• Despite a pickup in volatility and bouts of weakness in both October and November, all major asst classes are on track for a positive fourth quarter and a strong 2025. Risk appetite faced multiple setbacks during the quarter. The government shutdown created uncertainty early on, and November saw a sharper pullback driven by weakness in AI and tech. The risk-off move was broad — impacting tech, crypto, and credit — but short-lived. Markets rebounded by month-end as the shutdown ended and fundamentals strengthened, highlighted by Nvidia’s strong earnings and upbeat revenue outlook. Absent any major disruptions, investors should be satisfied with 2025 performance across asset classes: equities are tracking robust double-digit gains (the S&P 500 is currently +18%, and the ACWI ex-US is +30%), and core fixed income is on pace for its best returns in five years (Aggregate is +7%).
• This year was driven largely by policy shifts — a new administration, trade developments, Fed actions, and the tax bill. In 2026, the focus will shift to how the economy responds to those policies. The outlook remains tilted toward a bullish stance for risk assets, supported by tailwinds such as a healthy consumer, fiscal stimulus from the tax bill, tariff revenues, and continued AI-related spending. At the same time, slowing service prices and wage growth should help contain inflation. This environment suggests the Fed may adopt a “one-and-done” approach to rate cuts in 2026, though decisions will remain data-dependent, with jobs data taking center stage. While we expect further labor market weakness, the hurdle rate is lower than in past cycles given a shrinking labor force.
• Key non-economic risks for 2026 include:
  • AI Capex and Funding Needs – Heavy AI investment could strain valuations, with revenue timing mismatched against stretched P/E ratios. Increased debt issuance may pressure credit ratings and widen spreads.
  • Private Credit Cracks – Weakening credit metrics in a low-liquidity environment could expose vulnerabilities.
  • Fiscal Fears – While less of a concern now, any dilution of tariff revenues or unexpected spending (e.g., tariff rebates) could reignite worries and drive volatility in long-term rates.

We carry a small overweight in equities vs. fixed income. Given our base case that the US will avoid a recession, navigate trade risks effectively, and benefit from supportive monetary and fiscal policy into 2026, we see relative upside potential in equities compared to bonds.

Macro drivers remain supportive for equities heading into 2026, with strong earnings expectations, continued AI investment, and a favorable balance between policy and growth. That said, valuations and concentration risk are elevated and warrant caution. Returns are likely to come from earnings growth rather than multiple expansion, making tactical shifts and a focus on diversification and valuation opportunities essential.

Key positioning into 2026:

• Above-benchmark beta to capture upside
• Lower average valuations vs. benchmark
• Overweight US vs. International
• Tactical overweight in small caps, banks, healthcare, and retail

2026 is expected to strike a balance between Fed easing and lingering labor market concerns, keeping yields modestly lower while still at attractive levels for total return. With limited room for further spread compression, continued economic growth and strong corporate fundamentals should help keep spreads tight. Similar to 2025, yields will be the primary driver of returns, making active risk management and a focus on valuation opportunities essential.

Our key positioning into 2026:

• Drive excess yield through a diversified spread sector overweight
• Balance spread risk with extra duration
• Diversified non-core, favoring bank preferreds and higher-income securitized