Economic and market prospects seem to be holding steady in 2026. We anticipate moderate economic growth will continue, supported by expansionary monetary and fiscal policy, but there may be trouble brewing beneath the market’s surface.
The 2-year Treasury yield has fallen by more than 1.5% from its September 2023 high, while the 10-year Treasury has fallen by 0.4%. These shifts were supported by a series of rate cuts from the Federal Reserve, including two 0.25% cuts in the fourth quarter. The Fed also ended quantitative tightening and has begun easing reserve levels. Fiscal policies passed by the Trump administration last year included tax cuts for businesses, incentives for capital investment, and the extension of tax cuts primarily benefitting high income taxpayers. These expansionary policies are front-loaded, adding 0.2% to GDP growth from 2025 to 2027 despite having a slightly restrictive effect in the long- term due to increased deficits.
Trump’s chaotic use of tariffs as both a foreign policy and fiscal policy tool has generated waves of disruption across global supply chains. While the economy as a whole has been resilient, stress has been unevenly distributed, with the agricultural sector particularly hard hit. In November, The Yale Budget Lab estimated an average effective tariff rate to consumers of 16.8%. Amid continued negotiations and legal challenges, tariff policy remains a significant source of uncertainty for businesses and consumers navigating the economy.
Surging advances in artificial intelligence (AI) have led to a more concentrated U.S. stock market than at any period since 1926. The top 10% of stocks now account for 78% of total market cap, surpassing past peaks of 75% in 1932 and 73% in 2000. Relative concentration is even more pronounced in the S&P 500, with the top 10 names now
comprising about 40% of the index weight, compared with 25% at the March 2000 dot-com peak and approximately 18% just before the 1929 crash. We believe that the current market focus on AI-related themes, including the hyperscalers, data centers, and infrastructure plays, is more solidly based in fundamentals than either the 1929 margin-supported market speculation or the dot-com bubble. For the past three years, hyperscalers and AI enablers such as NVIDIA have generated substantially faster earnings growth than the remainder of the market, in contrast to many dot-com darlings that had only projected earnings supporting their market value.
At the same time, we note that these strong AI-related earnings are based on enormous capital investment by hyperscalers. The investment banking house, Jeffries, estimates that AI investment accounted for 44% of U.S. real GDP growth in 2025, creating the possibility of an overinvestment cycle. If this tide of investment turns because hyperscalers struggle to monetize their out-of-scale investments and subsequently reduce their spending, the resulting economic undertow could trigger both slower GDP growth and market shocks. This risk is heightened by the circular nature of current investment spending, where the purchase of high-end chips is frequently financed by credit from the chipmakers.
Still, we’re profoundly concerned about subsurface issues, as ongoing government uncertainty continues to rock the foundations of the international economic order. Economic growth and smoothly functioning markets depend upon a broadly shared consensus about the meaning of property rights and the primacy of international law. The Trump Administration’s actions seem designed to destabilize an international order based on the principles of national sovereignty, peaceful dispute resolution, and territorial integrity.
The NATO alliance, the United Nations, the Bretton Woods international monetary system, and the General Agreement on Tariffs and Trade (GATT) were all explicitly designed to incentivize mutually advantageous cooperation, even as they privileged the United States as a permanent member of the UN Security Council and through the centrality of the U.S. Dollar as an international reserve currency.
The incursion of U.S. troops into Venezuela on January 3rd to seize President Nicolás Maduro and exert control over the country’s oil reserves flagrantly violates international law, while Trump’s saber-rattling about seizing Greenland mocks the NATO treaty. Within the U.S., the Trump administration has threatened institutional norms and the separation of powers established in the Constitution, including through the illegal deployment of federalized national guard troops and ICE’s disregard for due process in its push for mass deportation.
U.S. equities advanced broadly over the fourth quarter, with the large-cap S&P 500 up +2.7% and the tech-heavy Nasdaq 100 gaining +2.5%. The S&P 500 Equal Weight rose a more modest +1.4%, underscoring continued mega-cap leadership even as breadth improved late in the quarter.
Sector dispersion remained meaningful within the S&P 500. Health Care led (+11.7%), followed by Communication Services (+7.3%) and Financials (+2.0%), while Real Estate (-2.9%) and Utilities (-1.4%) detracted; Consumer Staples finished flat (0.0%), extending its recent relative softness. The Magnificent Seven delivered mixed outcomes: Alphabet (+29%) and Apple (+7%) led the group, Amazon (+5%) and Tesla (+1%) saw modest gains, NVIDIA was flat, while Microsoft (-6%) and Meta (-10%) both declined.
Style leadership tilted toward Value, reversing the Growth-heavy tone seen earlier in 2025. The Russell 3000 Value climbed +3.8%, outpacing the Russell 3000 Growth at +1.1%. At the factor level, Quality showed strength: MSCI USA Quality returned +4.1%, outpacing the MSCI USA benchmark at +2.3%, a notable shift after Quality lagged during the risk-on rotation in prior quarters. In size segments, large caps remained the relative winner: the S&P MidCap 400 gained +1.6% and the S&P SmallCap 600 rose +1.7%, both trailing the S&P 500.
International equities delivered another strong quarter. MSCI Europe rose +6.2%, MSCI EAFE gained +4.9%, and MSCI Emerging Markets added +4.7%, continuing to outpace U.S. equities.
Fixed income posted moderate gains as yields stabilized and credit remained resilient. The Bloomberg U.S. Aggregate Bond Index returned +1.1% for the quarter; Investment Grade Corporates added +0.8%, and High Yield advanced +1.3%.
After strong gains throughout the year, S&P 500 valuation ended the quarter at 22.0x expected earnings for the next 12 months, modestly lower than the 22.8x level at the end of Q3, as multiple contractions partially offset solid earnings growth. Relative to history, valuations remain extended. The 30-year average forward P/E is 17.1x, and the market’s 22.0x level is roughly 1.5 standard deviations above that long-term mean.
The cyclically adjusted P/E (CAPE) finished the year at 39.6, which is 1.8 standard deviations above its 30-year average of 28.5. This is directionally consistent with the broader valuation picture. Despite the quarter’s positive equity returns, rich starting valuations remain a constraint, and Q4’s return composition underscores that point, where earnings gains did the heavy lifting while multiples detracted.
Whether or when the risks we have enumerated will affect markets is unknown, but those risks are inherent, and the year begins from elevated valuation levels.
In our prior outlook, we cautioned against theTrump administration’s assaults on freedom of speech, freedom from unreasonable search and seizure, and freedom of markets. We noted that the administration’s favor appears to be for sale. These assaults undercut the foundation for U.S. economic growth and diminish the standing of U.S. capital markets. So far, underlying systems have held, and we are apparently still navigating predictable waves. Whether or when the risks we have enumerated will affect markets is unknown, but those risks are inherent, and the year begins from elevated valuation levels. Despite expansionary monetary and fiscal policy and a generally benign economic outlook that should support earnings growth, we are maintaining a neutral allocation to equities across risk tolerance levels. We continue to evaluate holdings judiciously, with a focus on valuation, earnings prospects, and risk–reward trade-offs across multiple dimensions.
In this uncertain legal and institutional environment, we continue to seek quality in our holdings. Companies with strong balance sheets, demonstrated profitability, steady revenue flows and significant competitive advantages — derived from market position or intellectual property — possess greater financial flexibility. These factors position companies to adapt more effectively to a shifting economic environment. Declining interest rates are beneficial to companies across the capitalization spectrum, supporting improved earnings growth across the market and potentially reducing the market’s extreme level of concentration.
As a baseline for individual portfolio decisions, we continue to slightly favor stocks over bonds as a strategic allocation, even in the context of considerable economic and political uncertainty. While bonds frequently provide diversification benefits in portfolio construction, equities may face elevated near-term risk, including risks associated with elevated valuations. Over longer investment horizons, equities provide substantial protection against rising prices that bonds do not.
As the Trump administration flouts international law, guts environmental protections, and fuels the country’s social divisions with cruel deportation tactics, we believe it is more critical than ever to raise our voice. We believe companies that effectively manage environmental, social, and governance risks are better positioned for long- term financial performance. How companies address climate change, workplace satisfaction, and diversity directly affects costs, assets, and operational stability. We believe responsible corporate leadership on these issues is essential to sustaining performance and long-term credibility.
Trillium Asset Management, LLC (Trillium) offers investment strategies and services that advance humankind towards a global sustainable economy, a just society, and a better world. For over 40 years, the firm has been at the forefront of ESG thought leadership and draws from decades of experience focused exclusively on responsible investing. Trillium uses a holistic, fully integrated fundamental investment process to uncover compelling long-term investment opportunities. Devoted to aligning stakeholders’ values and objectives, Trillium combines impactful investment solutions with active ownership. The firm delivers equity, fixed income, and alternative investments to institutions, intermediaries, high net worth individuals, and other charitable and non-profit organizations with the goal to provide positive impact, long-term value, and ‘social dividends™.’
There is no assurance that impact or investment objectives will be achieved. This is not a recommendation to buy or sell any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. The specific securities were selected on an objective basis and do not represent all of the securities purchased, sold or recommended for advisory clients.
Information and opinions expressed are those of the author and may not reflect the opinions of other investment teams within Trillium Asset Management. Information is current as of the date appearing in this material only and subject to change without notice. This material may include estimates, outlooks, projections, and other forward- looking statements. Due to a variety of factors, actual events may differ significantly from those presented.
The 2-year Treasury yield has fallen by more than 1.5% from its September 2023 high, while the 10-year Treasury has fallen by 0.4%. These shifts were supported by a series of rate cuts from the Federal Reserve, including two 0.25% cuts in the fourth quarter. The Fed also ended quantitative tightening and has begun easing reserve levels. Fiscal policies passed by the Trump administration last year included tax cuts for businesses, incentives for capital investment, and the extension of tax cuts primarily benefitting high income taxpayers. These expansionary policies are front-loaded, adding 0.2% to GDP growth from 2025 to 2027 despite having a slightly restrictive effect in the long- term due to increased deficits.
Trump’s chaotic use of tariffs as both a foreign policy and fiscal policy tool has generated waves of disruption across global supply chains. While the economy as a whole has been resilient, stress has been unevenly distributed, with the agricultural sector particularly hard hit. In November, The Yale Budget Lab estimated an average effective tariff rate to consumers of 16.8%. Amid continued negotiations and legal challenges, tariff policy remains a significant source of uncertainty for businesses and consumers navigating the economy.
Surging advances in artificial intelligence (AI) have led to a more concentrated U.S. stock market than at any period since 1926. The top 10% of stocks now account for 78% of total market cap, surpassing past peaks of 75% in 1932 and 73% in 2000. Relative concentration is even more pronounced in the S&P 500, with the top 10 names now
comprising about 40% of the index weight, compared with 25% at the March 2000 dot-com peak and approximately 18% just before the 1929 crash. We believe that the current market focus on AI-related themes, including the hyperscalers, data centers, and infrastructure plays, is more solidly based in fundamentals than either the 1929 margin-supported market speculation or the dot-com bubble. For the past three years, hyperscalers and AI enablers such as NVIDIA have generated substantially faster earnings growth than the remainder of the market, in contrast to many dot-com darlings that had only projected earnings supporting their market value.
At the same time, we note that these strong AI-related earnings are based on enormous capital investment by hyperscalers. The investment banking house, Jeffries, estimates that AI investment accounted for 44% of U.S. real GDP growth in 2025, creating the possibility of an overinvestment cycle. If this tide of investment turns because hyperscalers struggle to monetize their out-of-scale investments and subsequently reduce their spending, the resulting economic undertow could trigger both slower GDP growth and market shocks. This risk is heightened by the circular nature of current investment spending, where the purchase of high-end chips is frequently financed by credit from the chipmakers.
Still, we’re profoundly concerned about subsurface issues, as ongoing government uncertainty continues to rock the foundations of the international economic order. Economic growth and smoothly functioning markets depend upon a broadly shared consensus about the meaning of property rights and the primacy of international law. The Trump Administration’s actions seem designed to destabilize an international order based on the principles of national sovereignty, peaceful dispute resolution, and territorial integrity.
The NATO alliance, the United Nations, the Bretton Woods international monetary system, and the General Agreement on Tariffs and Trade (GATT) were all explicitly designed to incentivize mutually advantageous cooperation, even as they privileged the United States as a permanent member of the UN Security Council and through the centrality of the U.S. Dollar as an international reserve currency.
The incursion of U.S. troops into Venezuela on January 3rd to seize President Nicolás Maduro and exert control over the country’s oil reserves flagrantly violates international law, while Trump’s saber-rattling about seizing Greenland mocks the NATO treaty. Within the U.S., the Trump administration has threatened institutional norms and the separation of powers established in the Constitution, including through the illegal deployment of federalized national guard troops and ICE’s disregard for due process in its push for mass deportation.
U.S. equities advanced broadly over the fourth quarter, with the large-cap S&P 500 up +2.7% and the tech-heavy Nasdaq 100 gaining +2.5%. The S&P 500 Equal Weight rose a more modest +1.4%, underscoring continued mega-cap leadership even as breadth improved late in the quarter.
Sector dispersion remained meaningful within the S&P 500. Health Care led (+11.7%), followed by Communication Services (+7.3%) and Financials (+2.0%), while Real Estate (-2.9%) and Utilities (-1.4%) detracted; Consumer Staples finished flat (0.0%), extending its recent relative softness. The Magnificent Seven delivered mixed outcomes: Alphabet (+29%) and Apple (+7%) led the group, Amazon (+5%) and Tesla (+1%) saw modest gains, NVIDIA was flat, while Microsoft (-6%) and Meta (-10%) both declined.
Style leadership tilted toward Value, reversing the Growth-heavy tone seen earlier in 2025. The Russell 3000 Value climbed +3.8%, outpacing the Russell 3000 Growth at +1.1%. At the factor level, Quality showed strength: MSCI USA Quality returned +4.1%, outpacing the MSCI USA benchmark at +2.3%, a notable shift after Quality lagged during the risk-on rotation in prior quarters. In size segments, large caps remained the relative winner: the S&P MidCap 400 gained +1.6% and the S&P SmallCap 600 rose +1.7%, both trailing the S&P 500.
International equities delivered another strong quarter. MSCI Europe rose +6.2%, MSCI EAFE gained +4.9%, and MSCI Emerging Markets added +4.7%, continuing to outpace U.S. equities.
Fixed income posted moderate gains as yields stabilized and credit remained resilient. The Bloomberg U.S. Aggregate Bond Index returned +1.1% for the quarter; Investment Grade Corporates added +0.8%, and High Yield advanced +1.3%.
After strong gains throughout the year, S&P 500 valuation ended the quarter at 22.0x expected earnings for the next 12 months, modestly lower than the 22.8x level at the end of Q3, as multiple contractions partially offset solid earnings growth. Relative to history, valuations remain extended. The 30-year average forward P/E is 17.1x, and the market’s 22.0x level is roughly 1.5 standard deviations above that long-term mean.
The cyclically adjusted P/E (CAPE) finished the year at 39.6, which is 1.8 standard deviations above its 30-year average of 28.5. This is directionally consistent with the broader valuation picture. Despite the quarter’s positive equity returns, rich starting valuations remain a constraint, and Q4’s return composition underscores that point, where earnings gains did the heavy lifting while multiples detracted.
Whether or when the risks we have enumerated will affect markets is unknown, but those risks are inherent, and the year begins from elevated valuation levels.
In our prior outlook, we cautioned against theTrump administration’s assaults on freedom of speech, freedom from unreasonable search and seizure, and freedom of markets. We noted that the administration’s favor appears to be for sale. These assaults undercut the foundation for U.S. economic growth and diminish the standing of U.S. capital markets. So far, underlying systems have held, and we are apparently still navigating predictable waves. Whether or when the risks we have enumerated will affect markets is unknown, but those risks are inherent, and the year begins from elevated valuation levels. Despite expansionary monetary and fiscal policy and a generally benign economic outlook that should support earnings growth, we are maintaining a neutral allocation to equities across risk tolerance levels. We continue to evaluate holdings judiciously, with a focus on valuation, earnings prospects, and risk–reward trade-offs across multiple dimensions.
In this uncertain legal and institutional environment, we continue to seek quality in our holdings. Companies with strong balance sheets, demonstrated profitability, steady revenue flows and significant competitive advantages — derived from market position or intellectual property — possess greater financial flexibility. These factors position companies to adapt more effectively to a shifting economic environment. Declining interest rates are beneficial to companies across the capitalization spectrum, supporting improved earnings growth across the market and potentially reducing the market’s extreme level of concentration.
As a baseline for individual portfolio decisions, we continue to slightly favor stocks over bonds as a strategic allocation, even in the context of considerable economic and political uncertainty. While bonds frequently provide diversification benefits in portfolio construction, equities may face elevated near-term risk, including risks associated with elevated valuations. Over longer investment horizons, equities provide substantial protection against rising prices that bonds do not.
As the Trump administration flouts international law, guts environmental protections, and fuels the country’s social divisions with cruel deportation tactics, we believe it is more critical than ever to raise our voice. We believe companies that effectively manage environmental, social, and governance risks are better positioned for long- term financial performance. How companies address climate change, workplace satisfaction, and diversity directly affects costs, assets, and operational stability. We believe responsible corporate leadership on these issues is essential to sustaining performance and long-term credibility.
Trillium Asset Management, LLC (Trillium) offers investment strategies and services that advance humankind towards a global sustainable economy, a just society, and a better world. For over 40 years, the firm has been at the forefront of ESG thought leadership and draws from decades of experience focused exclusively on responsible investing. Trillium uses a holistic, fully integrated fundamental investment process to uncover compelling long-term investment opportunities. Devoted to aligning stakeholders’ values and objectives, Trillium combines impactful investment solutions with active ownership. The firm delivers equity, fixed income, and alternative investments to institutions, intermediaries, high net worth individuals, and other charitable and non-profit organizations with the goal to provide positive impact, long-term value, and ‘social dividends™.’
There is no assurance that impact or investment objectives will be achieved. This is not a recommendation to buy or sell any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. The specific securities were selected on an objective basis and do not represent all of the securities purchased, sold or recommended for advisory clients.
Information and opinions expressed are those of the author and may not reflect the opinions of other investment teams within Trillium Asset Management. Information is current as of the date appearing in this material only and subject to change without notice. This material may include estimates, outlooks, projections, and other forward- looking statements. Due to a variety of factors, actual events may differ significantly from those presented.
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