Trever Christian and John Schwalbach, Partners
December 26, 2025

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The Discipline Dividend: Capturing Opportunity and Managing Risk in an AI-Driven Market

Key Observations

  • Tempered return outlook: Our 2026 Capital Market Assumptions point to a tempered outlook as higher valuations and softer yields reduce return potential.
  • AI exposure already embedded: Artificial intelligence (AI) is already woven deeply into equity markets, making exposure management essential. Our playbook calls for measured positioning and disciplined risk sizing to capture opportunity while avoiding excess.
  • Valuations shape positioning: Elevated valuations shape our positioning. We favor high quality fixed income for risk-adjusted returns, select global equity opportunities and alternatives to help manage volatility without overhauling portfolios.
  • Modest changes likely: The year ahead will likely bring gradual shifts rather than sweeping change. With strong foundations in place, most portfolios need only modest adjustments, underscoring a timeless principle that sometimes, no action is the best action.

As 2025 draws to a close, the year stands out for defining moments that sought to reshape markets and the global economy. From rapid policy shifts on Liberation Day to the return to rate cuts by the U.S. Federal Reserve and renewed hopes for peace in Europe and the Middle East, the past 12 months have been anything but static.

Our 2025 themes, Fragility, Durability and the Age of Alpha proved highly relevant. The near-bear market in April exposed market fragility and fixed income provided ballast when trends turned negative. Bonds delivered their strongest performance in the last few years as prices adjusted to evolving macro conditions. Marketable alternatives also stood out, with some exceeding long-term equity return expectations while often taking less risk than broad equity markets. As we recast our 2026 capital market assumptions you will generally see more modest return forecasts given the increase in valuations. Below we outline several key themes that will remain central into the new year and beyond.

Source: Fiducient Advisors Capital Market Assumptions. Market and economic data including, but not limited to, valuations, fixed income yields and inflation, are used to derive forecasts. Outputs and opinions are as of the date referenced and are subject to change. Information is intended for general information purposes only and does not represent any specific investment recommendation. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice. There is no guarantee that any of these expectations will become actual results. Past performance does not indicate future performance and there is a possibility of a loss. For additional information on forecast methodologies, please speak with your advisor. Please see Index Proxy Summary information at the end of this paper for summary of indices used to represent each asset class.1) Dynamic bonds are a blend of 33% Cash, 33% Corp HY, and 34% Global Bonds. 2) Tax Equivalent yield based on highest marginal Federal tax rate (37%). 3) Broad Real Assets is 20% REITS, 20% Global Infrastructure, 20% Commodities, 20% US Bonds, 15% Corp High Yield, 5% TIPS. 4) Morningstar Direct. Based on MSCI ACWI, as of October 31, 2025.

2026 Themes

Looking ahead to 2026, we anticipate a year shaped by subtle but meaningful shifts. Our themes serve as a playbook for navigating these changes. Current allocations provide a strong foundation, and most portfolios may require only modest adjustments. In fact, recasting our long-term assumptions reinforces the adage that sometimes, no action is the best action.

AI Playbook dives into the nuance of managing a narrow and exuberant market. We address the seemingly more frequent question: “Is AI a bubble?” and evaluate the asymmetry of potential outcomes. Is it worse to be underweight AI if it rallies or overweight if it falters? History, math and experience suggest it is better to leave some upside on the table than risk being caught in a severe downdraft. Navigating Valuation explores how to manage markets that appear richly valued and identify where green shoots of opportunity may exist. We also assess the role of alternatives in mitigating uncertainty without wholesale portfolio changes. Finally, Noise Resistance reviews economic and external factors influencing markets. While the existential weight of AI and elevated valuations present challenges, many indicators point to growth and additional stimulus ahead.

In all, we believe portfolios are well positioned thanks to the groundwork laid in 2025. With modest exceptions, such as selectively adding alternatives, portfolio adjustments will likely be limited.

AI Playbook

AI is poised to be one of the most influential forces in markets next year. Public equity markets, particularly in the U.S., are already highly concentrated in AI-related exposure. Whether you are an enthusiast or a skeptic, getting the right amount of exposure could mean the difference between success and failure. Here is our playbook for allocating in an AI-driven market without being distracted by the existential debates.

Bubble? The Jury is Out

Let’s start with the b-word: “bubble.” Classic bubbles share a familiar pattern: displacement, boom, euphoria and bust. Displacement often begins with a kernel of truth and a breakthrough that is genuinely transformative. That spark fuels the boom and the exuberance that follows. History offers many examples: the invention of radio, the expansion of U.S. railroads and the fiber-optic buildout that laid the foundation for the internet, just to name a few. Each innovation changed the world, created extraordinary market opportunities and ultimately led to sharp price declines in related stocks and industries after euphoria took it too far.1

Those who believe AI is truly transformative must also seemingly cosign the notion that transformative change often carries cautionary lessons. To hold one thought without the other is to ignore history and utter the words “it is different this time”, a phrase that has accompanied every cycle of excess only to be proven wrong. So where are we in this cycle? The boom is clear: adoption, demand and massive investment in research and infrastructure. Euphoria, however, is where the real debate begins.

On one hand, some believe AI-related companies have taken a measured approach. Capital expenditures, estimated at more than $1 trillion, have been largely funded by existing cash flow of these businesses rather than debt, a sign of discipline rather than speculation. Demand also continues to outpace supply, a dynamic rarely seen in the late stages of a bubble.

On the other hand, extremes exist. Consider Thinking Machines, an AI startup founded by a former OpenAI executive. It raised $2 billion in “seed” capital at a ~$10 billion valuation, without a product and reportedly unwilling to disclose to investors what it plans to build. A month later, they went through a second round, valuing the company at $50 billion.2 Still no product. Still no revenue.

Evidence of exuberance and optimism remains, but as in all cycles, the devil is in the details. Certain pockets of the AI ecosystem will undoubtedly overreach while others will remain disciplined. No one knows precisely where we sit in this cycle, but the approach to investing through it does not change; operate with openness and curiosity, stay disciplined in risk management and never lose sight of the first principles of long-term, diversified investing. The jury is still out, and in truth, a verdict will only come long after it is too late to act. Until then, we remain grounded in practical experience and committed to disciplined risk management to navigate the current environment.

The Facts: Look Inward First

If you own U.S. equities, you have already made an AI bet, and it may be your largest. Roughly 38% of the S&P 500 is tied to companies connected to artificial intelligence.1 For perspective, ahead of the Global Financial Crisis, financials were the largest sector, representing about 20% of the index. In 2000, technology peaked at 34%.4 This does not mean AI is a bubble, but it does showcase the market’s enthusiasm for transformative technologies. So before asking how to “get into AI,” recognize that in many ways, you may already be there.

Offense: The AI Flywheel

If AI proves to be as transformative as some expect, the benefits may not be evenly distributed. Companies with lower margins and sectors with lighter capital expenditure requirements, particularly service-oriented businesses, may see disproportionate gains. Mid-cap and small-cap could also present opportunities relative to large-cap U.S. stocks, given their exposure to businesses positioned to capture AI-driven efficiencies. That optimism has begun to work its way into earnings expectations and may provide newly found footing for securities outside of the “Magnificent 7.” Identifying these dynamics will be key to capturing upside beyond the obvious names.

Defense: Finding the Right Balance

With the facts in hand, sizing risk becomes critical. The top 10 stocks in the MSCI ACWI now account for roughly 25% of the index, nearly triple their share a decade ago.1 Our 2026 global equity allocations show top 10 exposure near 18%, above that of the ACWI historical norm of about 14%, yet far more risk-conscious than today’s market.5 Why does this matter? Because owning too little and watching AI soar is a better outcome than owning too much and suffering if AI falters. Our analysis shows that capturing some upside is preferable to risking a severe drawdown from overexposure.

Source: FactSet as of October 31, 2025. Scenario analysis consists of a number of key facts. 1) The top 10 stocks account for ~40% of the S&P 500 market cap. 2) Top 10 downside risk follow a similar outcome to 2022 in which they fell ~40% while the remainder of the index fell ~12% 3) Upside opportunity follows a similar pattern to the last 5 years in which the top 10 outperform the remaining by ~40%. Past performance does not indicate future performance.

Portfolio Impact

Famed investor Howard Marks, who recently wrote on the topic of an AI bubble, stated this:


“Since no one can say definitively whether this is a bubble, I’d advise that no one should go all-in without acknowledging that they face the risk of ruin if things go badly. But by the same token, no one should stay all-out and risk missing out on one of the great technological steps forward. A moderate position, applied with selectivity and prudence, seems like the best approach.”

AI is already embedded in portfolios, and in a meaningful way. Yet our approach holistically emphasizes measured exposure, thoughtful diversification and a focus on sectors positioned to benefit from AI’s real-world adoption. We are maintaining our overweight exposure to mid-cap and small-cap stocks and our modest overweight to non-U.S. equity. Both stand to benefit from a broadening of AI and should help mitigate downside risk if enthusiasm slows.

Navigating Valuation

While the sun seemingly rises and sets on AI, there is still everything else, and everything else outside of AI does not make it particularly easy. Across a wide range of metrics, valuations look full relative to history. Over the last 20 years, most markets are trading near historically full valuations. Credit spreads, the extra yield awarded to investors for taking on credit risk, are low, even as overall fixed income yields remain compelling. In the short term, that may mean very little, but over the long term, it matters. Navigating periods of elevated valuations requires nuance and clear alignment with risk tolerances and portfolio objectives.

As we recast our 10-year forecasts, the “cost” of full valuations comes into view. Our prospective median return for U.S. equity hovers just above 5% (before inflation), ranking near the low end of our historical forecasts. While lower forecasts may not excite, nuance matters. Opportunities exist across global markets.

Fixed income remains compelling on both an absolute basis (attractive yields) and a risk adjusted basis (relative to the outlook for public equity). Publicly listed real estate also looks more appealing after a modest showing last year. Supported by falling rates, REITs often behave like fixed income in rate-cutting cycles. Power infrastructure and other real assets may also benefit if AI-driven demand for computing capacity continues to accelerate.

Finally, marketable alternatives, whose value tends to accrue disproportionately during volatile periods, are positioned to help investors navigate full valuations without taking drastic measures. Our forward-looking return assumption for marketable alternatives stands at 7.0% compared to global stocks at 6.5% (MSCI ACWI). If markets continue their ascent, the asset class may underperform on an absolute basis, but with a modest opportunity cost. However, should volatility rise, they may prove accretive and provide downside protection.

Source: Venn as of October 31, 2025. Drawdown periods for on based on the last three largest drawdowns for each respective index. Past performance does not indicate future performance.

Portfolio Impact

Valuations are important over the long-term, and help determine what level of risk is warranted given objectives and tolerance. Even in a rich environment, opportunity persists. Fixed income offers risk-adjusted appeal with attractive all-in yields despite tight credit spreads. Marketable alternatives may offer upside capture should markets continue their upward path while reducing downside risk in a narrow and fully valued market. While alternatives may not be suitable for all based on liquidity or complexity, we believe clients without exposure should consider an allocation, and those already invested should review the potential benefits of an increased position.

Noise Resistance

Investors digested a steady stream of headlines this year: tariffs and Liberation Day in the spring, the passing of the “One Big Beautiful Bill,” the Federal Reserve resuming rate cuts after a nine-month pause and an autumn government shutdown that delayed key economic data. Despite the noise and uncertainty, the economy continues to grow, consumers continue to spend and the corporate backdrop remains healthy.

Tariffs dominated the conversation early in the year, starting with threats and uncertainty before settling near an average level of ~17%.9 While near-term inflation pressure is expected, the longer-term view remains anchored. Inflation has eased from post-pandemic highs but still sits above the Fed’s 2% target. Shelter costs have been moderating, yet many components of CPI remain above 3%. We believe inflation may ultimately move lower, but the path is likely to be uneven.

The labor market showed cracks as the year progressed, with downward revisions in the summer and shutdown-related disruptions. Job growth remains muted, and unemployment has edged up to 4.6%.7 This set the stage for the Fed to resume rate cuts in September after a nine-month pause. One cut each in October and December, respectively, left the target rate at 3.50%-3.75%. The government shutdown delayed critical data releases, fueling volatility around the December decision and more uncertainty for 2026 rate expectations, but markets continue to price in additional accommodation next year. Debate over Fed independence and Powell’s successor has added noise and will only increase in the months to come, but market data should remain the key driver of FOMC decisions.

Despite layoff headlines grabbing attention from firms like Meta, the overall employment picture remains stable and the consumer remains resilient. Early data suggest consumers spent nearly $12 billion on Black Friday, a ~9% increase from 2024.8 Additional stimulus from the “One Big Beautiful Bill” tax cuts, which are estimated to be $150 billion in tax refunds for 20266 and a central bank that is more accommodative lay the groundwork for economic acceleration.

Credit was a standout in 2025. High yield bonds returned 8% year-to-date through November, supported by strong risk appetite and demand for yield, which sits near 6.6%.3 While spreads hover near 20-year lows, corporate fundamentals and an increase in the credit quality of the index broadly temper concern. This lower cost of lending bodes well for economic expansion, but as allocators we continue to exercise caution given current valuations.

Portfolio Impact

The prospects for growth heading into 2026 are positive, but signs of moderation and uncertainty in the market persist. Positioning portfolios for multiple outcomes, rather than a single scenario, remains prudent. While all-in yields in non-investment grade remain high enough to compel an allocation, similar to last year we remain tempered in our sizing. With current spreads near all-time lows and credit risk seemingly absent, our emphasis remains on high quality investment grade fixed income. Additionally, we continue to believe select active management strategies have the ability to generate alpha in this market. Dynamic fixed income and alternatives like private markets and hedge funds offer flexibility to navigate sector divergences, capture market opportunities, uncover mispriced assets and manage risk effectively.

Final Thoughts

We approach 2026 with both optimism and realism. Continued stimulus from a more accommodative Federal Reserve, the “One Big Beautiful Bill” and a resilient economy provide a strong foundation for the transformative changes driven by AI, and, by extension, the markets. That said, we recognize that current valuations and pockets of exuberance around innovation introduce risks.

As we weigh the possibilities ahead, we remain mindful of our entrusted role with clients. Ultimately, we are stewards of capital, and it is our duty to protect capital and not speculate with assets that have been placed in our care. After recasting our capital market assumptions and reviewing portfolio exposures, we find little need for material shifts. While modest adjustments may be warranted, and more substantive discussions around adding alternatives may arise, we believe current positioning reflects both balanced risks and upside potential.

Sources

  1. FactSet. As of October 31, 2025.
  2. Reuters. November 13, 2025.
  3. BlackRock, Morningstar, Fiducient Advisors. As of November 30, 2025.
  4. Morningstar. As of November 30, 2025.
  5. Morningstar, Fiducient Advisors. As of November 30, 2025. See disclosures for global equity allocation definition.
  6. Tax Policy Center. As of December 11, 2025.
  7. BLS. As of December 16, 2025.
  8. Black Friday Statistics. As of December 2, 2025. https://statistics.blackfriday/
  9. Strategas. As of December 9, 2025.
  10. FactSet. As of November 30, 2025.

Disclosures

This commentary is provided for informational purposes only and does not constitute investment, legal, or tax advice, or a recommendation to buy or sell any security. Any forward-looking statements and forecasts are based on assumptions and expectations as of the date shown, are subject to change without notice, and may not be realized. Past performance is not indicative of future results.

References to indices are for illustrative comparison only. Indices are unmanaged, do not reflect fees or expenses, and cannot be invested in directly. Index returns shown (if any) generally assume reinvestment of dividends and other distributions.

When index benchmarks are referenced, we use widely recognized market indices (e.g., S&P 500, MSCI ACWI, MSCI EAFE, MSCI Emerging Markets, Russell 2000, Russell Midcap, Bloomberg U.S. Aggregate). A complete list of index definitions and proxy mappings is available upon request.

All investments involve risk, including possible loss of principal. Equity markets can be volatile. Fixed income is subject to interest rate, credit/default, and liquidity risk. International investments may involve additional risks such as currency fluctuations and geopolitical or regulatory risk. Alternative and private investments may involve higher fees, leverage, reduced liquidity, and greater complexity, and may not be suitable for all investors.