We sold two long-term group holdings last month: Big Communication Services and Systems Software. This continues our shift from growth into cyclical and defensive industries.

Given the convergency of three key risks related to AI, Bitcoin, and private credit, caution is certainly warranted.

Major market indexes show largely favorable patterns for 2026, but complacency is the real risk after a rare “three-peat” in S&P 500 annual performance.

We’ve had five consecutive years with momentum performing better among small caps than large caps. One reason for the sizable difference in 2025—and what may be concerning—is that the bulk of last year’s gains were driven by speculative, unprofitable companies (which are disproportionately small cap).

With recent extremes, both in underperformance and relative valuation, it feels like Low Vol could be near a turning point. At the very least, the margin for error is wider for this space than it has been in quite some time.

2025 was a year where “abnormal” became the new normal. From fiscal dominance and stubborn inflation risks to renewed credit stress and a shifting global leadership map, our favorite charts from the past year reveal the forces likely to shape markets in 2026—and where the next opportunities and risks may lie.

Last year’s Energy results earns an entry in the Cheapskate blooper reel, the sector will tie its personal best for the most consecutive years of underperformance against the S&P 500. However, this year’s delegate, Financials, offers a rare bright spot; it is the only Cheapskate sector to have beaten the S&P 500 during the last decade—pulling off that feat four times.

When we first published this work in 2011, the Bridesmaid’s alpha, both for asset classes and sectors, looked almost too good to be true. Since then, the performance edge for each has narrowed significantly—it’s still meaningful, but no longer magical.

Any hint of an Equal Weighted S&P 500 resurgence ignites a spark of optimism in active managers’ hearts. An EW run similar to the Tech Bubble aftermath doesn’t seem too farfetched. The downside? A bear market would probably be involved.

No, Virginia, there wasn’t a 2025 Santa Claus rally. It came down to the final few ticks, but the last five trading days of 2025 plus the first two trading days of the new year go in the books as a lump of coal.

The humdrum fourth quarter was not enough to derail the full year’s storyline, which goes into the books as a clean sweep for aggressive, bullish investment factors.

Investment management requires making decisions between alternatives, and the goal of fundamental analysis is to compare “what you pay” with “what you get.” We evaluated factors using metrics like valuation, profitability, and growth to lay out a menu of tradeoffs in the factor world heading into 2026.

Read this week's Major Trend.

SPX pulled off a rare three-peat in 2025, returning +15%-plus for three consecutive years. What often follows is much higher volatility. Yet, strong returns alone do not cause major volatility events. Today’s bigger risk is the unprecedented convergence of three long-running themes: AI, Bitcoin, Private Credit.

Sentiment, traditionally a contrary gauge of stock performance, was acutely bullish entering 2025—the 3rd most optimistic level in history, and therefore worthy of concern. Nevertheless, SPX’s 2025 return logged the 3rd best outcome for a year starting with such elevated confidence.

After narrowly averting a bear market in April, the S&P 500 rocketed 39% to end the year with an +18% total return. At present, our data shows the potential downside to revert to median levels is a loss of 44%.

Historically, the momentum plays of our Dreams and Nightmares have worked both ways, and 2025 was a “confirmation” year for this study. The best performing groups from 2024 beat the S&P 500 in 2025, and the worst performers of 2024 trailed both the Dreams and the S&P 500 in 2025.

After barely dodging a bear market decline in April, the S&P 500 proceeded to surge 39% through year end. The Mag Seven stocks followed the same pattern in exaggerated form. All seven names ended 2025 in positive territory, but contributed much less to overall performance than the previous two years. Still, their effect over the past three years is overwhelming: S&P Top Ten Index +188% vs. the Equal Weighted S&P 500 +43%.

Royal Blue Value surged 10% and 8% in the last two quarters of 2025, nearly doubling the annual return of RB Growth (+16%).

Our Ratio of Ratios continued its never-ending sideways trek in 2025, ending the year right at its four-year moving average. We enter 2026 with this vignette advising that Small Caps can be purchased at a steep discount to Large Caps (just like the last six years).