Welcome everyone, and thank you for joining us for our 2026 Market Outlook and Economic Update. I’m Stephen Rischall and I’m joined today by my partners David Jacobs and Matt Stadelman.

Before we get into the markets and the economy, we want to take a moment and share a little bit with you about our mindset. The last few years we’ve been describing ourselves as cautiously optimistic, but today we would describe ourselves a little bit differently as hopeful realists.

What is a hopeful realist? Well, to us, that means two things can be true at the same time, even though they might be a little bit contradictory.

So today we’re optimistic about long-term growth, innovation, and opportunity, but at the same time, we’re realistic about market cycles, risk, and human behavior. Our goal for this presentation today is to help you stay informed, confident, and grounded in realistic expectations, even when the world around us is noisy and contradictory.

Let’s start with a little bit of a reminder about something that affects all of us. It influences how we interpret what we see and feel on a daily basis. And this is our recency bias. It’s one of the most powerful tools and forces in investing and behavioral finance because it’s our tendency to put too much weight in what just happened and assume that it will continue, whether it’s good or bad.

Looking back at the last three years, the stock market has almost doubled. There’s been lots of volatility and stress, but it’s a really clear picture, right? Inflation feels permanent, but large market returns feel normal, and risk feels a lot lower than it really is.

The problem is the markets and the economy, they don’t move in a straight line. They move in cycles. So it’s time to shift our focus forward from the rearview mirror to the windshield.

I think that’s why you might watch this Outlook video and watch another Outlook video and come away with two totally different trains of thought. Or maybe more relatable, it’s like watching a news story on MSNBC and the same story on Fox News — same information, totally different perspective.

With that in mind, let’s take a look at what the market’s been telling us and what’s happening underneath the surface.

I want to call this chart the stealth bear market because it was going to surprise a lot of you. Despite the market almost doubling over the last three years, and the S&P being up almost 18% last year, when you look under the surface, over a third of the stocks in the S&P were actually negative for the year.

And what’s also surprising is that’s not that unusual. In most years, about 30 to 40% of the stocks in the S&P are actually down, but it really depends on which stocks are down.

So, as you were probably all aware of the Magnificent Seven, big tech has been leading the markets for quite some time. With those stocks doing quite well, it meant smaller companies didn’t do as well. Big tech makes up over 30% of the market right now, and if we add back a couple other very large companies like Amazon and Tesla — which aren’t technically tech companies — technology actually represents over 40% of the market.

So what that means is while markets like this can continue to rise, they tend to be a lot more fragile and more sensitive to changes in sentiment and fundamentals. It’s not a prediction of what the market’s going to do, but it’s an explanation of how this market’s been working.

If you owned the S&P 500 last year, it felt great. If you didn’t own any stocks, it probably didn’t feel as good. And hey, if you happened to own just a handful of the right tech companies, you got super lucky.

But keep in mind, this market cycle can last a lot longer than people might expect. We’ve seen periods before where stock performance remains concentrated in specific names or industries for many, many years. But what history tells us is this type of change really influences the risk that investors are taking, oftentimes without people realizing how much risk that is.

I think a great example of this is Apple stock. They’ve been a great story for decades. A huge growth company, the first trillion‑dollar company back in 2018. They’ve been a real market leader for a long time, but to a lot of people’s surprise this past year, they underperformed the S&P 500 by a lot. They used to be the most valuable company in the world, and more recently they’ve dropped down to number three.

Now that we know the market, especially performance, has been very concentrated in large tech, I think the question is: what are we paying for this growth? What are we paying for this concentration?

Currently, with a forward P/E ratio around 22x earnings, this ratio’s only been exceeded two times in history — one going into a new calendar year and one going into the year 2000. So at the end of 1999, the forward P/E ratio was around 24x — the dot‑com bubble era. And then in 2021 going into 2022, coming out of COVID where interest rates were low and the government had just printed $5 trillion, the forward P/E ratio was around 23x forward earnings.

Both of those scenarios preceded pretty nasty bear markets. That doesn’t mean this year’s going to be a nasty bear market, but it’s not a great sign, especially compared with the average of the last 25 years of forward P/E ratios — more like 16x. So if the market were to fall around 25% tomorrow, we’d be back to the average.

Compare this to overseas stocks, which are around 15x earnings. They’re much more attractive and much closer to their long‑term average. What it means to have higher valuations going into the year is typically long‑term returns tend to be lower, and volatility tends to be higher.

But it should be noted that we don’t use valuation as a tool for timing. It’s more of a probability tool. When you compare expected returns today, international markets simply offer a better starting point. That doesn’t mean they’ll outperform every year. For example, over the last decade, international stocks underperformed U.S. stocks, but in the last two years international has performed better.

Which leads to a case for diversification — meaning putting some of your eggs in baskets that haven’t been performing as well. Diversification is working well when it doesn’t feel comfortable.

So markets are really only half of the story. To understand where we go from here, we need to talk about the economy and why it feels so uneven.

One of the reasons the economy feels so confusing today is because it has been so uneven. We know that inflation hurt everyone. There’s really no denying that. These days, I go to the grocery store and I just cannot believe how much money I spend. So it doesn’t really matter how wealthy you are — we all feel it.

But what if I told you that the bottom 50% of folks in wealth and net worth in the United States, their households have more than doubled in net worth over the last five years? This is shocking to many people. Now this doesn’t mean everyone is thriving, but it does mean that balance sheets improved enough to absorb a lot of these higher prices. I think it’s resilience that really explains why spending didn’t collapse even as inflation and high interest rates created real stress in the economy.

A lot of that improvement came from stronger wage growth, especially at lower income levels. Rising home equity helped, and pandemic‑era savings lasted longer than expected. So those stronger balance sheets helped create a bit of a shock absorber for people — households had more ability, or thought they had more ability, to pay higher prices.

That unevenness comes even clearer when we talk about who’s actually doing the spending. This chart splits each generation from youngest to oldest and shows what it takes to have a net worth in the top 10% of U.S. households. Most of you might recall we asked this exact question in a survey earlier this year, and your responses were all over the place. The majority chose dollar amounts much higher than the data actually shows.

Most of our clients are definitely in that top 10%. That doesn’t mean you feel wealthy, especially after inflation. And you know, we live in L.A., so even if you have $5 million and you go down the 405 to Beverly Hills, maybe you don’t feel so rich. But your spending and investment behavior matters — and it matters disproportionately.

One story I’ve been sharing with clients is what’s happening in New York City. We all know New York City is one of the wealthiest cities in the country — home to many millionaires and the hub of global finance. Yet, as many of you know, they elected a socialist mayor a few months ago. What does that mean? It means that even in wealthy cities, many people are struggling due to inflation, especially younger people. They might still be making six figures, but they can’t afford a $5,000 room or many of the expenses in New York City. I think that example resonates with more people throughout the country.

This leads to a big question many of our clients have been asking: if so many people are under pressure, why aren’t we in a recession? Doesn’t really make sense, right?

When we look at the data, I think it comes down to two dominant forces: massive AI‑related spending and investment, and continued spending by higher income households. Nobody wants to pay more, but people in the top 10% are less sensitive to higher interest rates and still buying business class tickets to Europe. Together, this helped offset slower housing activity, tighter credit conditions, manufacturing softness, and inflation pressure. This framework helps explain why GDP stayed positive even as recession risks felt elevated.

It’s important to say this clearly: AI investment wasn’t just a market story — it translated to real economic activity, jobs, productivity gains, and earnings growth. Wealthy and high‑income consumers didn’t do all the spending, but they supported the service economy and corporate earnings. These were legitimate sources of growth.

However, when growth depends on fewer industries, the economy becomes more vulnerable. That doesn’t mean recession is inevitable this year; it just means the margin for error is smaller.

We’ve seen an unprecedented surge in AI spending — in data centers, computer chips, cloud infrastructure, power generation, energy usage, and software across the AI ecosystem. We should spend a moment on AI because it’s the number one topic everyone is talking about and will continue to be part of our lives.

Some of you may have heard of circular investing within AI. That’s when companies effectively pass money back and forth between each other. A clear example is Nvidia. Nvidia is the maker of AI chips and is now the largest company in the world. It recently invested $100 billion in OpenAI. OpenAI, the maker of ChatGPT and one of the largest private companies, then used that $100 billion to buy Nvidia chips. So Nvidia appears to be funding its own revenue — which isn’t necessarily a sustainable, long‑term model.

Regarding OpenAI’s business model: they reportedly made about $20 billion in revenue last year, but their expected capital spending over the next decade exceeds $1 trillion. How is that possible if they only had $20 billion in revenue? The answer is with other people’s money — whether it’s Nvidia, investors, or other AI companies.

As it stands, it’s unclear who the long‑term winners and losers in the AI space will be. Most AI companies aren’t yet profitable, and competition is extremely high. The number of AI startups today exceeds the number of public U.S. companies — so most are likely to fail, many will be acquired, and a few will stand on their own. There will be a lot of chaos as this all shakes out.

Another example is Nvidia again. In the dot‑com era, Cisco Systems was the darling hardware stock — the largest company in the world at the end of 1999. They made the hardware for the internet era. But when the bubble burst in 2000–2001, Cisco’s stock fell over 80%. It took 25 years for Cisco to recover. Other early winners like Yahoo and AOL faded entirely.

During that time, other parts of the economy slowed due to higher interest rates and slower growth, but AI spending stepped up and filled the gap. That’s why we think it’s important not to dismiss AI as mere hype. In fact, we’re seeing early signs of productivity gains across many industries. Long‑term opportunity in AI is real.

But AI wasn’t the only force supporting growth last year. Fiscal policy played a role in smoothing the cycle. The OBBA — depending on who you ask, the “One Big Beautiful Bill Act” or the “One Big Bad Bill Act” — is projected to add 0.9% to GDP this year. This includes spending programs and targeted investment that help support demand and offset the drag from higher interest rates. It didn’t create runaway growth, but it helped prevent growth from slipping into negative territory.

It’s important to remember that bills like this are temporary. Often they pull future demand forward. For example, when tariffs were announced, many people bought foreign vehicles before the tariffs took effect. Corporations did the same with goods and services. Policies like these aren’t mistakes — they’re just temporary. When the support fades, the economy stands on its own again.

When you step back, you see an economy that avoided recession but did so with less support. We know many of you expected a recession in the last couple of years — and we were wrong about that. But the economy avoided recession in a very specific way. Growth over the last couple of years depended on fewer factors and didn’t include typical growth drivers like a strong housing market, broad business investment, or widespread consumer spending.

This doesn’t mean the economy is about to collapse. It means shocks matter more — especially ones we don’t know about. Things like 9/11, credit default swaps, COVID — nobody saw those coming. They shaped economic outcomes in a big way.

Being a hopeful realist matters because we can acknowledge what’s working without assuming it will work forever. This awareness isn’t pessimism — it’s preparation. It helps us make better decisions about risk management, diversification, investing, and long‑term planning.

Now, I want to switch gears to what everyone listening wants to know: what’s going to happen this year?

Hopefully it’s not an alien attack—my one strong prediction is that the Rams are going to win the Super Bowl in 2026. You can lock that in.

But more seriously: is AI spending going to continue at the rate it is? I think yes, with very high conviction. We don’t see any signs of AI spending stopping soon. In fact, we expect spending on AI and technology infrastructure to be even higher this year than it was in 2025. Most companies, large and small, plan to keep spending on AI and technology, so it’s unlikely to slow down soon.

Will wealthy and high‑income consumers keep spending? Again, yes, though maybe not with meaningful increases — possibly a slight slowdown. We talk with many of you daily, and we know you’re still planning vacations, still managing groceries, and maintaining lifestyle spending. People may make small adjustments — like flying premium economy instead of first class — but spending is still there. If markets become volatile, we could see a quick pullback in spending.

Spending will likely keep up in part because we’re all creatures of habit. We like our lifestyles, so that helps support spending.

So what about stock returns this year? That’s the trillion‑dollar question. It’s really tough to tell for any one year. Based on elevated valuations and low dividend yields, we expect much lower returns than the historical average for U.S. stocks over the next five years — potentially around 5% this year. Another perspective is that returns might look more in line with long‑term averages, perhaps closer to 8–9% for large‑cap U.S. stocks.

AI is transformative. There are similarities to the dot‑com era, but from a stock market perspective, risks are elevated. Valuations are elevated. While we could have a good year, it seems more likely to us that seeing a 20–30% drop in the market is more probable than a 20–30% increase.

What about international stock returns? Overseas stocks have much more attractive valuations and often offer higher dividends — sometimes triple what U.S. companies do. Returns are more broad‑based across industries like finance and industrials, and we have a more favorable outlook for overseas stocks, potentially around 10% this year.

What about the economy? We think unemployment will tick up a bit, and GDP growth in 2026 will probably be lower than in 2025 — but still positive, potentially around 2.5%. Regarding interest rates, our “crystal ball” suggests rates will continue to go lower — maybe not as quickly as last year. We could see two cuts and possibly a third before the end of the year, with the federal discount rate around 3% or lower.

Inflation, as measured by the Consumer Price Index, came in around 2.7% as of December. That’s a rearview metric, and we expect inflation to stay around that level, perhaps a little higher — maybe about 3% a year from now.

On the topic of interest rates and cash, high‑yield savings, money market accounts, CDs, and short‑term Treasuries once paid over 5%. As rates have fallen, yields on these cash equivalents have come down closer to 3.5% — not as attractive as before. But there’s a silver lining: bond portfolios have benefited from the inverse relationship between yields and prices. As interest rates fell, bond values rose, delivering strong returns — sometimes double digits relative to cash equivalents over the same period.

This wasn’t about timing the market — it was about positioning portfolios appropriately. Cash yields change faster than most people expect, and recency bias can cause investors to assume current conditions will last forever. Bonds remain boring — but effective when used properly. They help portfolios generate income, reduce volatility, and provide flexibility when markets and the economy change.

Our focus is not about bonds versus stocks — it’s about building portfolios that are resilient in different environments. When markets do poorly, interest rates often fall further and bonds perform even better. Bonds act as a buoy and risk hedge against falling stocks.

Looking at everything we’ve discussed today, a few key items stand out that we want you to remember; The economy has been resilient, but not in the ways we predicted, markets have been strong because a small number of companies have led the way, AI is real and transformative — but capital intensive and cyclical, growth may continue, but risks remain high, trying to predict short‑term market performance is rarely productive.

What is productive is ensuring your investments align with your financial plan, your long‑term goals, your risk tolerance, and your time horizon. That’s why from a portfolio standpoint we focus on diversification, income, and stability when appropriate, and on managing risk across different environments.

We don’t feel we need to be perfect about timing, but we need portfolios that can withstand growth, slowdowns, or surprises. That’s what allows you to stay invested and avoid costly behavioral mistakes.

This is what it means to be a hopeful realist: participating in growth without ignoring risk. We are optimistic about long‑term growth and innovation and about owning many great companies in your portfolios. But at the same time, we are realistic about stretched valuations, concentration in specific industries and companies, and human behavior — especially recency bias.

Planning definitely beats prediction. So forget all those short‑term predictions we just made earlier in this video. A good financial plan helps you participate in growth without taking unnecessary risk.

If your plan is working, often the biggest risk is changing it just because a recent experience feels uncomfortable. The news of the day can be very persuasive, but sticking to your long‑term strategy matters more.

We want to thank you all again for joining us. We greatly value your trust and confidence in our team. At the end of the day, we’re here for you. We wish you and your families a healthy, prosperous, and fulfilling 2026. Until next time.