted investor psychology during the year, such as federal government layoffs, a federal shutdown, and potential problems at the Social Security Administration, but these didn’t have a direct impact on markets.

Here's a summary of how major market indexes performed during the quarter and for the year, respectively.

• US Large Cap Stocks: up 2.4% and up 17.7%
• US Small Cap Stocks: up 2.3% and up 12.7%
• US Core Bonds: up 0.5% and up 7.1%
• Developed Foreign Markets: up 4.8% and 31.6%
• Emerging Markets: up 5.5% and 34%

US stocks had a respectable Q4 and solid 2025. While it seemed like anything related to AI rose during the year, actual performance was mixed. The so-called Magnificent Seven stocks were up nearly 28% for the year as a group, but that average return spans Alphabet (Google) rising over 65% to Amazon climbing about 6%. Collectively these mega-cap stocks comprise over a third of the benchmark S&P 500’s market value, so their outperformance lifts the market average. At least within indexes containing a large weighting to these stocks. Indexes that don’t, such as the Dow 30 and others that organize holdings equally instead of by company size saw returns last year of 14% and around 10% or 11%, respectively. Across sectors, Tech and Communication Services, where most of the AI exposure resides, each rose by over 20% last year while most other sectors were up by the mid-teens. Only two of the eleven sectors, Consumer Staples and Real Estate, were down on the year but only by around 1%.

While US stocks got most of the news, foreign markets outperformed handily. This followed years of underperformance and was primarily driven by the US dollar having its worst year since 2017. Also, better stock valuations and fiscal stimulus by foreign governments helped, and massive investment in AI benefitted certain Asian markets. Tariff announcements by the Trump administration during April also helped, albeit indirectly. Tariff concerns were percolating in the markets as 2025 began, allowing foreign stocks to outperform during the first quarter. Then April hit and foreign markets were seen as a haven while the US market experienced a correction. Markets quickly rebounded in the US, losing less than a percent during April after being down nearly 15% at one point. But at their worst in April foreign stocks, as measured by the MSCI EAFE index, were only down about 3%. That was a springboard for the rest of the year that otherwise tracked with the S&P 500. Gold and other precious metals also benefited from some of these issues. A common fund tracking major metals returned almost 70% for the year and silver rose by a whopping 145%. These returns also reversed multi-year periods of underperformance.

Tariff-related fears largely subsided over the following months as the Trump Administration repeatedly backpedaled from its original sweeping tariff plans. This allowed investors to mostly look beyond recession fears that appeared overnight during April. The focus shifted to the seemingly more pressing issue of the Federal Reserve’s interest rate policies. Markets had “priced in” multiple rate reductions by the Fed during 2025 and investors mostly got what they wanted. The Fed reduced short-term rates by a quarter point three times, which lowered borrowing costs for some in the economy and helped provide a tailwind for the stock market. But longer-term rates, which the Fed doesn’t directly control, rose into year-end and kept borrowing costs on mortgages, for example, stubbornly high. As of this writing, the Fed is expected to lower rates again maybe twice in 2026, but that’s a moving target. These shifting but generally positive expectations also helped the core bond market, which returned around 6% to 8% in 2025, depending on maturity period and issuer type.

Otherwise, we begin 2026 with low risk of recession and analysts, at least on average, are targeting around a 10% annual return for the S&P 500. They’re slightly more bullish for this year than usual and that’s mostly due to the economic tailwind from massive AI-related investment lasting a while longer – maybe that’s Pollyannish but that’s the environment we’re in – excesses can last awhile. So, we should take these predictions with a grain of salt and some even see them as a contrarian indicator. Still, it’s helpful to know what Wall Street is expecting.

While I’m optimistic about 2026, it’s prudent to expect amped up market volatility. Analysts are bullish on stocks and that’s great, but retail investors have been bearish on the markets and economy for some time, even as markets trended higher. How much of this is based on headlines that have little directly to do with the markets is debatable. But there’s no doubt that uncertainty around social, financial, and economic issues is elevated in many households and boardrooms around the world. That’s nebulous as a catalyst but fosters an environment where larger market swings are just a headline away, so be prepared for it. The financial side of preparedness is straightforward, involving carefully and continually reviewing your portfolio for rebalancing opportunities while ensuring your money is always in the right place. The emotional side is harder, of course, and is why being a long-term investor is so difficult.

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We’re approaching the end of a good year for stocks and bonds, both at home and abroad. Volatility has picked up in recent weeks, and anything can happen prior to Dec 31^st, but there’s still a tailwind pushing us into 2026 and that’s a good thing.

That said, excess performance of major market indices like the S&P 500 is (and has for a couple of years now) been coming from a handful of stocks. That’s not news, of course, and we’ve discussed it multiple times. But it’s important to monitor the evolution.

At last check there were nine trillion-plus dollar companies in the S&P 500 and, collectively, they make up about 40% of the index’s market value. Of those, Google and Broadcom are each up nearly 70% this year and Nvidia is up 36%. Not all the biggest companies are having a banner year, such as Berkshire Hathaway up a solid 11% and Amazon up only 4%. But the outperformers are big enough and are outperforming enough that the S&P 500 is up nearly 17% year-to-date while the rest of the market is fair to middling.

We can see this disparity when comparing the S&P 500’s return to an index fund that weights the same index components equally versus by size. A common example, Invesco’s Equal-Weighted S&P 500 fund, ticker symbol RSP, is up about 10% this year. Large cap dividend-oriented stock funds are up about 13%. Those are solid returns from the bulk of the rest of the market but the Tech sector’s 27% and Communication Services up 20%, plus their combined index weighting of about 46% as of yesterday, has added real oomph to the bottom line of lots of portfolios.

Given this performance imbalance, rebalancing is a good idea as we close out the year. I mentioned this last week as well but it’s worthy of repetition. This is especially true if you’ve been getting extra lift from AI-related stocks, perhaps through holding common stocks, larger positions in broad market index funds, or both.

Maybe you have outsized but low basis common stock or mutual fund positions in your non-retirement account. If so, try to work around these while rebalancing across your whole portfolio. Sometimes there’s a limit to how much you can rebalance because of potential capital gains taxes on those low basis positions but do the best you can. Remember, rebalancing is most easily done within retirement accounts because you don’t need to worry about capital gains taxes.

If doing this yourself, you could review your holdings to see how “overweight” you are in the Technology and Communications Services sectors. As mentioned above, they comprise about 46% of the S&P 500, which is generally used to determine the overall market weight. Consider cutting combined exposure by around half since that’s about where it was before the public launch of ChatGPT two-plus years ago. Perhaps diversify into something like an equal-weighted fund like RSP, a dividend-oriented fund, or anything else that keeps you invested in stocks while reducing exposure to overheated sectors. Major foreign stock indexes like the MSCI EAFE also offer a substantially reduced weighting to these sectors while enhancing diversification, so an index fund based on that could also be a great choice.

I’m not suggesting an imminent decline for AI stocks, by the way. There seems to be a tailwind here too. Instead, I’m suggesting that trimming from your winners and adding to good quality underperformers is prudent and works well when managing portfolios in the real world over the longer term. This is counterintuitive but reduces overall volatility while creating opportunities to generate spending cash – often when the market is high. And as the saying goes, you never go broke by taking a profit.

Also important this week is the Fed holding its final rate-setting meeting this year on Wednesday. As I type, the CME FedWatch tool indicates a roughly 90% chance of another quarter point rate cut. This has whipsawed around in recent weeks, but the current thinking is one more rate cut now and then a wait-and-see approach from the Fed until deeper into 2026, maybe next summer.

This is one of those good news, bad news dynamics when the markets love low rates so long as they’re for the right reasons. But the Fed doesn’t have much reason to lower rates further than where we’re expected to be tomorrow, which is ultimately a good thing for the economy. Still, the markets are known to throw tantrums when they don’t get what they want, so the Fed’s tone and specific verbiage will be closely studied in the days ahead.

Other than that, have a great week!

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Last week we discussed Wall Street expectations for 2026 being a bit loftier than normal. Of the 18 firms tracked by my research partners at Bespoke Investment Group, all are expecting positive returns for the S&P 500 this year, from gains of a few percent to the high teens. Regardless of the specific numbers, it’s good know what these firms think, even if some consider such consensus a contrarian indicator. So, I wanted to dig into those predictions a bit this morning.

First up is, “Equities, Bubble or Boom?” from JPMorgan simply because they’re first in my inbox. The title says it all and is essentially where most analysts are at this point. While JPMorgan thinks we’re on track for another year of double-digit gains for the stock market, the AI bubble question dominates the list of risks. Earnings growth for the Magnificent 7 keeps being revised upward while the rest of the S&P 500 is being revised down. This means, at least in general, that strategists expect another year when performance from a handful of AI-related stocks (The Mag7 has expanded to maybe ten stocks) lifts the whole market. The gist is that these companies managed to grow so strongly last year amid a middling economy that they should be able to repeat due to continued massive infrastructure investments, having ample cash (on hand and via borrowing capacity) and increasing demand for AI services. The strategists suggest that “… bubbles burst into nothing, but the AI theme is building real infrastructure to meet growing demand.” Further, “The stakes are high, and visibility into the ultimate winners limited, but this looks less like a bubble and more like the tumultuous beginnings of a structural transition.” We’ll see…

Next, we have Morgan Stanley, who is bullish for 2026 and whose forecasts tend to be pretty accurate. Morgan says the US should outperform the rest of the world, which flips the script from 2025. They expect a 14% return from the S&P 500 but, as I mentioned previously, the exact number is less important than the trend. Like other analysts, Morgan sees the trend continuing with several tailwinds for stocks coming from market-friendly fiscal policies, expected interest rate cuts from the Fed, and continued investment in AI infrastructure.

Then we have predictions from Schwab strategists who tend to be conservative, which is a good check on a sometimes-exuberant industry. Schwab seems more focused on stock prices being too high in a US market that’s still being driven largely by the handful of companies already alluded to. This leads to a low margin for error and potentially amped up volatility, but within the context of a market that can churn higher. Schwab still expects more from foreign markets like Europe due to better valuations, higher dividend yields, and domestic spending plans in countries like Germany, so that’s interesting as well.

Last, we have my research partners at Bespoke Investment Group. They suggest that prices are high, but fundamentals are generally good. And we’re starting to see more companies performing better, both AI-related but also in other sectors and styles, such as small caps and dividend-oriented stocks. Rotations into and out of industries, sectors, and styles are healthy but can be unsettling.

Like JPMorgan, Bespoke reminds us that “toeing the line” isn’t in the market’s character. Following the 23 times when the S&P 500 was up from 10% to 20% in a year, median gains the following year were nearly 12% with positive returns 70% of the time. That sounds good but it has only happened three years in a row a few times. And based on market history, the tech-heavy NASDAQ has had five other runs like the last three years and, in year four, was up twice and was down three times, one of which was a 33% drop in 2022. Couple that history with the potentially contrarian indicator of how bullish strategists are and it’s best to expect a bumpy ride this year even amid positive returns.

Also from Bespoke is a summary of the firm’s 2026 Investor Sentiment Report. Interestingly, participants reported the biggest risk for market returns being an economic downturn, even for those who are bullish on stocks. This risk was followed in order of importance by the political environment and persistent inflation. “Other” was tied with “AI bubble” for last place. If anything, this underlines the nervous optimism pervading many positive market predictions right now.

To summarize… while these are only predictions and there are naysayers, most strategists are not expecting the AI Bubble (if we should even call it that at this point?) to pop this year. They’re also not expecting a recession. The US stock market, or at least parts of it, is expensive but still worth it based on growth prospects. And it’s prudent to expect more volatility this year.

So that’s the direction I’m headed in but not blindly. I’m spending even more time fretting over portfolio allocations and looking for rebalancing opportunities based on what the market is doing and not simply based on a calendar. I suggest you do the same if you’re managing your own portfolio.

In the coming weeks we’ll look at other market predictions and scenario-based ways to prepare.

Have questions? Ask us. We can help.

Good morning! This is a quick note as I sign off from these posts for the remainder of 2025. I'll still be working, of course, just taking a little more time to be with family and friends this holiday season. I hope you get to do the same! I'll be back at it during the first week of January with my Quarterly Update. Until then, happy holidays to you and yours. 

- Brandon

It’s that time of year again when the calendar seems to speed up as Dec 31^st approaches. Of course there’s lots of holiday spirit and fun in the meantime, but year-end also brings financial deadlines that can be stressful. Let’s take a few minutes to review some of the bigger ones from my perspective.

Leveraging capital gains…

Consider your spending needs. Do you need to generate cash for monthly spending into next year or do you have a large expense coming up? If so, look to your brokerage account to help fund this.

The stock market has done well and you likely have unrealized capital gains in your brokerage (non-retirement) account. This type of account can be cheaper tax-wise when you’re looking to generate cash because you can sell shares of an investment and only pay taxes on the gain. If you’ve held the investment for at least a year the gain is considered long-term and would be taxed at a 15% federal rate for most filers and 0% for those with low taxable income. If you held the investment for less than a year it’s considered short-term and taxed as ordinary income, so selling long-term gains is preferable. Your brokerage firm should have these details if you’ve bought your investments within the last dozen or so years.

The calendar matters because anything sold by Dec 31^st counts for this year’s taxes. Have you’ve looked at where you might be within the federal tax brackets? Are you in a low enough bracket that your capital gain rate is 0%? Whichever bracket you may be in, do you have a good amount of room before the next higher bracket?

Whatever the situation, you can use the calendar as a tool. Say you’ll need $40,000 for a purchase early next year. You could sell some of an investment this year to stay within your current bracket and the rest in the first days of 2026, straddling tax years while still getting your cash. This sort of maneuvering might seem too complicated but it helps your after-tax investment return over time.

The good news, at least from the standpoint of simplicity, is that calculating capital gains doesn’t really matter for IRA or 401(k) distributions, if that’s where your money is. However, regular distributions from retirement accounts are taxed as ordinary income so you should still try to manage your bracket position as we approach year-end.

Maybe you don’t need cash but want to rebalance after a good run for stocks. If so, it’s usually better to rebalance your household portfolio from within your IRA and 401(k) if possible because buying and selling within retirement accounts isn’t taxable year-to-year; only distributions are taxable.

Funding your retirement account…

Individuals get until next tax season to fund their IRA or Roth IRA for 2025, so that’s not necessarily a near-term deadline.

Employer-related accounts are another story. Employees have to fund their 401(k) and other workplace plans by Dec 31^st while their employers have until tax time the following year to make profit-sharing contributions. The same timing applies if you’re self-employed with no employees or maybe only have family as employees – you make contributions both as the employee (by year-end) and employer (by tax time).

The maximum 401(k) contribution as an employee is $23,500 this year with an added $7,500 if you’re age 50 or older (and maybe a little more if you’re 60-63). It’s common for people, especially busy self-employed folks, to assume they’re on track to fully fund their account only to find out too late that they’ve undershot, so take time to double check and make corrections prior to year-end.

Taking your RMDs…

The rules governing required minimum distributions have been evolving, and again earlier this year. However, the current required beginning age for RMDs is 73, so if you’ll be that age by year-end, you’ll want to take your taxable distribution by Dec 31^st or pay a hefty penalty. Granted, you get a slight reprieve if it’s your first RMD year because you can delay until April 1^st of next year. But then you’ll have to take two distributions next year (the late one and the current one) and pay taxes on both. While this sometimes makes sense from a tax planning perspective, I rarely recommend it.

Your brokerage firm (and humble financial planner) can tell you what your RMD is so it’s usually straightforward to get this done on time.

Or Gifting them…

One alternative to paying taxes on your RMD is to give some or all of it directly to charity from your IRA (not from your checking account, and up to $108,000 per year per individual or double that for a couple assuming the spouse has their own IRA). Doing so negates income tax on the distribution. The catch is that checks sent to charities by your brokerage firm must be cashed by Dec 31^st to qualify for this tax year. So contact your IRA custodian to get these out asap if you’ve been on the fence.

Or gifting appreciated stock…

Another way to give to charity is via shares of stocks that have done well within your brokerage/non-retirement account. Ideally, these would be your highest gain shares so the charity gets the full value of the gift while you don’t need to worry about eventually paying the capital gains taxes yourself; it’s a win-win but the transfer has to complete before year-end to count for this tax year. You can do this via your brokerage firm usually within a few business days and it shouldn’t cost anything but your time.

The One Big Beautiful Bill Act made some changes to the rules for gifting appreciated stock so you should consult with your tax advisor before doing anything. That said, if you normally itemize your deductions, aren’t in the highest tax bracket, and plan to give more than, say, a couple of thousand to charity, this likely makes sense for you.

Or batching your gifts…

The aforementioned OBBBA makes it advantageous for some taxpayers to “batch” several years of their charitable giving of appreciated stocks into 2025. The reason is that starting next year some taxpayers may find themselves no longer itemizing their deductions and only getting to write off up to $2,000 (for joint filers) of charitable giving. So talk with your tax advisor and consider batching gifts directly to charitable orgs or giving to a donor advised fund, both by Dec 31^st.

I’ve breezed through a bunch of details so let me know of any questions. Otherwise, good luck as we finish out the year!

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