2025 proved an eventful year by any measure. U.S. investors endured a global trade war, a dollar debasement trade, and political violence reminiscent of the 1960s. Meanwhile, applications of AI evolved from a clever Internet search engine to a tool that can condense hours of work to minutes. Looking abroad, the Ukraine/ Russia war approached its fourth year, China seeks to compete in high-tech innovation and not just manufacturing, and distrust has rarely been higher among the U.S.’s historically strong set of allies.
Despite plenty to fret over, U.S. and global stock and bond markets posted big gains. Up 17.9% in 2025, the S&P 500’s three-year climb of over 80% represents appreciation associated more with a decade of compounding than a few years. Non-U.S. stocks gained 32% in 2025, beating the S&P 500 for the first time since 2017. A 9% decline in the U.S. dollar was a defining catalyst for the outperformance. 
The intermediate government/credit bond benchmark increased 7.0% in 2025 on the heels of three additional 0.25% Federal Reserve interest rate cuts during the year. The Two-Year U.S. Treasury yield is down to 3.5%, which is the lowest since early 2022. Longer-term rates (and by extension residential mortgages and other popular consumer credit vehicles) remain stubbornly high, negatively impacting housing and consumer sentiment. Considering the political focus on interest rates, tough-to-decipher economic data, and diverging views among Federal Reserve Governors, the next Chair set to assume office in May has his hands full.
Reflecting on the incongruent events of 2025, we are reminded that while economies tend to grind higher, innovations often emerge that drive a disproportionate amount of economic activity. For 2025, research firm Gartner estimates public and private companies invested $1.5 trillion in AI-related capital investment. This represented a historic technological leap of faith and helped fuel the year’s economic growth and earnings. In fact, some economists estimate nearly all of 2025’s GDP growth resulted from AI-specific investments.
Whether additional AI investment, eventual returns on those investments, or another innovation drives markets higher in 2026 is unclear. Readers of this commentary know we won’t issue any near-term market predictions, or in Wall Street speak, an “annual forecast.”
On the following pages, however, we will share perspectives on asset valuations, recent market trends, and policy development that inform our current investment strategies. These and other longstanding Woodmont sensitivities – such as how leverage magnifies any mistake or crisis – influence our tactical portfolio decisions.
“The almost singular through line behind every major financial crisis is one thing: debt.” Andrew Ross Sorkin, 1929, Inside the Greatest Crash in Wall Street History
Of course, no tactical investment is a substitute for understanding a client’s goals, near-term financial priorities, and long-term risk capacity. In fact, our experience is that we can worry a lot less about the next market leap of faith if we invest with these important client-specific considerations in mind.
Stock Prices Are Up, But Largely Due to Earnings Growth
The S&P 500 is trading at 22X estimated 2026 earnings. This is well ahead of the twenty-five-year average of 17X but just about the valuation of stocks this time last year. Put another way, while U.S. stock prices were up significantly this past year, so were earnings! In fact, the chart below from Raymond James highlights earnings as the major price driver for 2025 market gains in tech, financials, and consumer discretionary stocks, in particular. 
Fortunately, the 2026 outlook for earnings growth remains strong at 15% for the S&P 500 and 13% for the MSCI All-World indices. (Source: FactSet Data Systems) While at today’s valuations, a lot of good news is priced in, we are encouraged that earnings are the driving force for recent gains versus valuation multiple expansion. The chart below, comparing tech returns and earnings since 2021 to those of the dot-com era, is insightful. Specifically, about two-thirds of the tech gains since 2021 are attributable to earnings growth, compared to less than 20% of the 2000 tech bubble run-up.
Non-U.S. stocks are currently trading at 14.5X estimated 2026 earnings. Having started the year at just over 12.5X, multiple expansion proved a bigger part of the return story for non-U.S. stocks this past year. Having lagged the U.S. indices for several years, and trading in line with historical averages, one would be hard-pressed to conclude that valuation multiples couldn’t improve from today’s levels.
The Pace of AI Adoption Has Some Practical Limitations
The adoption of current AI language model solutions is increasing rapidly among individuals and companies. Many attribute the slow pace of hiring for entry-level positions to the increased use of AI, or at least the expectation of productivity improvements related to AI. Along these lines, many large and high-profile companies have frozen employee headcount levels yet reiterated expectations for robust earnings growth.
“It’s (AI) not going to totally replace humans, but it does create an opportunity to do things significantly different.” Wells Fargo, CEO, Charlie Scharf, who has seen employee headcount fall from 275,000 to 210,000 since 2019
To support the growing demand, the industry will need power. Goldman Sachs estimates that if AI-related demand growth continues at its current pace, in five years it will consume 10% of all power produced. AI either must be delivered more efficiently and/or the cash for data center and grid investments will have to keep flowing - $2.5 trillion between now and 2030 - per the same Goldman study. While we are not betting against AI’s further penetration (including a more efficient version), the power challenge is real and likely tempers the pace of near-term adoption.
Regardless of this power challenge, companies, both large and small, stand to benefit from AI innovations. Considering the ensuing opportunities to increase efficiencies in customer service, administrative functions, and inventory fulfillment, 2026 could be the first year AI applications versus AI capital investment provide a material boost to corporate earnings.
Washington Continues to Ignore the Fiscal Policy Elephants in the Room. What Is an Investor to Do?
Even amidst the proliferation of AI, our clients worry about the risks of U.S. fiscal health as much as any other issue. After all, any business owner, professional, retiree, or non-profit board member can understand how deficits, debt, and unfunded obligations can be financially destructive. Unfortunately, leaders on both sides of the aisle continue to avoid the issue. There is talk of fiscal discipline, but no one has addressed the greatest challenge of our fiscal predicament, mandatory spending (i.e., Social Security, Medicare & Medicaid), which consumes over 60% of the Federal budget. At 27% of GDP, government revenues in the U.S. are significant but certainly a far cry from France’s 47%, where private sector growth has been stagnant for years. (Source: Wall Street Journal) Yet, with so much of government spending set on autopilot, the risk that government largesse could crowd out entrepreneurial, small business, and investor risk-taking is a serious one.
Source: CBO, Federal Budget in Pictures, 2024 Budget Data
Buffer ETFs, gold, and crypto assets are often cited as potential uncorrelated assets or hedges to a U.S. fiscal crisis. Truth be told, the wake of a potential U.S. credit crisis likely leaves few places to hide. And with crypto assets down 30% since October, we are reminded that most perceived hedges come with inherent risks or are expensive to employ.
Our approach in the face of this potentially brewing crisis is to ensure portfolio diversification. This includes owning U.S. and non-U.S. assets to hedge against a weaker dollar, as well as investing in small and large-capitalization stocks in various sectors doing business all over the world. We also prioritize liquidity, limit exposure to leverage on leverage strategies, and recognize the risks a loss of confidence in the U.S.’s fiscal health could have on U.S. Treasuries and the broader bond market. As a result, fixed-income portfolio duration remains under 3.5 years or approximately half of the benchmark.
Finally, we are drawn to companies with compelling offerings and the financial flexibility to adapt in turbulent times. This, in part, means a focus on companies with modest leverage and access to liquidity. No one can predict with certainty if and when “the tide could go out,” but we can do our best to avoid swimming with those we can see are already naked.
What About Policy and the OBBBA?
We issued a review of significant provisions of the One Big Beautiful Bill Act (OBBBA) in July, focusing on how this new legislation impacts individual taxpayers and small businesses. In fact, many of our clients have considered or implemented tax strategies in response to the analysis.
The focus on AI investment and lingering tariff uncertainties, however, seems to have pushed a few interesting components of the OBBBA to the background, including the appeal of 100% bonus depreciation for many businesses. Whether meaningful capital investment outside of the AI realm returns in 2026 due to these OBBBA incentives or others remains to be seen. What we know, however, is that policy visibility matters, and the 2025 on and off-tariff tactics created cloudy conditions at best for those evaluating capital investments, where the inevitable leap of faith is made much easier when the rules are set.
Happy New Year. What is Your Leap of Faith?
With the new year inevitably comes changing priorities, challenges, and opportunities. It is our goal to be your partner when evaluating how life’s next leap of faith can impact your financial plan, or where confidence in your financial plan is an important variable when imagining the possibilities.
“Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world.” Albert Einstein
Thank you for your continued trust and confidence. For many clients, our relationship now spans three decades and includes multiple generations. This partnership enabled Woodmont to reach two significant milestones in 2025—our 25th anniversary and surpassing $2 billion in assets under management.
As always, we look forward to answering your questions and serving as a resource. Wishing you all the best for a wonderful 2026!
The Woodmont TeamJanuary 6, 2026
This document contains general information only and is not intended to be relied upon as a forecast, research, investment advice, or a recommendation, offer, or solicitation to buy or sell any securities or to adopt any investment strategy. The information does not take into account any reader’s financial circumstances or risk tolerance. An assessment should be made as to whether the information is appropriate for you with regard to your objectives, financial situation, present and future needs.
The opinions expressed are of the date of publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Woodmont to be reliable, are not necessarily all inclusive and are not guaranteed as to accuracy. There is no guarantee that any forecasts made will come to fruition. Any investments named within this material may not necessarily be held in any accounts managed by Woodmont. Reliance upon information in this material is at the sole discretion of the reader. Past performance is no guarantee of future results.