The beginning of any new year is a natural moment for reflection and often renewed optimism, as we celebrate achievements, learn from mistakes, and consider what the coming year ahead may hold. Over the past year, in particular, there was much change on many fronts, especially in financial matters, and investors who looked beyond the noise of the moment and instead remained focused on economic fundamentals and managed through some severe bouts of market volatility early in the year were ultimately rewarded. 

Time and again, we have seen that adhering to Sand Hill’s disciplined investment philosophy of rebalancing against market extremes creates long-term value for our clients, and that approach proved meaningfully effective in 2025. The sheer number of “firsts” we have witnessed over the past six years has been remarkable and serves as a powerful reminder of the importance of focusing on the fundamental drivers of long-term market returns: economic growth and corporate earnings. Positive surprises relative to expectations can further enhance results and often lead to outsized returns, and there were many such surprises in the second half of 2025. 

Looking ahead, Wall Street strategists and economists are broadly optimistic, with most forecasting above-average GDP growth. The outlook is supported by provisions in the 2025 federal tax legislation that encourage capital investment through favorable tax treatment for equipment, along with higher-than-usual first-quarter tax refunds stemming from the retroactive application of certain individual tax changes. In addition, policy efforts aimed at supporting housing affordability could lead to a meaningful pickup in the housing market, further bolstering overall economic momentum. All of this comes on top of a backdrop of continued significant investment in—and implementation of—artificial intelligence, which should remain a meaningful contributor to economic growth. 

General expectations for corporate earnings growth are also strong, with year-over-year earnings for the S&P 500 projected to rise by approximately 15% in 2026, well above the long-term annual average of about 9%. The Magnificent Seven (Nvidia, Microsoft, Apple, Amazon, Alphabet, Meta, and Tesla) are expected to deliver earnings growth by an impressive 22%, while the remaining 493 companies are still projected to increase earnings by about 12%. With another year of elevated capital spending on AI infrastructure and continued progress integrating AI into business operations, this level of expected growth appears achievable—particularly if adoption broadens beyond the largest companies.  Plus, cost pressures should stabilize as last year’s abrupt tariffs become baked in. That said, with optimism already elevated, the question becomes where additional upside surprises might emerge and how they could influence market returns. 

In our view, 2025 was largely a year of AI experimentation, with many companies beginning to deploy tools but achieving limited success. These challenges were highlighted in an MIT study published last summer, which showed a 95% failure rate for enterprise AI solutions. As organizations gain a better understanding of how to deploy AI effectively, 2026 may mark a transition from experimentation to more practical and productive use. While we do not yet expect a full realization of AI’s long-term potential, even incremental improvements in adoption could lift profit margins and enhance labor productivity. As a result, despite already above average earnings expectations, there may still be room for some positive surprises. 

However, despite constructive economic and earnings forecasts, investor sentiment is not uniformly optimistic. Many remain skeptical about whether the scale of current AI investment will translate into durable profitability. At the same time, geopolitical risks have moved higher on investors’ list of concerns as the current administration pursues a more assertive approach to expanding U.S. influence and securing access to natural resources. Even more concerning for the economic outlook, however, is the softening in labor market conditions that first emerged last May. 

Hiring momentum then slowed through the second half of the year as job openings declined, wage growth moderated, and layoffs—while still modest by historical standards—became more visible in select sectors. Participation rates stabilized rather than improved, suggesting that the labor supply is no longer providing incremental support to growth. While overall employment levels remain healthy and do not yet signal recessionary conditions, these trends point to a cooling labor market that could temper consumer spending and weaken one of the key pillars of economic resilience. 

That said, with GDP growth projected to have exceeded 5% in the fourth quarter of 2025, interest rates poised for further modest revisions lower, and consumption remaining strong, the labor market softness is being offset by strength elsewhere in the economy. In this environment, we believe the most effective approach is to maintain diversification within portfolios while selectively tilting modestly toward areas offering the most attractive opportunities. Currently, we see increased opportunity in REITs, mid-cap stocks, and international equities. By staying focused on fundamentals, maintaining diversification, and rebalancing through inevitable ongoing periods of volatility, we believe our clients’ portfolios are well positioned to navigate uncertainty and capture opportunities as they emerge.