Commencing the Quarter – Q4'25

The U.S. equity market closed 2025 near record highs, with the S&P 500 up 17%, marking one of the strongest 3-year runs on record.

The rally was driven primarily by technology and AI-linked stocks, led by the “Magnificent 7.” However, as investors look ahead to 2026, our ongoing investor outreach highlights growing concerns around elevated valuations and the sustainability of AI-related spending, with increased scrutiny of companies’ ability to demonstrate a clear return on investment. These dynamics are driving renewed interest in the “other” 493 companies, which have climbed just 1.8% since October.

Recent management commentary reflects a still challenged and uncertain macro backdrop but with cautious optimism for gradual improvement heading into 2026. While inflation has moderated, its cumulative impact continues to weigh on consumer confidence and discretionary spending, particularly among low- and middle-income households. Adding to near-term pressure, the recent government shutdown temporarily disrupted volumes, delayed orders and funding, and further weighed on consumer confidence, though activity has largely resumed following its resolution. As a result, companies are guiding conservatively, though stable labor conditions and expectations for easing interest rates provide some support to longer-term outlooks.

Technology investments, particularly in AI, are increasingly viewed as a critical offset to macro and demand pressures. Across industries, companies are accelerating enterprise-wide AI adoption to drive productivity, automate workflows, enhance customer engagement, and unlock structural cost efficiencies—demonstrating tangible ROI. Executives now frame AI not as a future opportunity, but as a present-day productivity engine supporting margin expansion, scalability, and competitive differentiation.

Consumer behavior continues to skew increasingly value-driven. Lower- and middle-income households are trading down and leaning more heavily on promotions and discount channels, while higher-income consumers remain relatively stable but are also becoming more price conscious. This K-shaped dynamic is reshaping pricing, assortment, and promotional strategies across retail and consumer categories. To manage tariff and cost pressures, companies are prioritizing supply chain diversification, sourcing flexibility, private-label expansion, and selective pricing actions over broad-based price pass-throughs.

Europe and North America are showing relative resilience, supported by infrastructure spending, select end market strength, and enterprise demand. Asia is uneven, with strength in certain markets offset by continued caution and de-risking in China. Overall, companies are balancing geographic diversification with prudent risk management as global growth remains uneven.

Key themes from our analysis:

• Macro & Outlook — A Pressured Consumer Persists; Expectations for 2026 Are for Gradual Improvement as Rates Ease, Labor Stabilizes, and VUCA Moderates (Maybe)
• Demand Trends — Mixed Signals Across Sectors Continues, with Resilience in Aerospace, Luxury Travel, and AI-Driven Industries; Retail and Consumer End Markets Face Softer Volumes, Higher Promotion Intensity, and Affordability-driven Pressure
• Government Shutdown — Created Temporary but Notable Headwinds, Pressuring Volumes, Delaying Orders and Funding, and Weighing on Consumer Confidence
• Tariff Mitigation — Across Sectors, Companies Are Mitigating Tariff Pressures Through Supply-Chain Reconfiguration, Sourcing Flexibility, and Selective Pricing Actions, Prioritizing Value Perception and Margin Protection
• The Consumer — Remains Strained and Increasingly Value-driven; Low-and Middle-Income Households Trade Down, While Higher-Income Consumers Remain More Stable but Are Also Becoming More Price Conscious
• Technology + Efficiency/Productivity — Executives Highlight Accelerating Efficiency Gains, Growth, and Margin Expansion as AI Becomes a Core, Enterprise-wide Productivity Engine
• Around the World — Mixed Trends, with Europe and North America Showing Relative Resilience, Asia Split Between Strength in Select Markets and Continued Caution in China; LatAm Remains Uneven but Offers Pockets of Growth