If You Owned Stocks Over the Past Three Years, Congratulations! Now What?

Every investor-except those that short the market-feels pretty smug right now. Over the last three years, the S&P 500 has earned 26.29%, 25.02%, and 17.88% respectively. When you consider the power of compounding, the S&P 500 index made 86% from 2023-2025. For example, if you had begun this period with $100,000 and assuming no management fees, your December 31, 2025 statement would reflect $186,000. Not bad and also not common! It may be time for a Plan B or change in your investment allocation.

A large majority of Wall Street strategists think that 2026 will be a continuation of the powerful bull market. The average prediction for the 2026 return of the S&P 500 is 10-12%. This range is based on the belief that the federal reserve will continue to cut rates and that gross domestic product will remain strong. However, the 2026 estimates for interest rate cuts and GDP are vast. Strategists are also hedging their bets by including probabilities of a recession.

Our economy has many moving parts that could go sideways and derail these expected investment returns. Also, history has shown that strategists are only correct 47% to 48% of the time predicting market direction. Instead of relying on this "coin toss", It might be a good idea to review the economic variables and re-balance our portfolios.

Though the government shutdown leaves the final tally uncertain, GDP is estimated at 2% for 2025. Crucially, the build-out of AI infrastructure and data centers acted as the primary engine for this growth. Analysts suggest that AI-related capital expenditures accounted for the vast majority of incremental GDP growth this year. Investors must now decide: if the "AI frenzy" shifts from building infrastructure to seeking actual profits, where will that growth come from in 2026? As the build-out becomes more dependent on debt financing, the "shine" of big tech may dim, making sectors like healthcare and energy look significantly more attractive.

The companies responsible for the AI build-out have no problem saying that we are in the early innings. However, in the second half of 2025, the AI build-out  became   more dependent on debt financing. The shine of these investments is dimming and other investments may have greater sparkle-or upside. Given the heavy dependency of the S&P 500 on AI-related companies, it might be best to take some profits and increase exposure to other sectors such as healthcare, industrials, energy, and commodities. 

There is also a lack of clarity in the employment numbers. In November, the unemployment rate was little changed at 4.6%. Also in November, part-time positions increased by 909,000 for a total of 5.5 million. These were positions where the individuals wanted full-time jobs, but we're not able to find them. And consider this, most families have a hard time covering basic expenses when they work full-time .   

The employment situation may get worse. Up until now, AI hasn't claimed a lot of jobs. However, when surveyed, six out of 10 companies acknowledged that they expect to lay-off employees in 2026. AI was cited as the number one reason. The layoffs will increase consumer delinquencies, credit card usage, and savings depletion. If large job losses are realized, the side-effects could push us closer to recession.

The Supreme Court’s pending ruling on tariffs also adds volatility to markets in 2026. The current level of tariffs will remain at one of the highest levels in more than a century unless the Trump administration makes some changes. This puts extra pressure on corporate profits, slowing the economy, and pushing prices up. Higher prices will make it more difficult for the Federal Reserve to continue to lower rates. Stagnant rates mean that corporations will borrow less and the housing market will remain flat. It's hard to have a robust economy when neither corporations or consumers can borrow in order to buy inventory and homes. If tariffs were unplugged by the administration, interest rates could ease and borrowing would increase.

In 2025, due to the rising deficit, lower interest rates and potential tariffs, the value of the US dollar declined almost 10%. Even if tariffs are significantly cut, our country's ballooning deficit should continue to pressure the value of the US dollar. Combine this fact with emerging markets' catch-up with technology and establishing strong standards of living, it would be wise to invest in emerging markets and those foreign countries that still look inexpensive compared to the United States.

Finally, a small allocation to commodities would also make sense. Due to limited supply and increasing demand by technology and utility industries, I expect precious metals to continue to do well. Other commodities of interest include natural gas and energy. Natural gas is used to produce over 23% of the country's electricity and data centers are expected to double electricity usage by 2030. 

Investors have had it easy the past several years.  The purchase and auto-pilot ownership of passive S&P 500 index funds was highly profitable. This year, your investments may require more research and oversight.  I know it's been said before, but maybe it bears repeating: know what you own, regularly monitor your investments and reallocate when the reason for ownership changes.

Link: Michelle Connell and Portia Capital Management