Key Observations
As 2025 drew to a close, the year stood out for defining moments that sought to reshape markets and the global economy. From rapid policy shifts on Liberation Day to the return to rate cuts by the U.S. Federal Reserve and renewed hopes for peace in Europe and the Middle East, the past 12 months have been anything but static. Our 2025 themes, Fragility, Durability and the Age of Alpha proved highly relevant. The near-bear market in April exposed market fragility and fixed income provided ballast when trends turned negative. Bonds delivered their strongest performance in the last few years as prices adjusted to evolving macro conditions. Private markets also stood out, with some exceeding long-term equity return expectations while often taking less risk than broad equity markets.
2026 Themes
Looking ahead to 2026, we anticipate a year shaped by subtle but meaningful shifts. Our themes serve as a playbook for navigating these changes. Current allocations provide a strong foundation, and most portfolios may require only modest adjustments. We are using the start of the year to review asset allocation, rebalance towards long-term targets and reduce risk where it is possible.
AI Playbook dives into the nuance of managing a narrow and exuberant market. We address the seemingly more frequent question: “Is AI a bubble?” and evaluate the asymmetry of potential outcomes. Is it worse to be underweight AI if it rallies or overweight if it falters? History, math and experience suggest it is better to leave some upside on the table than risk being caught in a severe downdraft. Navigating Valuation explores how to manage markets that appear richly valued and identify where green chutes of opportunity may exist. We also assess the role of private markets in mitigating uncertainty without wholesale portfolio changes. Finally, Noise Resistance reviews economic and external factors influencing markets. While the existential weight of AI and elevated valuations present challenges, many indicators point to growth and additional stimulus ahead.
In all, we believe portfolios are well positioned thanks to the groundwork laid in 2025. With modest exceptions, such as selectively adding private markets, portfolio adjustments will likely be limited to start the year.
AI Playbook
AI is poised to be one of the most influential forces in markets in 2026. Public equity markets, particularly in the U.S., are already highly concentrated in AI-related exposure. Whether you are an enthusiast or a skeptic, getting the right amount of exposure could mean the difference between success and failure. Here is our playbook for allocating in an AI-driven market without being distracted by the existential debates.
1. Bubble? The Jury is Out
Let’s start with “bubble.” Classic bubbles share a familiar pattern: displacement, boom, euphoria and bust. Displacement often begins with a kernel of truth and a breakthrough that is genuinely transformative. That spark fuels the boom and the exuberance that follows. History offers many examples: the invention of radio, the expansion of U.S. railroads and the fiber-optic buildout that laid the foundation for the internet, just to name a few. Each innovation changed the world, created extraordinary market opportunities and ultimately led to sharp price declines in related stocks and industries after euphoria took it too far[1].
Those who believe AI is truly transformative must also seemingly agree with the notion that transformative change often carries cautionary lessons. To hold one thought without the other is to ignore history and utter the words “it is different this time,” a phrase that has accompanied every cycle of excess only to be proven wrong. So where are we in this cycle? The boom is clear: adoption, demand and massive investment in research and infrastructure. Euphoria, however, is where the real debate begins.
On the other hand, extremes exist. Consider Thinking Machines, an AI startup founded by a former OpenAI executive. It raised $2 billion in “seed” capital at a ~$10 billion valuation, without a product and reportedly unwilling to disclose to investors what it plans to build. A month later, they went through a second round, valuing the company at $50 billion[2]. Still no product. Still no revenue.
Evidence of exuberance and optimism remains, but as in all cycles, the devil is in the details. Certain pockets of the AI ecosystem will undoubtedly overreach while others will remain disciplined. No one knows precisely where we sit in this cycle, but the approach to investing through it does not change; operate with openness and curiosity, stay disciplined in risk management and focus on long-term, diversified investing.
2. The Facts - Look Inward First
If you own U.S. equities, you have already made an AI bet, and it may be your largest. Roughly 38% of the S&P 500 is tied to companies connected to artificial intelligence[3]. For perspective, ahead of the Global Financial Crisis, financials were the largest sector, representing about 20% of the index. In 2000, technology peaked at 34%[4]. This does not mean AI is a bubble, but it does showcase the market’s enthusiasm for transformative technologies. So before asking how to “get into AI,” recognize that in many ways, you may already be there.
3. Offense - The AI Flywheel
If AI proves to be as transformative as some expect, the benefits may not be evenly distributed. Companies with lower margins and sectors with lighter capital expenditure requirements, particularly service-oriented businesses, may see disproportionate gains. Mid-cap and small-cap could also present opportunities relative to large-cap U.S. stocks, given their exposure to businesses positioned to capture AI-driven efficiencies. That optimism has begun to work its way into earnings expectations and may provide newly found footing for securities outside of the “Magnificent 7.” Identifying these dynamics will be key to capturing upside beyond the obvious names.
4. Defense - Finding the Right Balance
With the facts in hand, sizing risk becomes critical. The top 10 stocks in the MSCI ACWI now account for roughly 25% of the index, nearly triple their share a decade ago[5]. We have been using this opportunity to reduce highly concentrated names in the index, where applicable, and diversifying to other equity asset classes like domestic small and mid-cap names along with increasing fixed income exposure. Why does this matter? Because owning too little and watching AI soar is a better outcome than owning too much and suffering if AI falters. Our analysis shows that capturing some upside is preferable to risking a severe drawdown from overexposure.
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Portfolio Impact AI is already embedded in portfolios, and in a meaningful way. Yet our approach holistically emphasizes measured exposure, thoughtful diversification and a focus on sectors positioned to benefit from AI’s real-world adoption. We remain focused on diversification as we look to maintain target weights within domestic small and mid-cap stocks along with exposure to international developed and emerging markets. |
Navigating Valuation
Across a wide range of metrics, valuations are high relative to history. Credit spreads, the extra yield awarded to investors for taking on credit risk, are low, even as overall fixed income yields remain compelling. In the short term, that may mean very little, but over the long term, it matters. Navigating periods of elevated valuations requires nuance and clear alignment with risk tolerances and portfolio objectives.
As we recast our 10-year forecasts, the “cost” of full valuations comes into view. Our prospective median return for U.S. equity hovers just above 5% (before inflation), ranking near the low end of our historical forecasts. While lower forecasts may not excite, nuance matters. Opportunities exist across global markets. Fixed income remains compelling on both an absolute basis (attractive yields) and a risk adjusted basis (relative to the outlook for public equity). Finally, private market investments, whose value tends to accrue disproportionately during volatile periods, are positioned to help investors navigate full valuations without taking drastic measures. Private infrastructure and other real assets may also benefit if AI-driven demand for computing capacity continues to accelerate. If markets continue their ascent, the asset class may underperform on an absolute basis, but with a modest opportunity cost. However, should volatility rise, they may prove accretive and provide downside protection.
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Portfolio Impact Valuations are important over the long-term, and help determine what level of risk is warranted given objectives and tolerance. Even in a rich environment, opportunity persists. Fixed income offers risk-adjusted appeal with attractive all-in yields despite tight credit spreads. Private markets may offer upside capture should markets continue their upward path while reducing downside risk in a narrow and fully valued market. While private investments may not be suitable for all based on liquidity or complexity, we believe clients without exposure should consider an allocation, and those already invested should review the potential benefits of an increased position. |
Noise Resistance
Investors digested a steady stream of headlines in 2025: tariffs and Liberation Day in the spring, the passing of the “One Big Beautiful Bill,” the Federal Reserve resuming rate cuts after a nine-month pause and an autumn government shutdown that delayed key economic data. Despite the noise and uncertainty, the economy continues to grow, consumers continue to spend and the corporate backdrop remains healthy. Tariffs dominated the conversation early in the year, starting with threats and uncertainty before settling near an average level of ~17%[6].While near-term inflation pressure is expected, the longer-term view remains anchored. Inflation has eased from post-pandemic highs but still sits above the Fed’s 2% target. Shelter costs have been moderating, yet many components of CPI remain above 3%. We believe inflation may ultimately move lower, but the path is likely to be uneven.
U.S. Inflation - CPI (Y/Y % Change)
The labor market showed cracks as the year progressed, with downward revisions in the summer and shutdown-related disruptions. Job growth remains muted, and unemployment has edged up to 4.6%[7]. This set the stage for the Fed to resume rate cuts in September after a nine-month pause. One cut each in October and December, respectively, left the target rate at 3.50%-3.75%. The government shutdown delayed critical data releases, fueling volatility around the December decision and more uncertainty for 2026 rate expectations, but markets continue to price in additional accommodation next year. Debate over Fed independence and Chair Jerome Powell’s successor has added noise and will only increase in the months to come, but market data should remain the key driver of FOMC decisions.
Despite layoff headlines grabbing attention from firms like Meta, the overall employment picture remains stable and the consumer remains resilient. Early data suggest consumers spent nearly $12 billion on Black Friday, a ~9% increase from 2024[8]. Additional stimulus from the “One Big Beautiful Bill” tax cuts, which are estimated to be $150 billion in tax refunds for 2026[9] and a central bank that is more accommodative lay the groundwork for economic acceleration.
| Portfolio Impact: The prospects for growth this year are positive, but signs of moderation and uncertainty in the market persist. Positioning portfolios for multiple outcomes, rather than a single scenario, remains prudent. While all-in yields in non-investment grade remain high enough to compel an allocation, similar to last year we remain tempered in our sizing. With current spreads near all-time lows and credit risk seemingly absent, our emphasis remains on high quality investment grade fixed income. Additionally, we continue to believe select active management strategies have the ability to generate alpha in this market. Dynamic fixed income and private markets offer flexibility to navigate sector divergences, capture market opportunities, uncover mispriced assets and manage risk effectively. |
Portfolio Allocations
Final Thoughts
We enter 2026 with both optimism and realism. Continued stimulus from a more accommodative Federal Reserve, the “One Big Beautiful Bill” and a resilient economy provide a strong foundation for the transformative changes driven by AI, and, by extension, the markets. That said, we recognize that current valuations and pockets of exuberance around innovation introduce risks.
As we weigh the possibilities ahead, we remain mindful of our entrusted role with clients. Ultimately, we are stewards of capital, and it is our duty to protect capital and not speculate with assets that have been placed in our care. After recasting our capital market assumptions and reviewing portfolio exposures, we find little need for material shifts. While modest adjustments may be warranted, and more substantive discussions around adding Private Market investments may arise, we believe current positioning reflects both balanced risks and upside potential.
Sources
[1] FactSet. As of October 31, 2025.
[2] Reuters. November 13, 2025.
[3] BlackRock, Morningstar, Fiducient Advisors. As of November 30, 2025.
[4] Morningstar. As of November 30, 2025.
[5] Morningstar, Fiducient Advisors. As of November 30, 2025.
[6] Tax Policy Center. As of December 11, 2025.
[7] BLS. As of December 16, 2025.
[8] Black Friday Statistics. As of December 2, 2025. https://statistics.blackfriday/
[9] Strategas. As of December 9, 2025.
Disclosures
The information provided is illustrative and for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. This document may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Certain targets within the presentation are estimates based on certain assumptions and analysis made by the advisor. There is no guarantee that the estimates will be achieved.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. The principal risks of Clarendon Private’s strategies are disclosed in the publicly available Form ADV Part 2A.
Diversification does not ensure a profit or guarantee against loss. Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss. Index returns are unmanaged and do not reflect the deduction of any fees or expenses.
Investments in mid-sized companies may involve greater risks than those of larger, better-known companies, but they may be less volatile than investments in smaller companies. Investments in small-sized companies may involve greater risks than in those of larger, better known companies. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. You cannot invest directly in an Index.
Comparisons to any indices referenced herein are for illustrative purposes only and are not meant to imply that actual returns or volatility will be similar to the indices. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. You cannot invest directly in an Index.
S&P 500 is a capitalization-weighted index designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Russell 2000 consists of the 2,000 smallest U.S. companies in the Russell 3000 index.
MSCI EAFE is an equity index which captures large and mid-cap representation across Developed Markets countries around the world, excluding the U.S. and Canada. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
MSCI Emerging Markets captures large and mid-cap representation across Emerging Markets countries. The index covers approximately 85% of the free-float adjusted market capitalization in each country.
Bloomberg U.S. Aggregate Index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
Bloomberg U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt. Eurobonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included.
FTSE NAREIT Equity REITs Index contains all Equity REITs not designed as Timber REITs or Infrastructure REITs.
Bloomberg Commodity Index is calculated on an excess return basis and reflects commodity futures price movements. The index rebalances annually weighted 2/3 by trading volume and 1/3 by world production and weight-caps are applied at the commodity, sector and group level for diversification.
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