Last year marked the silver anniversary of the new century, a milestone highlighted by three interest rate cuts, nearly 40 all-time highs in the U.S. equity market and the return of a steepening yield curve after the longest inversion on record. As with any milestone, markets faced many challenges, including tariff and policy uncertainty, recession fears and the longest government shutdown in U.S. history. At the start of the year, economic data pointed to a continuation of a strong macroeconomic environment, with robust corporate earnings, buoyant labor markets and above-trend GDP growth. While U.S. tariff announcements introduced volatility, concerns about slowing growth and rising inflation were tempered by the resilience shown in corporate earnings and by consumer spending. Markets reflected a strong risk-on sentiment and renewed optimism following the U.S. tariff negotiation announcements. While equities climbed, cash was the least positive asset class, underscoring the importance of staying invested and diversified. In this piece, our team reflects on the themes that drove portfolio positioning in 2025 and considers opportunities for the year ahead.

Asset class returns: International equities outperformed last year, driven by a weaker USD and attractive valuations. In fixed income, U.S. high yield outperformed U.S. core bonds given resilient corporate financials.

Portfolio positioning

Equity: Tactical models are overweight headline equity, while strategic models are neutral headline equity relative to the benchmark.

• Tactical models: Portfolios started the year with a pro-risk stance, expressed by an overweight to equity, specifically U.S. large cap equity. With the changing policy landscape throughout March and April, portfolios risk-managed their slight overweight positions in small cap and international equities, aligning closer to the benchmark. As tariff uncertainty waned, markets reflected a strong risk-on sentiment and our portfolios leaned further into equity risk, particularly in U.S. large cap and more recently in emerging market (EM) equities. Overall, regional equity leadership shifted each quarter, underscoring the benefits of asset allocation.
• Strategic models: Portfolios maintained a neutral headline equity with a preference for U.S. large cap and EM equities given earnings strength driven by a resilient U.S. consumer. Throughout the year, portfolios took profits on their positioning (by rebalancing) as U.S. equity momentum continued. These portfolios remained balanced in style exposure and leveraged active managers to find bottom-up opportunities.
• Outlook: We remain positive on our risk-on positioning, supported by strong corporate earnings, an easing Federal Reserve and expectations for increased government spending in 2026. The One Big Beautiful Bill Act (OBBBA) is expected to increase consumer spending and revive corporate tax cuts in early 2026, which can boost corporate profits while offsetting costs from tariffs. Recent earnings reports have shown that most U.S. large cap companies are resilient, with 81% of companies beating earnings expectations in 3Q 2025.¹ Further, estimated net profit margins for U.S. companies in FY 2025 are projected at 13%, exceeding the 10-year historical average.² This improvement is supported by growing confidence in productivity gains enabled by artificial intelligence (AI), which is contributing to higher profit expectations. In emerging markets, positive economic momentum, strong earnings revisions and attractive valuations, particularly in technology-related companies, offer investors the chance to participate in the next phase of global growth.

Fixed income: Tactical models are slightly underweight fixed income at a headline line, while strategic models are neutral relative to the benchmark.

• Tactical models: Portfolios came into the year with a sizable overweight to extended credit (given the attractive all-in yield) and a slight underweight to duration relative to the portfolio benchmark. As volatility spiked in March and April, portfolios added to core bonds for downside protection. At the end of 1H 2025, we tactically re-risked given clarity on fiscal policy, tariff negotiations and rising expectations for continued interest rate cuts. As of year-end, extended credit remains a top conviction trade. While its exposure has decreased versus 2024 year-end, it was largely as a result of funding other pro-risk trades such as equities. Overall, portfolios benefited from a modest underweight to duration for most of the year, especially as the U.S. Treasury curve steepened.
• Strategic models: Portfolios came into the year with strong conviction in core bonds and a balanced macro-economic outlook. Yet, as credit spreads widened and all-in yields became attractive at the end of the first quarter, portfolios diversified within fixed income by introducing an allocation to extended credit from core bonds. Overall, portfolios maintained conviction in extended credit throughout the year due to improved credit ratings and lower default rates.
• Outlook: Looking ahead to 2026, we expect a stable fundamental backdrop, as evidenced by a net leverage ratio below historical averages and interest coverage ratio above historical averages, showing that corporate balance sheets remain healthy and that corporates can pay off their debts. Over time, we anticipate that the Federal Reserve’s interest rate cuts – totaling 175bps over the last two years – should foster a more favorable lending environment for consumers that may stimulate growth. This sturdy backdrop would allow portfolios to benefit from extended credit, given its all-in yields remain attractive relative to investment grade fixed income despite tight spreads. Further, we expect a more normalized rate environment and deregulation to stimulate M&A activity and, consequently, higher bond issuance for financing. In this stable environment, greater supply may create pockets of opportunity for active management, should valuations become more attractive.

Alternatives: Our 2026 Long-Term Capital Market Assumptions put forth an environment of higher inflation volatility and, by extension, less stable stock-bond correlations over the coming business cycle. As client needs and fund structures continue to evolve, our team sees greater opportunity for better risk-adjusted returns for clients that can take on illiquidity risk through alternatives. Our team believes that an outcome-oriented approach to private markets – whether that be alpha, income and/or diversification – can best set up clients to meet their objectives.

Our framework suggests that a mix of the following can be optimized to exchange lower liquidity for potential higher returns and dampen volatility:

• Private equity for alpha potential 
• Private credit for income generation
• Private real estate for diversification benefits