2025 kicked off with a lot of consternation and worry regarding how tariffs would prompt higher inflation, interest rates, slow global commerce and possibly even cause recession. After some seemingly extravagant tariffs were announced, then later revised back and forth, the stock market swooned in early April under a cloud of uncertainty. Then, it became clear that tariff threats were being used as a geo-political / trade opening negotiating tool, not meant to be permanent like the Smoot Hawley / Fordney McCumber tariffs of the 1920’s. Those tariffs were ideologically driven trade barriers (that were indeed one of the causes of the Great Depression).
Fast forward to January 2026 and US GDP is growing at a robust 3.5% annualized rate with inflation modestly lower from 3% to 2.7% and US T Bill yields falling from 4.19% to 3.58%. The unemployment rate has risen a bit; 4% to 4.6%, however reflecting mostly fewer public sector jobs (not part of the real economy). Most impressive, stocks climbed 17.9% in 2025, including dividends, propelled by average earnings growth of 12%.
As we turn the corner into 2026 ‘affordability’ is a major topic among (particularly young) consumers. Everything is more expensive from compounding inflation, averaging 5% annually since the Covid years. Energy prices are an important factor influencing inflation. Boding well for lower inflation in the future are recently declining oil prices (likely to resume a downward trend)., from $75 per barrel last year to the current $56 per barrel.
Going forward, risks remain as equity markets approach full to excessive valuation with the S&P 500 Index price to (trailing) earnings ratio at about 30 (compared to 26 at the 2000 dot.com peak). Excluding the ‘Magnificent 7’ tech names (Alphabet, Amazon, Apple, Microsoft, Nvida, Meta and Tesla), the average PE ratio is about 18 to 22, still on the high side but far more reasonable. The sky-high average PE ratio of the ‘Mag 7’ at 47 times trailing earnings is more rational today vs. the dot.com stock PE 25 years ago because AI is quite legitimately a monumental change agent. Economically, AI is developing into another ‘industrial revolution’ size and scale impact, improving earnings and making everything more efficient, whereas the dot.com era was largely hyped and shallow.
Capital investment commitments to the US are also a significant economic growth catalyst. Apple is planning a $600 billion US investment; the EU, $600 billion; Saudi Arabia, $1 trillion; Japan $550 billion; Tiawan Semiconductor, $165 billion and Hyundai, $21 billion and there will be others being hammered out in trade negotiations. Since the 18th Century, economists have all agreed that the general or average standard of living of a nation’s populace positively correlates with the amount of capital investment – foreign or domestic.
Along with maintaining a balanced, asset allocated, broadly diversified approach in high quality, income generating investments, we believe investment portfolios will continue
benefiting from lower taxes, declining interest and inflation rates and other economically positive developments.
